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Analytical Annex
JOB LOCATION:
PRINERGY 3
The UK Low Carbon
Transition Plan
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1
Contents
List of Charts
2
List of Tables
3
List of Boxes
3
Executive Summary
5
Structure of the Annex
9
Chapter 1:
The Long Term
13
Chapter 2:
Getting there: transforming the UK economy
and energy system to 2050
17
Chapter 3:
Reducing UK emissions of greenhouse
gases from 2008-2022
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29
Chapter 4:
Aggregate costs of the package
of policies
53
Chapter 5:
Estimated impacts of the package of policies
and proposals on energy prices and bills 61
Chapter 6:
High level summary of impacts on
energy security
79
Chapter 7:
Macro-economic costs of climate change
mitigation measures
89
Chapter 8:
Sustainability
99
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Contents
List of Charts
Chart 1
Global emissions of greenhouse gases
14
Chart 2
Global mean temperature rise
15
Chart 3
Historic and illustrative future trajectory for UK GHG emissions intensity
of output (1990 – 2050)
18
Chart 4
One scenario for UK sectoral CO2 emissions to 2050 on an 80% CO2
emissions reduction path
21
Chart 5
Sectoral CO2 emissions in 2050 under MARKAL scenarios
24
Chart 6
Variation in electricity demand and generation technologies in 2050
under MARKAL scenarios
24
Rate of decarbonisation of the electricity sector under
MARKAL scenarios
25
Chart 8
Energy consumption across scenarios
26
Chart 9
Central Projections for the net UK carbon account with and without the
Transition Plan Package of Policy Measures
35
Chart 10
Uncertainty around emission projections
36
Chart 11
UK Territorial Emissions in the Traded Sector and the UK Share of the
EU ETS Cap
38
Chart 12
A Marginal Abatement Cost Curve in the Non Traded Sector
41
Chart 13
Increase in renewables brought on in 2020 by this package, compared
to current policies and 2005 levels
51
Chart 14
Non Traded Carbon Price 2008-2022 period
57
Chart 15
Policy MAC curve for policies that deliver savings in the non-traded sector 60
Chart 16
Estimated impact of the package of climate change policies on domestic
and non-domestic retail gas prices
64
Chart 17
Estimated impact of the package of climate change policies on domestic
and non-domestic retail electricity prices
65
Chart 18
Estimated impact of the package of climate change policies on domestic
energy bills at varying sustained fossil fuel prices
72
Chart 19
Increase in energy bills in 2020 for different income deciles
Chart 20
Impact of climate change policies for households that take up insulation
and renewable energy measures
75
Chart 21
Percentage change in energy bills for households that take up renewable
heat and insulation measures
76
Chart 22
Actual and Projected UK Fossil Fuel Demand and Production
80
Chart 23
Price Duration Curves for 2020 and 2030 Great Britain
84
Chart 24
Capacity Margins under 29% large scale renewable electricity generation
85
Chart 25
Expected Energy Unserved (GWh) under 29% large scale renewable
electricity generation
86
Innovation and the costs of mitigation (GDP impact in 2020)
94
Chart 7
Chart 26
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Chart 27
GDP costs (relative to baseline) by sector
95
Chart 28
CO2 cost screen: sectors potentially exposed under unilateral
CO2 pricing
96
Chart 29
The net air quality benefit associated with Climate Change measures
3
104
List of Tables
Table 1
MARKAL scenarios
22
Table 2
Carbon budgets level
30
Table 3
Impacts on emissions in policies from this Transition Plan (MtCO2e)
45
Table 4
Detailed breakdown of savings delivered by Transition Plan policies by
budget period (MtCO2e)
46
Table 5
Overall costs of the package
55
Table 6
Net Present Value and cost-effectiveness of policies achieving savings in
the non-traded sector
58
Table 7
Policies assessed in the Department of Energy and Climate Change
models on Climate Change Impacts
63
Estimated impact of energy and climate change policies on average
domestic energy bills
66
Estimated impact of energy and climate change policies on average
domestic gas bills
66
Estimated impact of energy and climate change policies on average
domestic electricity bills
67
Table 11
Industrial Gas Eurostat size band Annual consumption (MWh)
68
Table 12
Industrial Electricity Eurostat size band Annual consumption (MWh)
68
Table 13
Estimated impact of package on average non-domestic energy bill at
varying levels of energy consumption
69
Estimated impact of package on average non-domestic gas bill for
medium sized consumers
69
Estimated impact of package on average non-domestic electricity bill
or medium sized consumers
70
Estimated impact of energy and climate change policies on average
domestic energy bill
71
Estimated impact of energy and climate change policies on average
non-domestic energy bill for medium sized consumers
71
Table 8
Table 9
Table 10
Table 14
Table 15
Table 16
Table 17
Table 18
Projected Impact of Transition Plan Measures on Fossil Fuel Consumption 81
Table 19
Projected Percentage of UK Consumption Imported Before and After
Transition Plan Measures
83
Table 20
MARKAL-MED cost estimates for scenarios
91
Table 21
Technologies, learning rates and cost-reductions in the MARKAL model
92
HMRC Computable General Equilibrium (CGE) model
90
List of Boxes
Box 1
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Executive
Summary
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The UK Low Carbon Transition Plan
Analytical Annex
This annex provides the analysis and
evidence underpinning the conclusions of the
main body of the UK Low Carbon Transition
Plan. It focuses in particular on the impacts
of the policies set out in the Transition Plan,
including impacts on emissions over the
first three budget periods, on security of
supply and on the local environment. It also
assesses the overall costs of the policies and
how they are borne among different parts
of society.
The package of policies saves about 700
million tonnes of CO2e (MtCO2e) and puts
the UK on track to meet the first three
carbon budgets. Taking into account the
impact of the Transition Plan policies, central
emissions projections show emissions below
each of the first three carbon budgets with a
cumulative over-achievement of 147 MtCO2e
by the end of the third budget.
There is substantial uncertainty over
emissions projections and the 147 MtCO2e
of projected over-achievement provides a
‘contingency reserve’ to draw on in the event
that emissions are higher than projected.
In combination with the flexibility to bank
over-achievement from one carbon budget
period to another and other policy options
being considered within Government, the
projected contingency provides confidence
that the UK will meet carbon budgets
domestically. This prepares the UK for tighter
carbon budgets following a comprehensive
global deal.
Overall the package comes at a cost of
£25 to £29 billion.1 This is consistent with
other estimates of the costs of action to
the UK. These costs, though significant,
are substantially lower than the damage
costs which would be associated with
unmitigated climate change. These were
estimated at between 5 and 20% of GDP
in the Stern Review2, estimates which Lord
Stern has recently commented are likely to
substantially underestimate the damages.
The package of climate change and energy
measures set out in the Transition Plan will
have an impact on energy consumers across
the UK. Compared to the counterfactual
scenario in which none of these policies
are in place, on average, domestic energy
bills will be 9% higher in 2020 and industrial
energy bills 21% higher. The additional
impact in 2020 of the policies in this
Transition Plan relative to today is £76, which
is equivalent to approximately 6% of current
bills. Similarly, for an indicative non-domestic
user, we estimate that these policies make
up approximately £101,000, or 8%, of
current non-domestic bills. The additional
impact in 2020 is estimated to be £212,000,
equivalent to approximately 15% of current
bills. Government has sought to mitigate
these increases, through policies which help
households and businesses improve their
energy efficiency.
There will be a variable impact on individual
houses owing to differential take up of
energy efficiency, renewable heat and
micro-generation measures – those who
take up measures will find impacts on bills
substantially reduced. Sustained higher
prices for fossil fuels would reduce the cost
of some climate change policies, lowering
the cost passed through onto consumer
bills. A sustained oil price of $150 per barrel
means that policies set out in this Transition
Plan in 2020 would reduce bills slightly
compared to the projected bill in 2020
without these policies.
1
This is a one-off figure covering the lifetime of the measures that the policies in the package implement.
2
“Stern Review on the Economics of Climate Change“ Available at:
http://www.hm-treasury.gov.uk/sternreview_index.htm
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2 Executive Summary
In addition, there are some already
established climate change policies which
continue to affect bills – by 2020, the impact
of all climate change policies, both existing
and new, will be to add, on average, an
additional 8% to today’s household bills and
17% to today’s non-domestic bills.
The policies in this Transition Plan will lead
to a significant reduction in the use of
fossil fuels in our energy mix. By reducing
our demand for fossil fuel, we reduce our
exposure to security of supply risks, including
the risk associated with imported energy.
The package of policies is estimated to
reduce UK demand for fossil fuels by 19%
in 2020 compared to the counterfactual
by increasing the supply of renewable
energy and improving the UK’s
energy efficiency.
In 2020, a larger proportion of renewable
generation, particularly wind generation,
will create challenges from increased
intermittency. Analysis suggests that these
risks to electricity security of supply are
manageable before 2020, but that after 2020
they could potentially become a problem due
to the closure of old gas and coal plants and
additional renewable deployment. Further
work will be done to determine the scale
and nature of the challenges of intermittent
generation and to consider ways of reducing
the impact, for example through measures
to improve the responsiveness of demand.
We will call for stakeholders’ views on our
assessment of intermittency in a call for
evidence later this year.
3
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A package that delivers the UK’s fair
share of global climate change mitigation,
supports continued economic growth and
distributes the costs fairly, goes a great deal
of the way towards delivering a package that
is consistent with sustainable development.
However wider environmental impacts
must also be considered. In general there
are strong synergies between climate
change policies and the wider environment.
For instance, reducing greenhouse gas
emissions can improve air quality. There
will be a substantial improvement to
local air quality from meeting carbon
budgets, estimated to be worth 20,000
life years3 annually by the end of the third
carbon budget period. The policies will
also reduce noise pollution, and reduce
water eutrophication. However, there are
tensions in some cases, notably between
the combustion of bio-mass and air quality.
Where there are tensions, safeguards that
exist need to be maintained and monitored to
ensure they offer the appropriate protection
for the local environment, while still ensuring
we effectively achieve our energy and climate
change goals.
Improvements in air quality are associated with a range of health benefits most notable being the increase in life
expectancy and quality of life. These impacts have been estimated in accordance with best practice as set by the
Interdepartmental Group on Costs and Benefits air quality subject group. For further information please see:
http://www.defra.gov.uk/environment/airquality/panels/igcb/
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11
Structure of the
Annex
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10
The UK Low Carbon Transition Plan
Analytical Annex
This annex presents the analysis and
evidence underpinning the conclusions of the
main body of the Transition Plan. It focuses
in particular on the impacts of the Transition
Plan package of policies. It is divided into two
main sections.
hardest. However, it is important to ensure
that the burden of action does not fall
disproportionately on some sections of the
UK population or sectors of the economy.
This annex considers the distribution of the
costs within the UK.
The first section considers the long term,
focusing on our 2050 target of reducing UK
net emissions of greenhouse gases (GHG) to
at least 80% below 1990 levels. This section
sets out the size of the task, and assesses
the costs and benefits both for the UK and
globally of meeting our 2050 goals. It also
considers the different possible pathways
to 2050 and beyond, including the variety of
technologies that will need to be brought on.
U Security of energy supply. The package,
particularly the policies relating to the
renewable energy target in 2020, will have
an impact on security of energy supply.
Continuity of energy supply is fundamental
to the functioning of our economy and a
central element of the Government’s long
term energy policy. Overall security of
energy supply may be expressed in different
ways, but embraces at least the following
three components in the long term:
The second section assesses the impacts
of the policies set out in this Transition Plan
for the period covering the first three carbon
budgets. This section considers the impacts
of the package on the UK’s GHG emissions,
the costs of the package and how these are
distributed, the impact of the package on
security of energy supply, macro-economic
costs and finally wider environmental impacts.
