Cost Of The UK’s Climate Change Act
By Paul Homewood
The UK Government introduced the Climate Change Act in 2008, which enshrined in law a commitment to ensure that the net UK carbon account for all six Kyoto greenhouse gases for the year 2050 is at least 80% lower than the 1990 baseline.
The legislation contained a summary of the financial impact, which estimated annual costs of between £14.7bn and £18.3bn. The impact assessment also claimed that benefits would be greater. However, none of these “benefits” were directly related to the UK; instead they were simply calculated from the “Social Cost of Carbon”, or SCC, as originally devised by the Stern Review. This SCC is no more than a theoretical guess at the “avoided global damage cost of emissions”.
Furthermore, DECC have stated categorically to me that they cannot provide an estimate of any potential benefits to the UK.
And, as the impact assessment points out, if the rest of the world takes no action, all the costs would be borne by the UK, and the UK would receive no benefits from reciprocal action by other nations.
The Act, however, did not provide any detail on how the GHG emissions reduction would be achieved. This, instead, was left to a succession of Carbon Plans, each to last five years, with the first one beginning in 2008. These Plans start to fill in some of the detail.
Let’s start by looking at the Carbon Budgets themselves. So far, the first four have been set.
|First Carbon Budget 2008-12||Second Carbon Budget 2013-17||Third Carbon Budget 2018-22||Fourth Carbon Budget 2023-27|
|Carbon Budget (million tonnes CO2 equivalent)||
|Percentage below 1990 baseline||
The first significant thing to note is that, as DECC point out, emissions are already down by a quarter from 1990 levels. As the chart from CDIAC below shows, this has been a steady reduction since 1990, and indeed since 1970. Much of this reduction has been due to two factors:-
1) The switch from high CO2 coal, to low CO2 natural gas, both for power generation, but also for domestic heating.
2) Decline of heavy industry, much of which has migrated abroad.
The significance of this is that very little of the emissions reduction has been due to the Act, or any specific government planning. Despite the costs arising from the government’s green agenda, which can already be observed, there has been very little effect on GHG reductions so far. The really significant costs are still to come.
Per capita CO2 Emission Estimates for the United Kingdom
Financial Impact – Carbon Plans 1-3
In their latest Carbon Plan, published in 2011, the government have provided much more detail on the costs involved with meeting its first three Carbon Budgets. Bearing in mind, this covers the period 2008-2022, the following table summarises these costs, expressed as Net Present Value, and assuming a “Central Fossil Fuel Price Scenario”.
|Renewables Obligation for electricity generation||42820|
|Small scale Feed in Tariffs||3370|
|EU Emissions Trading System/Carbon Price Floor||3910|
|Carbon Capture demonstration||9020|
|Renewable Heat Incentive||6530|
|Impact of reducing car emissions to 95g/km||22010|
|EU new car complementary measures||4060|
1) This equates to £6.1bn per year, but in reality will be much higher in the remaining years of the plans. Costs have been much lower so far, for the simple reason that emission reductions have been minimal and most of the action plans have barely got off the ground yet. As an example, wind power is only contributing about 5% of electricity generation. This will need to increase massively, along with the subsidies it attracts, if the carbon budgets are to be achieved.
2) These costs do not actually cover all items. For instance, there is no allowance for:-
a) Electricity Capacity Mechanism – the amount the government, and in turn consumers, will have to pay fossil fuel generators to keep plant on standby, for when the wind does not blow.
b) Subsidies for nuclear power.
c) The extra cost for households, who switch to low carbon heating alternatives, such as heat pumps.
3) The costs are highly sensitive to fossil fuel prices. For instance, the cost of the renewables obligation/carbon price floor increases by £30.3bn under the “low fossil fuel price scenario”.
4) Figures do not include savings from energy efficiency, which the government claims will reduce the overall cost.
Financial Impact – Carbon Plan 4
The details behind the plan for 2023-27 are not as well developed, and are split down into different scenarios.
Nevertheless, the plan does give estimated costs of between £26bn and £56bn. (These costs will not necessarily be incurred in the 2023-27 period. These are just the costs that will need to be incurred, and may be incurred sooner. Equally this period may see the impact of costs connected to Plan 5.)
However, these government figures are rather disingenuous, as they are net of savings from greater energy efficiency. Without such savings, the cost increases to a range of £77.8bn to £125.3bn. (The lower figure is based on doing much less to reduce emissions, and instead buy international credits.)
This argument about energy savings is really a bit of a nonsense. If I choose to ride a bike to work, turn the central heating down, or pay extra money out for a fuel efficient car, I expect to keep the money I have saved. I do not expect the government to take this money away in the form of higher taxes or subsidies. They might just as well tell me to eat, smoke and drink less, and give them the money I save.
The true costs, therefore, equate to between £15.6bn and £25.1bn a year, or over £1000 per household.
- Most of the reduction of CO2 emissions to date occurred before 2008, or as a result of the recession. The real action/costs have not begun yet.
- If carbon targets are to be met, costs will need to significantly rise above current levels.
- Decarbonising transport and domestic heating is a huge part of the strategy. So far the government has no real idea how this can be achieved. This may well lead to costs being greater than estimated.
- Current plans are to reduce emissions by 50% before 2030. Between 2030 and 2050, emission cuts will need to increase to 80%, so costs will increase further then.
- By 2027, the total cost of the Act could have amounted to as much as £216bn, equivalent to £10.8bn a year.
Full details on the Carbon Plans are here.