For once, the government has got its climate change policies right. The idea of a windfall tax on energy suppliers has widespread support. One hundred or so Labour MPs have come out in favour. Caroline Lucas, the newly elected leader of the Greens, has advocated such a policy and many Conservatives express private approval. The trade unions were infuriated by Alistair Darling's refusal to back the proposal. Rather than backing a windfall tax, it looks like he favours plans that oblige the utilities to improve the energy efficiency of customers' homes.

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If you were prime minister and faced the need to cut UK greenhouse gas emissions by at least 80%, which policy would you support? Taxing the high profits of the energy companies or obliging them to invest a £1bn in energy-saving measures targeted at the houses with the worst insulation? Put this way, there shouldn't be much argument. If we are to reduce CO2 output, the government must focus on improving the dreadful waste of energy in British homes. Our houses are far more important emitters of greenhouse gases than our car or even our holiday flights. About 25% of UK emissions come from running our homes, most of them badly insulated and leaky. The scope for improvement is immense.

By contrast, applying an unexpected windfall tax might actually increase emissions. The current profits of the utilities are going to be partly used to make the huge investments in renewable energy that we urgently need. E.ON, for example, faces the need to find at least £500m to build its share of the 1-gigawatt London Array, the biggest offshore wind farm in Europe. A raid on its bank account by the Treasury is not going to help E.ON pay for the new turbines.

If our only interest is climate change, Darling's focus on energy efficiency is absolutely appropriate. The proposed £1bn home insulation scheme is the nucleus of a set of policies that might start reducing domestic energy use. About 8 million homes in the UK don't have cavity wall insulation. Almost all households could profitably improve their loft insulation. Full double-glazing would benefit a large percentage of UK homes.

In fact, eco-renovation is probably the most effective and cheapest way of reducing UK energy use. Simple measures will cut 30-50% from the heating bills of most homes. We should welcome Darling's proposals. In fact, we need to encourage the government to go much further, copying the German government's commitment to improve the energy performance of its entire housing stock by 3% a year. Backed by grants and soft loans, the German scheme is substantially reducing energy use in over 200,000 homes a year. Many of the most successful schemes have reduced energy use by nearly 85%. We could easily do the same in the UK. It might also pull a hundred thousand people into good jobs.

'But what about fuel poverty?' people will say. Twenty thousand more people die in the UK's winter than in summer, many because of inadequate indoor temperatures. Shouldn't the government's real priority be to increase the affordability of gas and electricity above every other objective so that people can heat their homes? No: it actually makes far more financial sense to improve the energy performance for decades to come than to temporarily reduce the price of fuel. A targeted investment of a few hundred or even a thousand pounds will typically pay for itself within three or four years in lower fuel bills. It may seem harsh, but this is far better than a short-run discount on prices.

Environmental groups led by Green Alliance have complained last week that the main political parties have begun to ignore climate change as they focus on the financial pressures faced by householders and business. Darling's policy of not subsidising fuel costs or arbitrarily penalising the energy companies is a striking counter-example. He should be congratulated for his courage, not criticised for his inhumanity or berated for his obeisance to big business.

This article was originally published in the Guardian on Wednesday 10 September 2008.