UÊ GHG emissions. In the third carbon
budget period (2018 – 2022) the UK has
committed to reduce its net emissions of
GHGs to at least 34% below 1990 levels,
a level which puts the UK on track to meet
its 2050 emissions reduction target.
The annex presents projections for UK GHG
emissions and shows that the policies set
out in this Transition Plan give us confidence
that our carbon budgets will be met.
UÊ Costs and their distribution. Policies
to reduce emissions or improve energy
security will impose costs on sections
of the UK population and UK economy.
Overall the costs of action will be lower
than the costs of unchecked increases
in global GHG emissions and they will
also be distributed more fairly, as climate
change would hit the poorest in the world
DEC-PB13289_AnAnnex.indd 10
Physical security: avoiding involuntary
physical interruptions to consumption
of energy.
Price security: avoiding unnecessary
price spikes due to supply/demand
imbalances or poor market operations
and maintaining competitive prices
relative to other countries.
Geopolitical security: avoiding undue
reliance on specific nations as sources
of energy so as to maintain maximum
degrees of freedom in foreign policy.
UÊ ÊThe macroeconomic and transitional
costs. Macroeconomic modelling of
the costs of transforming the UK to a
low carbon economy is considered.
This modelling consistently suggests
that the costs in both the short and the
long term, though significant, are likely
to be manageable. The costs, as part
of co-ordinated global action, are much
lower than the damages associated with
dangerous climate change.
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Structure of the Annex
UÊ Êˆ˜>Þ]Ê̅iÊwider environmental impacts
of the package are considered. The Climate
Change Act 2008 states that proposals
and policies for meeting carbon budgets
must, when taken as a whole, ‘be such as
to contribute to sustainable development’.
Considering the impact of the package
on greenhouse gas emissions, energy
security, fairness and economic growth
goes a great way towards assessing the
sustainability of the package. However,
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it is also necessary to take account of
wider environmental impacts such as air
quality, biodiversity and the landscape. This
annex values these wider environmental
impacts wherever possible and provides a
qualitative analysis in other cases.
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11
Chapter 1:
The Long Term
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The UK Low Carbon Transition Plan
Analytical Annex
Long Term Impacts
The benefits of effective global action
on climate change will by far outweigh
the costs. The Stern Review4 suggested
that global action to tackle climate change
will produce huge social and economic
benefits in the long term, avoiding global
costs equivalent to 5-20% of global GDP per
annum and dwarfing the costs of coordinated
international action (around 1% of GDP
by 2050 for a 500 – 550 parts per million
emissions trajectory). These cost estimates
have been largely confirmed by Government
modelling, which suggests that, if we
pursue least cost policies, costs of action
will vary between 1% of global GDP in 2050
(for stabilising atmospheric concentrations
at 550ppm CO2e) to 3% (for a trajectory
towards stabilisation at 450ppm CO2e).
Lord Stern has recently indicated that the
Stern Review estimates are very likely to
substantially understate the true benefits of
action.5 Quantifying these impacts is very
challenging, particularly in relation to the
risks of uncertain but potentially catastrophic
outcomes that, if they took place, would in
all likelihood be irreversible.6 The risk of these
outcomes is reflected in the precautionary
approach adopted by the Committee on
Climate Change (CCC), which recommended
an 80% reduction in UK emissions by 2050
Chart 1
Global emissions of greenhouse gases
Emissions of Greenhouse Gases
140
120
Emissions GtCO2e
100
80
60
40
20
0
1991
2011
2031
2051
2071
2091
2111
2131
2151
2171
2191
Source: UKCP09 (2009) Emissions from the three non-mitigations scenarios used in UKCP09 (green, blue,
navy) and a mitigation scenario from the CCC (dashed pink) aimed at limited global temperature change to
around 2˚C above pre-industrial levels
4
‘The Stern Review of the Economics of Climate Change’, 2006. Available at:
http://www.hm-treasury.gov.uk/stern_review_report.htm
5
Comments made at the Copenhagen Climate Summit, March 2009.
6
These challenges are described in some detail in ‘Carbon Valuation in the UK Policy Appraisal: A Revised Approach’
DECC (July 2009), which sets out the Government’s new approach to valuing carbon in policy appraisal.
http://www.decc.gov.uk
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Chapter 1:
The Long Term
as an appropriate contribution to a global
stabilisation of GHGs that would allow a
very low probability – less than 1% – of a
o
temperature increase of 4 C. Government
continues to improve its understanding of
global climate impacts, through the AVOID7
programme and through its support for the
development of a new version of the PAGE
model (which was used by the Stern Review
to estimate climate damages). But the
evidence in favour of global action is
already overwhelming.
Climate Projections for the UK (UKCP09)
were launched recently.8 These projections
use emissions scenarios9 to estimate values
of climate variables (e.g. temperature and
15
11
rainfall) up to the end of the 21st century in
the absence of action.
In the medium emissions scenario the
o
temperature by 2050 would rise by 2.4 C
o
and by 2100 by 4 C. Such a level of
warming would have severe impacts on
society and the environment. Even under
the lowest emissions scenario without
mitigation, temperatures would still rise by
o
1.8 C in 2050, and by 2100 the increase
o
would reach 2.8 C and would continue to
rise beyond then. In the high emissions
scenario the mean temperature would rise
o
2.6 C by 2050 and by 2100 the increase in
o
temperature would be approaching 6 C.
By comparison, the predicted temperature
Chart 2
Global mean temperature rise
Global Mean Temperatures
6
IPCC Emission Scenarios
High
Medium
Low
World Stabilisation Scenario
Peak in emissions at 2016
followed by an annual
decrease of 4%
Temperature Rise oC
5
4
3
2
1
Temperature rise from pre-industrial baseline of 1750
0
1991
2011
2031
2051
2071
2091
Source: UKCP09 (2009) Temperature profiles for each of the emissions scenarios in chart 2.
All non-mitigation scenario temperatures are rising in 2100 while the mitigated CCC scenario stabilises at
around 2˚C.
7
Government programme to avoid dangerous climate change, for more information see www.avoid.uk.net
8
http://www.metoffice.gov.uk/climatechange/guide/ukcp/
9
Those shown are IPCC SRES scenarios A1F1 (high), A1B (medium) and B1 (low).
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UK Low Carbon Transition Plan
Analytical Annex
rise for a mitigation scenario (the CCC
o
mitigated scenario) in 2050 would be 1.8 C
o
but crucially it would only be about 2 C
in 2100.10
The key point is that while temperatures
in 2050 may not be that different between
the mitigated and the most optimistic
unmitigated scenarios, by 2100 there will be
a huge difference – the difference between
catastrophic global warming and mere
warming, which while very challenging,
is something to which human society can
adapt. The main beneficiaries of urgent
action now, because of the long life time of
greenhouse gases in the atmosphere, will be
our descendants.
The CCC estimated that the costs to the
UK of meeting an 80% target would be
in the order of 1-2% of GDP in 2050.
Government has published its own estimate
of the costs of meeting the 80% target
in the Impact Assessment of the Climate
Change Act.11 This estimate drew upon a
variety of modelling work including the work
commissioned by the CCC and estimated
costs to be of a similar order of magnitude.
Overall, the costs to the UK of meeting
our 2050 target are affordable – given the
consequences of not acting – providing we
reduce emissions cost-effectively as part
of co-ordinated global action. This means
bringing on the right technologies and getting
the policy mix right. This is explored in the
next section.
10 These are global mean average temperatures which are averaged over land and sea. Land temperatures are generally
higher and temperatures in summer are higher than temperatures in winter. UKCP09 ‘downscales’ global models to
give projections for climate variables for the UK. For the UK, it is possible that the summer temperature for the CCC
mitigated scenario, where we are on track to reach an 80% reduction in GHG emissions by 2050, will be about 3oC
higher than pre-industrial levels, similar to the most optimistic ‘unmitigated’ scenario.
11 Available from http://www.decc.gov.uk/en/content/cms/legislation/cc_act_08/cc_act_08.aspx
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11
Chapter 2:
Getting There
Transforming the UK Economy and Energy System to 2050
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The UK Low Carbon Transition Plan
Analytical Annex
level of growth to be accommodated within
the UK GHG emissions reduction target, the
GHG emissions intensity of output in the
UK would have to reduce to less than one
tenth of its 2009 level. This is a massive
undertaking, requiring a step change in the
way in which we generate and use energy.
The global economy will be growing too,
with growth rates in the developing world
expected to exceed those in the UK.
Higher global growth will increase global
demand for resources, with implications for
energy security and global emissions.
The long term goal
As part of co-ordinated international action
the UK has committed to reduce its net
emissions of greenhouse gases (GHGs) to at
least 80% below 1990 levels by 2050.
This is intended to be a contribution to a
global reduction in GHG emissions of 50%
below 1990 levels in 2050, to meet the aim
of restricting global temperature increases to
o
no more than 2 C.
This reduction in emissions needs to be
achieved against a backdrop of the UK and
the global economy sustaining economic
growth. The Government’s long-term
projections assume GDP growth for the UK
(after 2014) of 2.25 – 2.5%12 per year. This
would imply the UK economy being up to
2.8 times larger in 2050 than today. For this
Meeting the 2050 emissions reduction target
is achievable but will require a balance of
effort between reducing energy systemrelated carbon dioxide emissions, non-CO2
GHG emissions and the use of international
emissions trading.
Chart 3
Historic and illustrative future trajectory for UK GHG emissions intensity
of output (1990 – 2050)
250
200
150
100
50
2050
2047
2044
2041
2038
2035
2032
2029
2026
2023
2020
2017
2014
2011
2008
2005
2002
1999
1996
1993
1990
0
CO2e/GDP (2008 = 100)
Source: Department of Energy and Climate Change calculation (2009)
12 http://www.hm-treasury.gov.uk/bud_bud08_longterm.htm
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Chapter 2:
Getting There
Use of international
carbon trading to meet
the 2050 target
additional abatement in the UK and selling
the excess internationally where the
international price is higher than the marginal
cost of abatement in the UK.
There is uncertainty over the extent to
which the long term target will be met by
reducing UK territorial emissions or through
purchasing international carbon allowances.
In assessing which of these scenarios is
likely to hold, it is important to note that
international carbon allowances are likely to
be scarce in 2050. The absolute quantity of
allowable global emissions in 2050 would
be at least 50% below 1990 levels and
the global economy would be expected
to be several times larger. As part of the
Government’s review of carbon valuation,
published in July 200914, Government
analysts have estimated global carbon
prices in 2050 using the GLOCAF15 model
and estimates available from other models
and evidence. On the basis of this work,
Government economists have adopted,
for 2050, a central estimate of £200/tCO2e,
with a low sensitivity of £100/tCO2e and a
high sensitivity of £300/tCO2e.16 The range
reflects uncertainty in the global availability
and cost of abatement in 2050.
In 2050, the UK’s vision for international
action to reduce emissions includes a global
carbon market, where global emissions are
capped and the purchase of an international
carbon allowance will fund an additional
tonne of abatement elsewhere. Trading
enables the same environmental outcome
to be achieved at lower cost, by allowing
nations with relatively high cost abatement
options to fund emissions reductions in
countries with lower cost opportunities,
while also contributing to decarbonisation
in developing countries. An effective global
market would provide a mechanism to
ensure these low-cost opportunities are
financed in the most efficient way. Estimates
suggest that through an effectively designed
carbon market the global costs of the action
required by 2020 could be reduced by at
least one third and possibly up to two thirds
depending on market design.13 National
costs of abatement will differ, owing to
differing geographies and endowments of
natural resources, infrastructure stock and
specialisation in production. An efficient
delivery of the UK’s long term target
would therefore involve the UK purchasing
international carbon units where they are
cheaper than the cost of reducing emissions
in the UK or, alternatively, undertaking
19
11
Even at the lower end of the spectrum, these
carbon prices are a significant increase on
current market prices for carbon. In 2050,
it is likely to be cost-effective for the UK to
undertake substantial domestic action and it
is anticipated that much of the UK’s long-term
target would be achieved through domestic
abatement. Analysis by the Committee on
Climate Change (CCC) suggests that in most
2050 scenarios, when access to allowances
is unrestricted, international allowances do
not contribute more than 10% of total UK
emissions reduction effort. This reflects the
relatively cost-effective nature of domestic
13 ‘Road to Copenhagen’ DECC p43 http://www.actoncopenhagen.decc.gov.uk/en/ambition/road-to-copenhagen/
14 Carbon Valuation in the UK Policy Appraisal: A Revised Approach (July 2009) www.decc.gov.uk
15 The GLOCAF (Global Carbon Finance) model combines bottom up abatement cost curves from all regions of the world.
The model provides analysis of the global finance flows that result from global deals, with regional burden shares and
varying limitations on international carbon markets.
16 Real 2009 prices.
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The UK Low Carbon Transition Plan
Analytical Annex
abatement options, although the CCC analysis
suggests a changing use of credits over the
timeline to 2050.
Government analysis suggests that
international carbon trading might play a
greater role in meeting the UK’s long term
target. This analysis17 used GLOCAF for
all abatement costs meaning that both
domestic abatement costs (within the
EU) and international abatement costs
were modelled using the same underlying
methodology.18 However, interpreting
the results for implications to the UK is
complicated as GLOCAF carries only regional
abatement costs. Each region was given
a burden share of international action to
meet the goal of stabilising atmospheric
concentrations at 450ppm in the long term.
The European burden share was an 80%
reduction on 1990 emissions.
The modelling indicated that Europe would
meet its target most efficiently by importing
20% of its reduction target in the form of
international allowances, reducing emissions
within the EU to 64% below 1990 levels. If
it is assumed that the UK is typical of the EU
as a whole, then the GLOCAF modelling can
provide an insight into the extent to which
the UK would achieve its target domestically
under a global least cost approach to avoiding
dangerous climate change.
In summary, uncertainty about the relative
national and international costs of abatement
implies uncertainty about what the UK’s
80% reduction target means for the level
of reduction in UK territorial emissions by
2050. This highlights the importance of
flexible market based instruments such as
international trading to ensure that climate
change is tackled cost-effectively.
The underlying uncertainty about the level of
domestic abatement in 2050 is captured in
the scenarios set out below, which consider
both a case where the domestic energy
system decarbonises by 90% relative to
1990 levels in 2050, and one in which a 70%
reduction is required.
Modelling of the UK energy
system and associated
carbon dioxide emissions
to 2050
Government and the CCC have previously
commissioned research using the
MARKAL-MED19 model, which models the
UK energy system and associated carbon
dioxide emissions.
Different scenarios have been analysed,
which consider various constraints on
the level of allowable emissions in 2020
and 2050 and variations in the underlying
availability and cost of energy technologies.
Given these constraints on emissions and
costs, the MARKAL model finds the lowest
cost way to meet UK energy demand.
17 Previously published in the Climate Change Act Impact Assessment.
http://decc.gov.uk/Media/viewfile.ashx?FilePath=85_20090310164124_e_@@_climatechangeactia.pdf&filetype=4
18 The CCC analysis modelled domestic and international abatement using two different models with different underlying
cost data – MARKAL15 and GLOCAF. The UK Market Allocation (MARKAL) model is a least cost optimisation model
of energy use that investigates least cost solutions to meeting energy service demand while meeting emissions
constraints. Most notably, the model is rich in technological detail (e.g. costs, lifetime and efficiency) and its
assumptions have been extensively peer reviewed. The main limitation of this modelling approach is the unrealistic
assumption of perfect foresight out to 2050. Owing to this assumption, the modelling estimates produced by MARKAL
should be interpreted as the lower bound estimates of the long term costs of carbon abatement.
18 Previously published in the Climate Change Act IA.
19 The Markal MED model is an extension of MARKAL with more complex treatment of demand elasticities. Additional
information on the Markal MED can be found in ‘MARKAL-MED model runs of long term carbon reduction targets in the
UK’: http://www.theccc.org.uk/reports/supporting-research
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Chapter 2:
Getting There
21
11
Chart 4
One scenario for UK sectoral CO2 emissions to 2050 on an 80% CO2 emissions
reduction path
CO2 emissions by sector
600
Transport
Services
Residential
500
Industry
Hydrogen
400
MTCO2
Electricity
300
Agriculture
200
Upstreamand
non-sector
100
0
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Source: MARKAL (2008)
Chart 4 is an output from the MARKAL
model, showing emissions from sectors of
the economy over the period 2000 to 2050
under a scenario requiring a 33% reduction in
emissions in 2020 and an 80% reduction in
2050 compared to 1990 levels.
implemented and the least cost pathway
the UK should follow. Scenarios were
commissioned for each of 70%, 80% and
90% reductions in CO2 where the model
has been constrained to meet the 2020
renewable energy target.
The uncertainties over the extent to which
it would be efficient for the UK to meet the
long term target through international carbon
trading and over the feasibility of achieving
an 80% reduction in non-CO2 GHG emissions
lead to a range of possible emissions levels
from the energy system that are consistent
with achieving the 2050 target. Accordingly,
one of the scenarios considered sees UK
CO2 emissions from the energy sector
fall by 70% in 2050, and another by 90%
(implying significant purchase of allowances
and / or greater effort in the non energy
sectors). This has significant implications
for the technologies that will have to be
In addition to uncertainties over emissions
constraints there are considerable
uncertainties in projecting future costs and
availabilities of low carbon technologies.
The outputs from MARKAL scenarios –
and those of any model – are sensitive to
assumptions about the future state of the
world, including notably:
DEC-PB13289_AnAnnex.indd 21
UÊ the future path of fossil fuel prices;
UÊ the availability and cost of new abatement
technologies in the future; and
UÊ improvements in energy efficiency that can
be achieved.
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22
The UK Low Carbon Transition Plan
Analytical Annex
Forecasting these variables out to 2050
is inherently uncertain and changes in
assumptions can lead to significantly
different modelling results. Depending on
the scenario, different sectors contribute
to a greater or lesser extent to the overall
reduction in UK emissions. The technologies
within a sector can also differ significantly.
A further uncertainty is the possibility of
one or more ‘technology shocks’. Over the
period to 2050 there could be breakthroughs
in low carbon technology, unanticipated in
the MARKAL model, which could radically
alter the lowest cost approach to reducing
emissions.
In combination, these factors mean that
it is not possible for a precise pathway for
the UK’s transformation to a low carbon
economy to be forecast. To demonstrate
this point, Table 1 below describes eight
scenarios produced by the MARKAL model,
which are all consistent with meeting the
2050 target for an 80% reduction in net UK
GHG emissions relative to 1990, but which
differ in their assumptions relating to the
price and availability of key technologies and
the extent of domestic abatement from the
UK energy system.
It should be noted that these scenarios have
been commissioned for a variety of purposes
over the last two years, and have not
therefore been defined with a constraint that
they must be consistent with the package
of policies contained in this Transition
Plan. We have, however, commissioned
three scenarios – the 70%, 80% and 90%
renewables scenarios – that meet the
constraint of meeting the UK’s renewable
energy target. The purpose of presenting
these runs here is not to make a prediction
about the future, but to illustrate the extent
of uncertainty and commonality in possible
future pathways to our 2050 goal.
Table 1
MARKAL scenarios
Scenario
CO2 Emissions
reductions
(relative to 1990)
Other assumptions
70% scenario
29% in 2020,
70% in 2050
Commissioned by the CCC. Max nuclear
and CCS build rate 3GW p.a. in the 2020s,
5GW p.a. thereafter.
70% RES
29% in 2020,
70% in 2050
Commissioned by DECC for this Transition
Plan. Model constrained to deliver
sufficient renewable generation in 2020 to
meet the Renewable energy target.
80% base case
33% reduction by
2020. 80% reduction
by 2050
Commissioned by the CCC. Max nuclear
and CCS build rate 3GW p.a. in the 2020s,
5GW p.a. thereafter.
80% high bio-energy
31% in 2020,
80% in 2050
Commissioned by Defra in 2007. High
availability of domestic and imported
biomass, with high capacity for biomass
liquids to meet transport energy demand.
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Chapter 2:
Getting There
80% RES
29% in 2020,
80% in 2050
Commissioned by DECC for this Transition
Plan. Model constrained to deliver
sufficient renewable generation in 2020 to
meet the Renewable energy target.
80% ‘resilient’
(low electricity)
26% in 2020,
80% in 2050.
Commissioned by UKERC. Energy demand
must fall by at least 1.2% a year. No single
energy source can account for >40% of
the primary energy mix, or more than 40%
of the power mix from 2015 onwards.
Constraints on level of expected
un-served energy. Power sector modelling
supplemented to account better
for intermittency.
90% scenario
38% in 2020 and
90% in 2050
Commissioned by the CCC. Max nuclear
and CCS build rate 3GW p.a. in the 2020s,
5GW p.a. thereafter.
90% RES
29% in 2020,
90% in 2050
Commissioned by DECC for this Transition
Plan. Model constrained to deliver
sufficient renewable generation in 2020 to
meet the Renewable energy target.
Chart 5 shows that these scenarios result
in significantly different sectoral shares of
overall CO2 emissions in 2050.
Under all scenarios the use of electricity in
the UK increases (Chart 6). However,
the scenarios show a significant variation
in the level of UK electricity consumption in
2050 and the mix of generation technology
DEC-PB13289_AnAnnex.indd 23
23
11
that is providing it. Overall electricity
consumption does not change much
between the scenarios where the model
was constrained to meet the renewable
energy target and where it was not,
however the composition of the generation
mix does change.
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24
The UK Low Carbon Transition Plan
Analytical Annex
Chart 5
Sectoral CO2 emissions in 2050 under MARKAL scenarios, compared to
2005 emissions
MtCO2
600
500
400
300
200
100
0
2005
70% base 70% RES 80% base
80% high
80%
bio
resilience
80% RES 90% base 90% RES
Transport
Services
Residential
Industry
Hydrogen Production
Electricity Usage
Agriculture
Upstream
Source: Department of Energy and Climate Change analysis based on MARKAL (2009)
Chart 6
Variation in electricity demand and generation technologies in 2050 under
MARKAL scenarios, compared to 2005 emissions
2500
Electricity output by fuel (PJ)
2000
1500
1000
500
0
2005
70%
70% RES 80% base 80% high
80%
80% RES
bio
resilience
90%
90% RES
Other Renewables
Imports
Gas
Coal
Wind
Gas CCS
Coal CCS
Nuclear
Source: Department of Energy and Climate Change chart based on MARKAL (2009)
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Chapter 2:
Getting There
All scenarios share some characteristics.
These include by 2050, electricity
accounting for an increased share
of energy consumption, a radical
de-carbonisation of electricity supply and
a dramatic improvement in
energy efficiency.
Chart 7 shows the carbon intensity of
electricity for each of the scenarios over the
period to 2050. Substantial decarbonisation
of electricity supply is achieved in all
25
11
the scenarios, but there is considerable
divergence in the rate at which the
decarbonisation is achieved. The MARKAL
modelling indicates that a relatively wide
range for the carbon intensity of grid
electricity in particular years, such as 2030,
would be consistent with reaching the long
term goal of an 80% decarbonisation.
Chart 7
Average emission from power generation
(gCO2per kWh)
Rate of decarbonisation of the electricity sector under MARKAL scenarios
500
400
300
200
100
0
2010
2015
2020
2025
2030
2035
2040
2045
2050
70% base
70% RES
80% base
80% high bio
80% resilience
80% RES
90% base
90% RES
Source: Department of Energy and Climate Change chart based on MARKAL (2009)
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26
The UK Low Carbon Transition Plan
Analytical Annex
Achieving the UK’s climate change
mitigation goals will require the use of many
technologies in the power sector – there
is no silver bullet. The MARKAL modelling
provides evidence that there will be a
significant role for renewables, coal and gas
with carbon capture and storage (CCS) and
nuclear to achieve the required
emissions reductions.
Chart 8 compares the energy demand for
each of the scenarios in 2050 with the energy
demand in 2005. Significant energy demand
reductions of between 26 and 43% are
achieved across the scenarios. Taking into
account the higher level of GDP we would
expect in 2050 this is equivalent to the energy
intensity of GDP falling to around a quarter
of the 2009 level. MARKAL modelling shows
that this can be achieved primarily through
energy efficiency measures, but there will
also be some energy demand reduction from
substitution to less energy intensive activities
and less waste of energy. These last two
effects are encouraged by the higher energy
prices that are the result of adopting low
carbon technologies.
Analysis indicates that energy efficiency is
essential to meeting our 2050 target and is
cost-effective too. Achieving a greater than
tenfold reduction in the carbon intensity
of the UK economy in 2050 will not be
achievable solely through a de-carbonisation
of the UK energy supply but will also require
a much more efficient and less wasteful
use of energy. Cost-effectiveness analysis
indicates that energy efficiency should be the
first choice of measure in moving to a low
carbon economy.
To achieve a tenfold reduction in carbon
intensity of GDP by 2050 (see the first section
of this chapter), energy supply will also need
to be decarbonised. The MARKAL modelling
shows that the carbon intensity of energy
falls between 50 and 80% by 2050.
Chart 8
Energy consumption across scenarios
TWh
1800
1600
1400
1200
1000
800
600
400
200
0
2005
70%
70% RES
80%
base
80% high
80%
bio
resilience
80% RES
90%
90% RES
Source: Department of Energy and Climate Change chart based on MARKAL (2009)
Note: This chart compares energy consumption in 2005 with energy consumption scenarios in 2050.
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Chapter 2:
Getting There
The policy regime for
the future
As the above discussion shows, there are
some commonalities in the outcomes of the
different scenarios assessed. Where there
is a clear pathway policy should focus on
removing constraints and barriers that prevent
or slow progress. Accordingly, the package
of policies in the Transition Plan seeks to
address barriers that act to slow the uptake
of energy efficiency measures and to support
key low carbon generation technologies.
Conversely, where there is significant
uncertainty in predicting the least cost
pathway towards achieving our 2050 targets,
flexibility in policy design is important – there
is a danger that if policies are too prescriptive
about the ‘route map’ in the long run, then we
may lock ourselves in to a high cost emissions
reductions path if certain technologies turn
out to be more or less costly than anticipated
or assumptions about the future turn out to
be wrong. This is an argument for providing
a clear and stable investment framework
– underpinned by the 2050 target – but
allowing individual investors to decide which
technologies to deploy to meet it.
The level of investment in low carbon
technology research and development is
an important determinant of the future
costs of abatement. Market and regulatory
failures with respect to investment in
innovation justify intervention to minimise
the medium to long term costs of meeting
carbon budgets. Intervention could increase
investment by addressing:
UÊ positive externalities arising from
investment in innovation; and
UÊ the short term weakness of the carbon
price signal arising from immature carbon
markets and regulatory uncertainty over
future global deals and caps on emissions.
DEC-PB13289_AnAnnex.indd 27
27
11
Overall, the policy package put forward in this
Transition Plan is designed to meet the long
term investment and innovation challenges
created by the 2050 target. It comprises:
UÊ A transparent regime for pricing carbon in
the long term, through international carbon
trading systems (such as the EU Emissions
Trading System).
UÊ Direct support for individual technologies,
or groups of technologies, where there is a
compelling argument that they are needed as
part of the global effort to reduce emissions
and yet are unlikely to be brought on through
the carbon price alone. Key technologies
may not be brought on sufficiently quickly
without direct support until deeper
emissions reductions targets are agreed
globally resulting in a stronger and more
credible carbon price signal, and without
intervention to address innovation market
failures. Government has chosen to support
directly renewable and low carbon energy
technologies through the policies in the
Renewable Energy Strategy and to support
Carbon Capture and Storage demonstration.
UÊ Broader support for a range of potentially
viable technologies where there is greater
uncertainty over which will be the lowest
cost solution.
UÊ A stable, credible regulatory regime for
reducing emissions in the UK in the long
term, based around the 2050 target and
interim five yearly carbon budgets,
to give companies sufficient confidence
to invest in low carbon technologies.
The budget levels that have now been set
by Government for the period 2008 – 2022
put us on track to meet the 2050 target
and reflect the key importance of achieving
a global deal on climate change.
These principles are discussed in greater
detail in relation to the Transition Plan
package of policies in Part Two.
24/7/09 07:36:28
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29
11
Chapter 3:
Reducing UK
Emissions of
Greenhouse Gases
from 2008-2022
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30
The UK Low Carbon Transition Plan
Analytical Annex
Carbon budget levels
The CCC proposed two sets of carbon
budgets for the UK, one to apply now
before a global deal on climate change is
reached (‘Interim’ budgets), and a more
challenging set to apply once a global
deal on climate change has been agreed
(‘Intended’ budgets). Based on this advice,
the Government has set carbon budgets that
are based on the CCC’s Interim budgets,
consistent with the UK’s share of the EU’s
target to reduce greenhouse gas emissions
to 20% below 1990 levels by 2020.
The CCC recommended that, in the event
of a satisfactory global agreement through
the Copenhagen negotiations, the UK
should move to its Intended budgets.
The Government agrees that as part of a
successful global deal it should move to
tighter carbon budgets. The appropriate
level of the tighter budgets will depend on
the outcome of international negotiations on
climate change. The CCC will therefore be
asked to review its recommended Intended
budgets following a global deal and once
proposals on sharing out the new EU target
are agreed. The Government will amend
the carbon budgets in the light of those
discussions and taking into account the
advice of the CCC.
In the event of successful negotiation of
a global deal the EU would adopt a more
ambitious target of up to a 30% reduction
in GHG emissions across the EU by 2020
over 1990 levels. The intra-EU effort share
of this more stringent target has not been
negotiated; however, the UK would take on
a tougher target than under the current EU
Climate and Energy Package. In line with
CCC advice and the requirement of the
Climate Change Act, the Government will
tighten carbon budgets in response to these
more stringent international obligations.
As the final shape of the 30% EU package
has not been negotiated it is not possible
to be precise about the level of the more
ambitious UK carbon budgets following a
global deal. However, the CCC provided
illustrative estimates of the level of tighter
‘Intended’ budgets. These showed a smaller
UK share of a tighter EU ETS cap, with a
consequent reduction in UK emissions in
the traded sector. In the non-traded sector,
the ‘intended’ budgets required the UK
to achieve an additional 140MtCO2e of
abatement over budgets two and three.
Table 2
Carbon budgets level
Budget 1
(2008-2012)
Budget 2
(2013-2017)
Budget 3
(2018-2022)
Budget level (MtCO2e)
3018
2782
2544
Percentage reduction
below 1990 levels20
22%
28%
34%
20 Comparing average annual emissions over the budget period to UK emissions in 1990 of 777.4 MtCO2e based on 2007
inventory methodology.
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Chapter 3:
Reducing UK Emissions of Greenhouse Gases from 2008-2022
The Climate Change Act does not specify a
trajectory towards the 80% 2050 emissions
reduction target, other than requiring a
minimum reduction of 34% in the net UK
carbon account in 2020 relative to 1990.21
The trajectory will be established through the
level of the carbon budgets which will be set
with regard to criteria22 including technology
relevant to climate change and the implications
for the feasibility and cost of achieving
emissions reductions in a given period.
The trajectory implied by the current level
of carbon budgets from 2008 – 2022 is
less stringent than that required to meet
an 80% 2050 emission reduction target on
a straight line basis. But the CCC believes
this is sufficient to put us on track if met
through domestic emissions reductions.
However, were a successful global deal to
be negotiated, the level of budgets would be
amended, setting the UK on a much more
stringent trajectory.23
In practice, this means that if a comprehensive
global deal can be achieved at Copenhagen
this year, the UK and other EU member
states will take on greater action, earlier.
While evidence (e.g. from the IPCC 4th
Assessment Report) suggests that delaying
action to reduce emissions risks increasing
costs by locking in investments in carbonintensive infrastructure, the argument for this
approach is clear – making highly ambitious
action by the EU contingent on action by other
countries is intended to maximise the chances
of achieving a global deal.
31
11
Mitigating global emissions will require
co-ordinated global action. Dynamically
adjusting domestic climate change policy in
response to significant international actions
and commitments will help achieve the
overall required emissions reductions in a
cost-effective manner.
Measuring emissions
UK carbon budgets and the 2050 target
are measured in terms of the Kyoto basket
of greenhouse gases24 and specified in
terms of the net UK carbon account.
To calculate the net UK carbon account,
UK greenhouse gas emissions from the
UK national emissions inventory report
are adjusted to account for the amount of
carbon units which have been bought in
from overseas and retired by Government
and others (including participants in the EU
Emissions Trading System) to offset UK
emissions (‘credits’), and UK carbon units
which have been disposed of to a third party
(‘debits’). Meeting the budgets and the long
term target will require a balance of effort
from CO2 mitigation, non-CO2 mitigation and
the purchase of carbon units representing
emissions reductions abroad.
The emissions coverage of UK carbon
budgets is not identical to the scope of the
UK’s commitments under the Kyoto protocol.
While carbon budgets cover UK emissions
only, the UK’s commitments under the Kyoto
protocol include emissions from the crown
dependencies and certain overseas territories.
21 See the following section for a description of the net UK carbon account.
22 Section 10 of the Climate Change Act lists the matters to be taken into account in connection with carbon budgets.
http://www.opsi.gov.uk/acts/acts2008/pdf/ukpga_20080027_en.pdf
23 Meeting the current non-traded portion of carbon budgets domestically prepares the UK to meet the tighter budgets.
Purchase of international credits might be expected to form an important part of the additional effort required to meet
more challenging carbon budgets. The CCC advice stated that use of credits from outside the EU, under the tighter
carbon budgets to be set following a global deal, would be acceptable given the feasibility and cost-effectiveness of
going further domestically.
24 Climate change is caused by various greenhouse gases. The Kyoto Protocol applies to emissions of a basket of
six greenhouse gases: Carbon Dioxide (CO2), Methane (CH4), Nitrous Oxide (N2O), Hydrofluorocarbons (HFCs),
Perfluorocarbons (PFCs) and Sulphur Hexafluoride (SF6). Non-CO2 greenhouse gas emissions arise from a number of
sources including agriculture and land use change (largely methane from livestock), the waste sector (e.g. from landfill)
and industrial process emissions, for example in the cement and paper industries.
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32
The UK Low Carbon Transition Plan
Analytical Annex
Under carbon budgets, emissions associated
with land use, land use change and forestry are
treated in line with current UNFCCC reporting
requirements, in a more comprehensive way
than under the Kyoto protocol which only
considers a subset of these emissions. As is
the case under the Kyoto protocol, emissions
from international aviation and international
shipping are not included in carbon budgets,
as there is currently no internationally agreed
methodology for attributing these emissions to
individual countries. However, section 10 of the
Climate Change Act requires we take account
of these emissions in setting carbon budgets.
Where we are now:
current emissions
The most recent year for which full inventory
data on UK GHG emissions are available is
2007. In 2007, approximately 85% of UK
GHG emissions were CO2 emissions, the vast
majority of which are energy system related.
The other 15% are non-CO2 GHG emissions
such as methane emissions from livestock
and waste.
Around 40% of the UK’s emissions are
covered by the EU Emissions Trading
System. This is a cap-and-trade scheme
which sets a limit (cap) on emissions in the
EU’s power and heavy industry sectors.25
The UK’s share of the EU Emissions Trading
System cap in 2007 was 12.5% of the total
cap. Within the UK, emissions of CO2 in the
EU ETS (‘traded sector’) were 256.3 MtCO2
in 2007. To comply with the EU Emissions
Trading System, UK installations were net
importers of EU allowances, importing 25.7
MtCO2e of allowances. Within the UK, in
sectors of the economy not covered by the
ETS (‘the non-traded sector’), CO2 emissions
were 286.3 MtCO2.
Non-CO2 GHG emissions were 93.7MtCO2e
in 2007, which is 48% lower than in 1990.
This reflects the already substantial progress
that has been made to reduce non-CO2
GHG emissions in a number of sectors. For
example, methane emissions from waste
landfill have fallen by 59% between 1990
and 2007, and are projected to fall by 63%
by 2020 (relative to 1990 levels). Likewise,
overall GHG emissions from agriculture
(predominantly nitrous oxide and methane)
have fallen by 21% since 1990. Overall,
non-CO2 GHG emissions were 48% lower
in 2007.
In total, the net UK carbon account was 610.6
MtCO2e in 2007, in 1990, the corresponding
figure was 777.4 MtCO2e. There has therefore
been a 21% reduction between 1990 and 2007.
25 See ‘Reducing emissions in sectors covered by the EU ETS’ section later in this chapter for further detail.
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Chapter 3:
Reducing UK Emissions of Greenhouse Gases from 2008-2022
Principles for developing
policies to reduce
emissions
Achieving the 2050 GHG emissions
reductions target will require Government
intervention. This section sets out the
economic principles underlying that
intervention and informing the policies set
out in this Transition Plan. These are set out
in more detail in a Government publication
“Making the right choices for our future”,
published in March 2009.26
There are extensive market failures and
barriers to action, the combined impact of
which lead to a higher level of emissions
than is socially optimal. Without intervention,
the market will under-allocate resources
to reducing GHG emissions. Where policy
instruments address one or more of these
market failures, and do so effectively, overall
welfare will be increased.
UÊ The emission of greenhouse gases is a
negative externality. Those who emit
them do not suffer the damages that they
cause. This results in more greenhouse
gas emissions than is optimal for society
as a whole.
UÊ There are behavioural barriers to exploiting
low and negative cost abatement options.
For instance imperfect information about the
options and availability of energy efficiency
technology, or the costs of the energy
being used, may lead to under-investment
in reducing energy consumption.
UÊ Those investing in innovation create
positive externalities in the shape of
new knowledge and skills which spread
beyond the investor. Owing to this
positive externality, without intervention,
investment in low carbon research and
development would be lower than the
socially optimal level. There are further
33
11
barriers to innovation which will further
dampen investment, such as regulatory
uncertainty and information asymmetries.
Individual policy interventions are justified on
their ability to address specific market failures
or barriers which prevent the exploitation
of cost-effective carbon abatement
opportunities. The Impact Assessments of
the individual policies comprising our overall
plan all set out the rationale for intervention
on this basis.
The greenhouse gas emissions externality
can be addressed through ensuring that those
who release emissions face a price for doing
so, that reflects not just their private costs
of releasing emissions but the wider social
costs too. Increasing the cost of producing
emissions aligns the incentive for individuals
or firms to reduce their emissions with the
social benefit from lowering emissions. It
increases the incentive for individuals or firms
to invest in installing low carbon technologies.
A price can be placed on greenhouse gas
emissions through the introduction of carbon
taxes, cap and trade schemes or implicitly
through regulations requiring investments in
more costly low carbon technologies.
There are a diverse set of behavioural barriers
to the exploitation of carbon abatement
options. These range from informational
barriers and split-incentives to psychological
and sociological factors creating inertia.
Policy interventions to address these
barriers can include regulations, information
campaigns and technologies to raise the
visibility and therefore the awareness of
energy use and the associated emissions.
Tackling the greenhouse gas emissions
externality and behavioural barriers above, is
fundamental in laying the foundation for low
carbon innovation to take place, as it largely
determines the likely level of demand for
future goods and services.
26 http://www.defra.gov.uk/environment/climatechange/research/economics/framework.htm
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Government also needs to give support at
the appropriate time and in the appropriate
way if it is to bolster low carbon industries’
innovation. This will depend on the sector,
its market structure and the profile of
organisations operating within it.
Overall, the ideal policy framework is
one that is flexible enough to adapt to
changing circumstances while still providing
businesses and individuals with policy
certainty to make long-term investment
decisions. Fundamental to this effort is
securing a global agreement to reduce
greenhouse gas emissions. Designing
domestic climate change policy around
international interventions, and adjusting
it dynamically alongside significant actions
to tackle the problem at the global level,
will help achieve the required emissions
reductions in a cost effective manner.
In estimating the impacts of this plan on
emissions and its overall costs, it is necessary
to define which policies are included in the
package and to compare the world with their
impact to a baseline case, the counterfactual,
without them. The following section sets out
the approach taken to defining the baseline.
Baseline used in this
analysis
The Transition Plan sets out a package
of policies to meet the first three carbon
budgets. To assess the impacts of this
package it is necessary to define firstly the
scope of the package – which policies are
included – and secondly what the baseline for
comparison is – the world without the policies.
Defining the scope of the package requires
a decision on the inclusion or exclusion of
particular policies. The decision has been
taken to include those policies which have
been announced more recently than the 2006
Climate Change Programme. Where there has
been an extension to policies which existed
DEC-PB13289_AnAnnex.indd 34
prior to the Climate Change Programme the
extended ambition has been included in the
package. A detailed list of policies included
is shown below. This list includes policies
announced in the 2007 Energy White Paper,
the Renewable Energy Strategy policies and
additional policies set out in this Transition
Plan. This decision has been taken as it goes
far enough back to capture the most active
policies contributing to meet the first three
carbon budgets, and aligns the policy baseline
with that used by the Committee on Climate
Change in their December 2008 report.
The policies set out in the Transition Plan
which are included in the package of policies
and proposals are:
UÊ The December 2008 EU Climate and
Energy Package agreement to a tightening
of the EU Emissions Trading System cap in
Phase 3 (2013 – 2020) (baseline assumes a
continuation of the Phase 2 EU ETS cap);
UÊ The Renewable Energy Strategy
(Renewable Electricity and Renewable
Heat). This includes the extension of the
Renewables Obligation, Feed-in-Tariffs,
the Renewable Heat Incentive and the
extension of bio-fuels to 10% by energy;
UÊ Vehicle efficiency standards, EU new car
average fuel efficiency standards of 130g/
km by 2015, the additional impact of
further new car efficiency improvements
to 95g/km by 2020 and new van average
efficiency standards of 160g/km.
UÊ Complementary measures for cars (gear
shift indicators/low rolling resistance tyres/
more efficient air conditioning/tyre pressure
monitoring/ low viscosity lubricants);
UÊ Low rolling resistance tyres for HGVs;
UÊ SAFED bus driver training;
UÊ Illustrative rail electrification of 750km of
single track rail line;
UÊ Carbon Reduction Commitment;
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UÊ Extension to Climate Change Agreements;
UÊ One-off interest free loans to SMEs;
UÊ The Carbon Emissions Reduction Target;
UÊ One-off interest free public sector loans;
UÊ Future Supplier Obligations for domestic
energy efficiency;
UÊ Agriculture proposals; and,
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11
UÊ Waste proposals (Food to anaerobic
digestion, diverting wood waste and raising
landfill tax in budget 2009).
UÊ Community Energy Savings Programme;
UÊ Zero Carbon Homes;
UÊ Smart-metering (households and business);
UÊ Energy Performance of Buildings Directive –
Includes Energy Performance Certificates,
Display Energy Certificates for public buildings,
inspections for air conditioning systems,
and advice and guidance for boiler users.
UÊ Product policy – minimum standards and
labelling, in line with ambition announced in
the Energy White Paper 2007;
Meeting carbon budgets:
Emissions projections from
2008 to 2022
The policies set out in this Transition Plan
will allow us to meet our carbon budgets
on central expectations. Chart 9 shows
central projections for the net UK carbon
account up to 202227 with and without the
Chart 9
Central Projections for the net UK carbon account with and without the
Transition Plan Package of Policy Measures
650
Greenhouse gas emissions MtCO2e
600
550
500
450
400
0
2008
2009
2010
2011
2012
2013
2014
Power & heavy industry
Transport
Workplaces
Farms & countryside
2015
2016
2017
2018
2019
2020
2021
2022
Homes
Source: Department of Energy and Climate Change (2009)
27 CO2 projections from the DECC energy model, non-CO2 projections are produced under contract by AEA technology Ltd.
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The UK Low Carbon Transition Plan
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policies presented here. Central projections
show the net UK carbon account to be lower
than each of the first three carbon budgets.
The combined impact of the Transition Plan
policies is to reduce projected emissions
by 459 MtCO2e over budget three and 715
MtCO2e over the three budgets as a whole.
There is, however, considerable uncertainty
over emissions projections. There are
several factors which are key drivers of the
level of emissions. These include changes
in fossil fuel prices, external temperatures,
energy use, GDP and population growth.
There is also uncertainty about the extent
to which policies will be effective in
reducing emissions. Further, there is wider
uncertainty about the way society and the
UK energy system will evolve in the future.
An estimated range for the uncertainty
surrounding UK net carbon emissions
projections for each of the three carbon
budget periods from 2008 – 22 is shown
in Chart 10.28
The uncertainty means that we cannot rely
on central estimates alone to demonstrate
that we are on track to meet carbon budgets.
In the rest of this section, we set out how
Government has dealt with this uncertainty
in developing its package of policies to meet
carbon budgets. We cover first those sectors
Chart 10
Uncertainty around emission projections
MtCO2e
3500
3000
2500
2000
Gap: -44
Upper: 62
Lower: -145
Gap: -64
Upper: 65
Lower: -184
Gap: -39
Upper: 126
Lower: -170
1500
1000
500
0
Budget 1
Budget 2
Central projections – without Transition Plan policies
Budgets
Budget 3
Projections – with Transition Plan policies
Source: Department of Energy and Climate Change (2009) Negative implies that emissions are below the budget
28 There is relatively greater uncertainty over projected emissions from the agricultural sector. The projections for
greenhouse gas emissions from agriculture are based on a scenario for the sector, developed by ADAS in 2005,
which contains considerable uncertainty about the likely future structure of the agriculture sector. The methodology
used to estimate greenhouse gas emissions from agriculture is fairly simple, using absolute numbers of livestock,
area of land under arable crops and amount of fertiliser used. There is therefore a significant margin of error associated
with estimates of emissions from the agriculture sector for any given year, although the trend over time is likely to
be much more reliable. Defra is considering currently how to develop a more refined inventory for emissions from
agriculture. Significant changes to how emissions are estimated could have implications for carbon budgets, in which
case the Government might seek the advice of the Committee on Climate Change on how to take this into account.
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for which uncertainty over emissions has
effectively been eliminated – the power and
industrial sectors capped by the EU Emissions
Trading System – and then the remaining
sectors of the UK economy, emissions from
which show significant uncertainty.
Reducing emissions in
sectors covered by the
EU ETS
The EU Emissions Trading System (ETS)
covers 42% of EU GHG emissions and 41%
of UK GHG emissions. There is certainty
in the overall level of emissions within the
capped sectors across the EU as a whole.
The agreement reached in December 2008
achieves an EU wide reduction of 22% in
traded sector emissions in 2020 relative
to 2005 verified emissions. The EU has
committed to a larger reduction in EU
greenhouse gas emissions following an
international deal – the proportion of the
additional effort which would come from the
ETS sectors is yet to be negotiated, but once
agreed there would again be certainty over
ETS sector emissions across the whole
of the EU.
The creation of an EU wide cap has the
strengths of providing certainty over the
quantity of emissions, while the flexibility
created through the trading mechanism
allows these reductions to be achieved
efficiently, at least cost.
DEC-PB13289_AnAnnex.indd 37
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11
The net UK carbon account and the
traded sector
The traded sector (the sectors of the UK
covered by the EU ETS) makes a contribution
to the net UK carbon account that is equal to
the UK’s share of the EU ETS cap. If EU ETS
installations in the UK emit more than the
UK share of the cap then there will be a net
import of allowances to the UK. Importing
allowances will fund equal and opposite
emissions reductions in the wider EU, or in
developing countries.
Chart 10 above, showing we are on track to
meet our carbon budgets, shows the net UK
carbon account. The projected level of the
net carbon account includes a credit equal
to the level of net imports of EU allowances
from the EU Emissions Trading System or a
debit where the UK is a net exporter. In some
years over the period to 2022, the UK is
projected to be a net importer of allowances,
in other years the UK is projected to be a
net exporter. Over the period as a whole the
UK is projected to export a small number of
allowances (13MtCO2e). This means that UK
territorial emissions over the three carbon
budgets will be lower than the projected level
of the net UK carbon account by 13MtCO2e.
Chart 11 shows traded sector emissions in
the UK and the UK share of the EU ETS Cap.
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The UK Low Carbon Transition Plan
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Chart 11
UK Territorial Emissions in the Traded Sector and the UK Share of the
EU ETS Cap
MtCO2e
300
250
200
150
100
50
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
-50
Traded emissions with package
UK share of EU ETS cap
Net purchase of allowances
Source: Department of Energy and Climate Change (2009)
To note: Chart 11 includes domestic aviation, but excludes international aviation.
The important point to note is that changes
in UK territorial emissions (represented
by the navy line in the chart above) in the
capped sectors will not change the level
of emissions across the EU as a whole.
The availability of allowances is unchanged.
The additional reduction in capped sector
emissions in the UK would alter the
distribution but not the level of emissions
across the EU as a whole. Similarly, the
net UK carbon account – which is used for
determining compliance with carbon budgets
– would be unchanged by any reduction
in UK territorial emissions within the EU
ETS sectors. Under the carbon accounting
regulations for UK carbon budgets,29 the
contribution of the traded sector to the net
UK carbon account will always be equal to
the UK’s share of the
EU ETS cap – the quantity of auctioning
rights allocated to the UK government plus
the free allocation of allowances to UK
installations as represented by the pale line
in the chart above.
There is still a rationale for the
Government to seek abatement in
the traded sector
This does not mean that the UK Government
can be complacent about decarbonising the
sectors covered by the EU ETS. There are
still strong reasons for the UK to seek out
emissions reductions in the traded sectors.
29 The Carbon Budgets regulations can be found at: www.opsi.gov.uk/si/si2009/uksi_20091257_en_1 Further information
can be found on DECC Carbon Budgets web page: www.decc.gov.uk/en/content/cms/what_we_do/lc_uk/carbon_
budgets/carbon_budgets.aspx
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Reducing territorial UK emissions in the
traded sector reduces the number of
allowances that are imported, or increases
the number of allowances that are exported
by the UK. This carries an economic benefit
approximately equal to the value of EU
allowances.30 Where the UK can reduce
emissions in the traded sector at a lower
cost than the EU allowance prices there will
be a net benefit to the UK with the overall
cost of complying with the EU ETS reduced.
Policies that address barriers or market
failures in the traded sector, allowing low
or negative cost abatement to be exploited,
will also reduce the price of EU allowances
and so minimise impacts on energy bills for
businesses and consumers across the EU.
Further, successfully exploiting low cost
abatement potential and supporting low
carbon innovation in the traded sector could
facilitate the negotiation of future, ambitious
caps which are consistent with a trajectory
towards the UK’s 2050 target.
Reducing territorial UK emissions in the
traded sector may carry other ancillary
benefits, such as improvements to air
quality and energy security. Energy and
process efficiency savings, where these
can be achieved cost-effectively, place UK
companies in an advantageous position for
handling the tighter EU ETS and global caps
in the future.
A wide range of policies are in place to
achieve reductions in emissions in the
traded sector – for example policies targeting
improvements in energy efficiency (such as
product regulations) or policies seeking to
support innovation in the traded sector and
bring down the future costs of abatement
(such as Carbon Capture and Storage
(CCS) demonstration).
39
11
Residual uncertainty over the UK
share of the EU ETS cap
The EU ETS cap creates certainty over EU
wide emissions in the ETS sectors. However,
there is still some residual uncertainty over
the UK’s exact share of the ETS cap for
Phase 3 of the EU ETS, running from 2013
to 2020. Although the share of auctioning
rights allocated to the UK Government has
been agreed, there remains uncertainty
over the exact level of free allocation of
allowances to UK installations owing to
a variety of factors including uncertainty
surrounding the patterns of openings and
closures of plants receiving free allocations.
Further, the detailed implementation of
the revised EU ETS Directive is still being
negotiated, covering issues such as detailed
rules for allocating free allowances to
different industries reflecting technologies
used and the competitive pressures they
face from outside the EU. Should the actual
level of allocations to UK installations differ
significantly from the estimated level used
to set carbon budgets, the traded sector
component of the budget may need to be
amended, taking into account the advice of
the Committee on Climate Change.
Reducing emissions from
sectors not covered by the
EU ETS
Government’s approach to
developing policies in sectors not in
the EU ETS
There is a much greater challenge for
Government in tackling emissions from
sectors outside the EU ETS, (the ‘non-traded’
sector) since these are not capped. The
general principles for developing policies
to overcome market failures still apply,
30 This is only an approximation owing to second order effects. Lower demand changes the market price of allowances
which in turn changes the distribution of EU ETS emissions, and the cost to the UK of its remaining imports of
allowances (or reduce the revenue from exports of allowances).
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The UK Low Carbon Transition Plan
Analytical Annex
but in addition a number of more specific
challenges, relating to the uncertainty
surrounding uncapped emissions, need
to be overcome. This section sets out
Government’s specific approach to
developing policies to reduce emissions from
these sectors, based on: a clear assessment
of feasible technical potential for reducing
emissions; a focus on the potential of
individual measures to overlap and interact
with each other through the analysis of
packages of measures; and a variety of
approaches to dealing with the inherent
uncertainty in emissions from these sectors.
Assessment of emissions
reduction potential
In its December 2008 report31 the CCC
provides an analytical view of the costeffectiveness of technical options to deliver
reductions in non-traded sector emissions.
This analysis has been supplemented
by Government analysis to inform the
development of the package of policies.
The CCC’s analysis considered feasible
technical abatement potential relative to a
baseline level of emissions. The baseline was
generated for the CCC using 2008 fossil fuel
price assumptions, 2008 growth assumptions
and included the impact of policies up to and
including those which were announced in the
UK Climate Change Programme
2006 (UKCCP).32
The CCC’s analysis of the cost-effectiveness
of abatement options can be presented in
the form of a marginal abatement cost curve
(MACC). An example MACC is shown in
Chart 12. The MACC presents in order of
cost-effectiveness the options for reducing
emissions in the non-traded sector in 2020.
Each rectangle represents a technical option
for reducing emissions, with the height of
the box determined by the measure’s costeffectiveness and the width by the volume of
abatement that it is feasible for this measure
to achieve in the year 2020.
The MACC below shows the ‘high feasible’
abatement potential identified by the CCC.
This includes abatement measures from
industry, domestic and non-domestic
buildings, transport, agriculture and waste
sectors. Approximately 33% of abatement
potential is from transport measures and
35% of total abatement potential is negative
cost, i.e. money saved by implementing
the measure would outweigh any costs.
Of this negative cost abatement potential,
about 20% is from non-CO2 measures
(predominantly agriculture), and 28% is from
energy efficiency measures in the domestic
sector, for example, insulating your home.
31 “Building a Low Carbon Economy – the UK’s contribution to tackling climate change” (December 2008). Available at
http://www.theccc.org.uk/pdf/TSO-ClimateChange.pdf
32 http://www.defra.gov.uk/environment/climatechange/uk/ukccp/pdf/ukccp06-all.pdf. The CCC baseline level of emissions
differs slightly from the no policy projection that is used in this annex. Both the CCC baseline and the no policy and
proposal projection were generated by the DECC energy model, however the CCC baseline was generated in 2008
using older fossil fuel price and growth assumptions. There has also been some minor re-evaluation of policy delivery
from the UKCCP 2006. Though this complicates the interpretation of the CCC MACC, the differences are not sufficiently
material to invalidate the CCC cost-effectiveness analysis, or their assessment of the volume of abatement that
particular technical measures could deliver.
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11
Chart 12
A Marginal Abatement Cost Curve in the Non Traded Sector
£/tCO2e
13,950
4,600
Domestic
Non-domestic
Transport
Industry
Agriculture
Waste
900
300
250
200
150
100
50
0
-50 0
5
10
15
20
25
30
-100
35
40
45
50
55
60
65
70
MtCO2e
-150
-200
-250
-3,450
Source: Committee on Climate Change (2008)
Further analysis undertaken by Government
and other bodies indicates that potential
in some areas may be lower than the CCC
analysis suggested or come at a higher cost.
For example:
UÊ The CCC MACC analysis assumed that
the capital costs of solid wall insulation
were £4000 for an average 3 bed property.
However, there remains considerable
uncertainty over the future costs of solid
wall insulation. A solid wall supply chain
review carried out by the Energy Saving
Trust in April 2009 suggested that the costs
of installing solid wall insulation for a single
property would on average be more than
three times this cost (£12600) and that
even for multiple property installations the
costs would still be two and a half times as
expensive (£10000).33
UÊ Research commissioned by the
Department of Energy and Climate Change
into ‘hidden costs’34 has indicated that
there are real and substantial time and
financial costs associated with domestic
energy efficiency and carbon saving
measures that existing cost-effectiveness
analysis neglects. These hidden costs
mean that the CCC analysis overstates
the cost-effectiveness of many household
measures (including, again, solid wall
insulation). This in part explains why
apparently profitable energy efficiency
measures are not being taken up by
households and reduces the cost-effective
potential from the domestic sector.
33 It should be noted that there is considerable uncertainty over learning rates for solid wall insulation which could reduce
both the cost of installation, and the hidden costs associated with the measure (for instance by reducing the thickness
of insulation required or by installing alongside other measures).
34 “The hidden costs and benefits of domestic energy efficiency and carbon saving measures” ECOFYS, May 2009
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UÊ In agriculture, some mitigation measures
identified by the CCC were excluded from
elements of Government’s analysis of
feasible technical potential on the basis
that there was insufficient evidence to be
certain of their effectiveness in the UK
(e.g. nitrification inhibitors), or that they
were currently not permitted for use in the
EU (ionophores and bST hormones). Even
those mitigation measures which have been
identified as offering realistic potential are
subject to significant scientific uncertainty.
However, the evidence base and legislative
situation for some mitigation measures
may change over time and demand or other
factors may change the cost-effectiveness
of other measures. The Government’s
policy strategy in agriculture will not be
based exclusively on one piece of analysis
and will consider ways that other promising
mitigation measures can be developed
through Government intervention.
UÊ In waste, the measures outlined in this
Transition Plan concentrate on reducing
landfill methane emissions. The CCC
also included abatement potential arising
from renewable energy, which overlaps
with other policies in the Transition Plan,
and hence would be double-counted if
apportioned to waste. In addition, the CCC
assigned lifetime methane savings to the
year that the waste is diverted from landfill
(the emissions savings actually occur over
100+ years), whereas for the purposes of
carbon budgets it is necessary to assign
methane savings to the years in which
they are actually emitted.
UÊ In transport, the potential emissions
savings in the UK may be dependent
on international agreements on the
policies that would deliver the technical
abatement potential identified by the CCC.
For example, the EU new car efficiency
regulation agreed in December 2008 set a
target for new cars sold across the EU of
DEC-PB13289_AnAnnex.indd 42
95gCO2/km by 2020. The CCC therefore
modelled the technology bundles that could
deliver a 95g average for new cars sold in
the UK. However, the regulation does not
prescribe the efficiency of cars that are
bought in any one member state, as the
target is for sales across the EU as a whole.
New car fuel efficiency in the UK has
historically tracked above the EU average
by around 6gCO2/km, and our central
forecast is for the UK to continue to track
above the EU average. Measures could be
implemented to encourage the take-up of
the lowest emitting cars in the UK, but as
the target is set as an average across the
EU, this would not affect the level of global
emissions, but would displace emissions
reductions elsewhere in the EU.
UÊ These views are reflected in the package
of policies that has been developed.
The CCC MACC shows potential abatement
by technical measure (that is, it represents
assessments of the abatement that could be
brought about by the actions and behaviour
of individuals and firms, such as installing
insulation in a home). There are complications
when moving from these technical measures
to a package of policies.
UÊ Government intervention rarely targets
individual technologies;
UÊ Overlaps between policies create
difficulties in accounting for their overall
impact; and
UÊ The UK GHG inventory must be
sophisticated enough to pick up the impact
of the methods that policies incentivise.
Flexible policies
MAC curves provide a guide to the potential
and future costs of technical measures.
However, since these are subject to
considerable uncertainty, policies should not
be overly prescriptive as to the measures
that should be taken up.
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Reducing UK Emissions of Greenhouse Gases from 2008-2022
Flexible market based policies can reveal
the lowest cost measures by harnessing
individual investment decisions. Price
instruments improve the economics of low
carbon technologies relative to more polluting
substitutes. Those investing will respond
to the carbon price signal, investing in the
technologies that are most cost-effective at
the time they are making the decision.
An example of a price-based instrument is
the Carbon Reduction Commitment which
will place a cap on the emissions of
non-energy intensive businesses and the
public sector. It does not specify which
abatement technologies must be used
to meet the cap which should result in
abatement being achieved at least cost.
Dealing with overlapping policies
Because climate change policies rarely target
specific abatement measures, several climate
change policies may be encouraging the take
up of the same underlying technical carbon
abatement options. For example, a retail firm
which installs more energy efficient fridges
may do so in response to none, some or all of
the following policies: the EU ETS increasing
electricity prices, participation in the Carbon
Reduction Commitment, the Climate Change
Levy, product regulations, Carbon Trust
advice, an interest free loan or feedback from
their smart-meter, etc. If in performing policy
appraisal all of these policies are attributed
the savings associated with the more efficient
fridges, then the sum of savings from all the
policies will be overstated.
To minimise the risk of over-stating the
savings from policies a package approach
has been adopted when accounting for the
impact of policies on emissions.
In the transport sector, policies are modelled
sequentially through the National Transport
Model. Transport emissions are modelled
after the introduction of each additional
43
11
policy with the additional policy attributed
the change in emissions since the previous
run of the model. This ensures that the
total savings attributed to individual policies
sum to the total modelled savings from the
package of all the policies acting together.
In the non-transport sector there are three
overarching policies which provide a degree of
aggregate certainty over the level of emissions
reductions that will occur within their scope.
These policies are the Carbon Reduction
Commitment (CRC), the Climate Change
Agreements and obligations on domestic
energy suppliers. Each of these policies and
the policies they interact with are treated as
packages – the ‘non-energy intensive business
and public sector package’, the ‘energy
intensive business package’ and the ‘domestic
energy efficiency package’ respectively.
Some non-transport abatement options
occur outside of the three packages – notably
non-CO2 GHG abatement, abatement from
non-energy intensive organisations too small
to be included in the CRC and lifestyle changes
in the domestic sector. For policies targeting
these reductions, particular vigilance is
required to account for policy interactions
when assessing savings.
The costs and benefits of renewable
measures are attributed to the Renewable
Energy Strategy policies owing to the
substantial incentives that these policies
offer. For instance, owing to their eligibility for
renewable incentives, the costs and benefits
of on-site micro-generation installed as part
of zero carbon homes building regulations are
not accounted for in the net present value of
Zero Carbon Homes but in the net present
value of the renewables policies.
Each policy appraisal has been peer reviewed
through the Inter-Departmental Analyst
Group35 to ensure consistency of the policy
appraisal and to ensure that the policy
overlaps have been fully considered.
35 See www.decc.gov.uk
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Sensitivity of the inventory
The UK GHG inventory used to record
emissions from agriculture is based on a very
simple methodology, using absolute numbers
of livestock, area of land under arable crops
and amount of fertiliser used. This means
that, in its current form, it would be unable to
account for many of the emissions reductions
which would occur as a result of the measures
currently envisaged for the agriculture sector
within this Transition Plan. In addition, many
of these measures are in any case subject to
significant scientific uncertainty in terms of
their abatement potential.
Measuring the impact and effectiveness
of these measures would require moving
from the current ‘Tier 1/2’ system within the
inventory to a Tier 2 or 3 system, facilitating
a considerably higher temporal and spatial
resolution and a focus on land management
activities at a much more detailed level. This
would allow individual mitigation measures to
DEC-PB13289_AnAnnex.indd 44
be accounted for in a verifiable way. This will
need substantial investment and a proposal
has been drawn up to take this forward.
Overall Impact of Policies
on Emissions From 2008
to 2020
Bringing the analysis of policies together
forms a central estimate of emission
savings from the EU ETS and sectors not
covered by the EU ETS. Table 4 lists the
policies with their carbon savings. The overall
carbon savings differ from the sum of the
individually appraised policy savings owing
to macro-economic interactions that arise
in the Department of Energy and Climate
Change energy model. With the policies
set out in this Transition Plan, we are on
track to meet all three carbon budgets on
the central projections and save in total
around 700 million tonnes of CO2e.
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Reducing UK Emissions of Greenhouse Gases from 2008-2022
45
11
Table 3
Impacts on emissions in policies in this Transition Plan (MtCO2e)
Budget 1
(2008-12)
Budget 2
(2013-17)
Budget 3
(2018-22)
Budget level
3018
2782
2544
Central projections
Without Transition Plan policies
2987
2961
2964
Savings from policies
Package of policies appraised and entered into
the model
12
232
455
Macro-economic interaction
Within the Department of Energy and Climate
Change model36
1
11
3
Total Savings
13
243
459
2974
2718
2505
-44
-64
-39
-145 to 62
-184 to 65
-170 to 126
MtCO2e
Central projections with Transition Plan policies
Carbon budget ‘Gap’37
Range for carbon budget ‘Gap’
36 The savings from the package of policies, when modelled in the DECC energy model, do not exactly equal the
appraised savings from the policies owing to interactions within the model. The interaction effect is small relative to the
volume of appraised savings.
37 Negative value implies emissions are lower than the budget. Figures may not sum due to rounding.
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The UK Low Carbon Transition Plan
Analytical Annex
Table 4
Detailed breakdown of savings delivered by Transition Plan policies by
budget period (MtCO2e)
Budget 1
(2008-12)
Budget 2
(2013-17)
Budget 3
(2018-22)
0
155
248
New Car CO2 standards to 2015
0
5.1
20.1
Additional Renewable Transport fuels, 10% by
energy by 2020
0
9.1
30.1
Low Carbon Buses
0
0.2
0.9
0.4
1.0
1.0
Domestic energy efficiency package39
9.3
30.4
45.8
Product Policy (additional to the domestic
energy efficiency package)40
-0.8
-2.4
-4.5
Zero Carbon Homes
0.1
0.6
2.2
Smart-metering and better billing
(lifestyle changes)
0.9
2.1
1.8
Community Energy Saving Programme
0.2
0.1
0.1
Non-energy intensive business and public
sector package41
0.3
2.4
4.6
One-off interest free public sector loans
0.1
0
0
One-off interest free loans to SMEs
0.2
0.2
0
Product Policy for SMEs
-1.1
-2.5
-3.9
Smart-metering for SMEs
0.1
2.2
4.7
MtCO2e
Policies (firm and funded) EU ETS
Reduction in UK share of EU ETS cap38
Transport
SAFED training for bus drivers
Households
Business and Public Sector
38 Reductions due to policies introduced prior to the Energy White Paper 2007 are not shown, and the EU ETS cap for
2008-2012 was set before then which means that savings for that period are not shown here. Savings in budget 2 and 3 are
relative to the UK share of the cap in 2008-12.
39 Includes: the full impact of CERT (a minority of this ambition was announced prior to the 2007 Energy White Paper, where
it was extended. It was subsequently further extended in September 2008); Future supplier obligation; Energy performance
Certificates; better billing and smart-metering; product policy, and Heat & Energy Saving Strategy Supporting Measures.
In a separate exercise estimated savings from residential smart meters have been revised and, whilst overall CO2 savings
are broadly similar, they are more weighted to the non-traded sector and to later years than is suggested here.
See: http://www.decc.gov.uk/en/content/cms/consultations/smart_metering/smart_metering.aspx
40 Product Policy savings are negative because of the Heat Replacement Effect: more energy efficient products create less
ambient heat which needs replacing via alternative fuel sources. Overall, products policy provides a significant net benefit,
due to savings in emissions in the traded sector and their associated benefits. Non-traded sector emissions increases
presented above for products policy are not the most up-to-date, and should be treated as higher-bound/cautious
estimates, which we plan to improve on in the future as further evidence becomes available.
41 Includes the Carbon Reduction Commitment, Energy Performance of Buildings Directive, Business Smart-metering,
Product Policy, Public sector targets and loans, Carbon Trust advice and loans.
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EPBD for SMEs
0
0.3
0.7
0.7
11.1
42.6
0
0.8
1.7
Excluding EU Emissions Trading System
10.5
60.7
147.6
Including EU Emissions Trading System
10.5
215.4
395.8
0
1.0
18.5
EU New Van CO2 regulations
1.0
5.2
9.3
Complementary measures for cars
0.3
2.6
3.7
Low rolling resistance tyres for HGVs
0
0.1
1.1
Illustrative Electrification of 750km of
single track rail line
0
0
0.8
0
8.0
8.0
0
0
3.3
0
0
15.0
1.3
17.0
59.6
11.7
232.4
455.4
47
11
Renewables
Renewable heat (RHI plus supporting measures)
Waste
Increased Landfill Tax (Budget 2009)
SUBTOTAL (firm and funded policies)
Further intended abatement
Transport
EU New Car CO2 regulation: 95g/km by 2020
Business and Public Sector
Energy intensive business package42
Waste
Diverting food waste away from landfill
Diverting wood away from landfill
Agriculture
Crop management and fertiliser use
Enteric fermentation and methane
Manure management
SUBTOTAL (further intended abatement)
TOTAL43
Total savings (appraised and entered into the model)
42 Includes the extension to Climate Change Agreements, Energy Performance of Buildings Directive, Business Smartmetering, Products Policy, Carbon Trust advice and loans
43 Figures may not sum to this total due to rounding.
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The UK Low Carbon Transition Plan
Analytical Annex
We are therefore on track to meet our
carbon budgets on central expectations.
However, the uncertainty in projecting future
emissions is such that there is a significant
chance that domestic emissions will be
higher than central projections. There are
a number of elements to Government’s
strategy for dealing with this uncertainty:
UÊ The package approach set out above
should ensure we can have greater
confidence in the emissions savings
attributed to policies than has been the
case previously. This will help deal with
policy uncertainty.
UÊ For the first two budget periods in
particular, the net UK carbon account
is projected to be lower than required
to achieve our carbon budgets by
147MtCO2e. Any contingency reserve
built up helps to deal with unexpected
events, such as significantly lower fossil
fuel prices than assumed in our central
price scenario.44 (If fossil fuel prices were
lower than expected under our central
projections – $60 as opposed to $80 per
barrel in 2020 – this would only increase
total emissions by 64MtCO2e over the
three budget periods. This is less than our
contingency reserve so we would still be
on track to meet the carbon budgets.)
particularly. Further work will be carried
out on policy proposals to target some of
the untapped cost-effective potential to
provide a greater contingency and to further
prepare the UK for tighter international
targets. Further work is being carried out on
policy proposals for SMEs, and further nonCO2 GHG abatement from agriculture.
UÊ There may be further abatement
available from broader behavioural
change. Government will seek to unlock
this through a variety of means. Reductions
in emissions can be achieved if people and
business switch to less energy intensive
activities or reduce their waste of energy.
However the evidence base is too thin to
quantify the savings that will be delivered.
Government will work to develop this
evidence base – for example through the
pilot schemes in the transport sector and
the assessment of Real Time Displays.
UÊ Over-achievement can be banked.
The Climate Change Act permits unlimited
banking of over-achievement from one
budget period to another. This maintains
an incentive for the UK to make emissions
reductions as and when it is cost-effective
to do so, even when on track to meet the
current budget. Banked allowances would
increase the contingency to cope with
unanticipated increases in emissions.
UÊ Taxes and other economic instruments
can play a significant role in delivering
carbon budgets. The Government will
continue to examine options for further
carbon savings from such measures,
but must take into account primary
considerations such as broader fiscal,
economic and social objectives. The
Government has committed to aiming
to reform the tax system to increase
incentives to reduce environmental
damage, shifting the burden of tax
from “goods” to “bads”. Of course,
environmental taxation must be welldesigned and must continue to meet
the tests of good taxation – including
economic efficiency, acceptable
distributional impacts, and implications
for international competitiveness.45
UÊ We are exploring further policies
in a variety of areas; non-CO2 GHG
emissions, forestry and SME emissions
UÊ Credits. Government has made it clear
that it intends to achieve the current
carbon budgets without purchasing credits,
44 http://www.berr.gov.uk/files/file51365.pdf
45 http://www.hm-treasury.gov.uk/prebud_pbr02_adtaxenvir.htm
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Reducing UK Emissions of Greenhouse Gases from 2008-2022
outside of the EU Emissions Trading
System – consistent with CCC advice
and to prepare for the more stringent
budgets that would follow a substantive
international deal. The option remains
of using credits in the non-traded sector
in the event that expected domestic
emissions reductions are not fully realised,
consistent with the advice of the CCC
that it would be prudent to reserve such
an ‘insurance option’. In the case of the
first budget period, this would require an
amendment to the zero limit on credit use
outside the EU ETS set in legislation.
UÊ The Climate Change Act allows a limited
level of borrowing from future budget
periods (1% of the next budget) to reconcile
an overshoot of a budget. Borrowing would
entail greater action in the next budget
period, both to get back on track and to
meet the now more stringent budget.
Policies to support
Innovation and bring down
long term costs
This Transition Plan sets out the policies
Government has put in place to meet the
first three carbon budgets. But it is also key
that we develop policies to ensure we are on
track to meet our 2050 target cost-effectively,
which means creating an appropriate
framework for investment and innovation,
addressing market failures where they exist,
such as positive externalities, information
failures and barriers to entry. Government
needs to give support at the appropriate time
and in the appropriate way if it is to bolster
low carbon industries’ innovation. This will
depend on the sector, its market structure
and the profile of organisations operating
within it. Policies in this Transition Plan
support innovation in a variety of sectors.
49
11
Pull and push support
Interventions to increase low carbon
innovation can be broadly categorised as
either increasing the demand side ‘pull’ for low
carbon technologies or providing a technology
‘push’ by increasing early stage research into
low carbon technologies. A balance is required,
with the optimal mix for particular technologies
depending on where a potential technology
lies on the innovation curve.
The Department of Energy and Climate
Change commissioned a report from Frontier
Economics46 on low carbon innovation.
This report shows that given the currently
available innovation support, an additional
pound of support would, depending on how
it is targeted, deliver very different levels of
additional innovation effort. The balance of
support required will depend on the maturity
of the technology among other factors.
While the level of R&D spending is generally
relatively low compared with demonstration
and deployment, the risks are far greater
that the technology will not come to market.
Therefore, although the gains are potentially
higher, these should be balanced against
higher risks. Once adequate financial
incentives are in place, deployment will take
place mainly through the private sector.
The position is different for R&D, however
– there are more barriers for private R&D
investment (and more potential gains to the
economy as a whole rather than to individual
R&D investors) so the case for Government
support is potentially stronger.
This does not imply there is no role for
demand side deployment incentives – it
highlights the importance of sufficient
demand being a pre-requisite for most
innovation – but suggests that, where there
is already a broad range of incentives in place
for many low carbon technologies, additional
R&D support can have a bigger impact on
46 Alternative Policies for promoting Low Carbon Innovation, Frontier Economics, July 2009, commissioned by DECC and
published alongside this report.
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The UK Low Carbon Transition Plan
Analytical Annex
encouraging more innovation and reducing
the costs of a technology, compared to
additional later stage incentives.
The Frontier report also highlights the
importance of adopting a variety of innovation
incentives. The way an innovation incentive
policy is implemented will have its own risk and
reward profile for a potential innovator. Without
a mix of policies, (for instance, obligations,
grants, match funding, and technology
prizes) some organisations are more likely to
take advantage of the innovation incentives
compared to others, with the innovative
potential of some organisations left untapped.
Successful innovation will bring down
the costs of meeting the carbon budgets.
Macroeconomic modelling by HMRC,
detailed later in this annex, has found that
a higher rate of cost reduction in wind
generation could increase GDP in 2020
by around 0.05%, or around £1bn. The
importance of innovation in low-carbon
technologies has been underlined by a
recent report from the UK Energy Research
Centre.47 Accelerated development of
low-carbon technologies could reduce the
cost of meeting the 2050 target by £36bn
over 2010-2050. The potential savings are
slightly lower, however, since neither of
these estimates include increased research,
development and demonstration (RD&D)
costs, which would be necessary to achieve
accelerated technology development.
Further analysis of the UK’s support for low
carbon innovation can be found in a recently
published report from the Carbon Trust.48
This suggested a need to focus on a range of
‘technology families’ and prioritising to ensure
public resources are placed where they can
offer the greatest additionality. This is not
picking individual technologies, but intervening
where Government can be most effective, in
line with the new industrial activism.49 Such an
approach can accelerate the development of
technologies which show the largest potential
for carbon abatement and net economic
benefit to the UK. The Government has broadly
welcomed the findings of the report and will
continue to support a portfolio of key emerging
technologies, but where market failures and
barriers differ across sectors it will strengthen
future emerging low carbon technology policy
by tailoring support for technologies.
Support for renewables
The Government has set out a
commitment to deliver 15% of final
energy consumption from renewables
by 2020.50 In the lead scenario meeting
this entails over 30% of electricity being
generated by renewables in 2020. Such a
commitment constrains the pathways to the
2050 target that the UK can take. However,
success at bringing forward innovation in
renewable technologies reduces the costs
of abatement targets in the UK and globally
in the future. Chart 13 demonstrates the
impact of the Transition Plan on bringing on
renewables.
The financial incentives included in the
Renewable Energy Strategy (RES) to
incentivise take up of renewable energy
technologies will stimulate innovation
benefits through both faster technology
deployment and through streamlining supply
chains. Other policies to address non-market
barriers – for example in the biomass supply
market – will also encourage private sector
investment through addressing market
failures and barriers to market development.
Innovation and deployment of renewable
technologies is inherently risky and the
benefits from innovation are unpredictable.
47 UKERC, 2009, Decarbonising the UK Energy System: Accelerated Development of Low-Carbon Energy Supply Technologies
48 Carbon Trust (2009): ‘Focus for success: A new approach to commercialising low carbon technologies’
49 BERR (2009): New Industry, New Jobs, Crown copyright http://www.berr.gov.uk/files/file51023.pdf
50 Renewable Energy Directive: http://eur-lex.europa.eu/JOHtml.do?uri=OJ:L:2009:140:SOM:EN:HTML
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51
11
Chart 13
Increase in renewables brought on in 2020 by this package, compared to
current policies and 2005 levels
300
TWh
250
200
150
100
50
0
2008
Electricity
2020
(current policies)
Transport
2020
(new policies)
Heat
Source: Department of Energy and Climate Change (2009)
The measures included in RES aim to reduce
these risks by encouraging a portfolio of
technologies. The RES market instruments
will provide learning by doing benefits across
a range of sectors and technologies – the
RO for large scale renewable electricity, RHI
across renewable heat and FITs for small
scale electricity technologies.
Learning curve benefits are expected to
accrue as increased technology deployment
is linked with cost reductions, suggesting
that further deployment will reduce the
costs of these technologies. Technologies
starting from different points tend to achieve
different learning rates. For example,
modelling undertaken for the RES in the large
scale electricity sector suggest that capex
costs of wind technologies could be 10-15%
lower in 2020 than in 2010, whilst wave and
tidal technologies could achieve 30-40% cost
reductions. On the smaller scale, photovoltaic
(PV) technology and micro-wind might achieve
cost reductions in the order of 50-60% in 10
years, whilst more established technologies
such as small scale hydro and waste, are
expected to be closer to parity.
In the heat sector, which is starting from
DEC-PB13289_AnAnnex.indd 51
a very low deployment base in the UK
but where technologies are relatively well
established world-wide, cost reductions could
be in the order of 10-23% (see Chapter 7 for
more detail) – the upper range reflecting heat
pumps rates where significant economies
of scale could be expected with the rapid
expansion of this market. These results show
there are significant gains through continuous
improvement of existing products through
design and performance enhancements.
Associated benefits on supply chains and
householder and community engagement
will also help to overcome non-financial
barriers, bringing down deployment costs
in the longer term and help to meet
carbon targets.
Support for early stage innovation in
renewables can also deliver significant
benefits. This is why the Government
is today announcing a package of up to
£120m that has been earmarked to support
offshore wind, along with up to £30m of
support for wave and tidal and up to £10m
for electric vehicles. The measures in these
packages will provide testing infrastructure,
grant support for RD&D, work at removing
24/7/09 07:36:36
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The UK Low Carbon Transition Plan
Analytical Annex
barriers to deployment and, in the case of
electric vehicle deployment, of charging
infrastructure. Together, these measures
form complementary packages that will make
significant contributions towards innovation
in these sectors, hence bringing down the
costs of the 2020 renewables target and
meeting the carbon budgets.
Taking the offshore wind package as an
example, this will facilitate and fund RD&D,
helping to increase learning rates and hence
achieve potentially very large cost savings. To
achieve a higher learning rate and hence make
a big difference to the costs of meeting the
renewables target, the Carbon Trust (2008)51
estimate that £1.2 to 1.8bn needs to be spent
on offshore wind RD&D in the UK to 2020.
They also estimate deploying 29GW could cost
a total of £75bn over the next two decades, but
that increased innovation (increasing learning
rates from 9% to 15%for instance could
reduce the cost of deployment by £14bn.
Support for carbon capture
and storage
The timely and effective development
of CCS technologies requires a strategic
approach across the whole innovation chain,
from research and development through to
commercial-scale demonstration. CCS has
the potential to capture 90% of emissions
from large combustion power stations
thereby contributing to Greenhouse Gas
reductions globally. However, CCS has not
yet been fully demonstrated as an end to end
process on a power station at commercial
scale. At this stage of development,
investment in CCS is very costly and risky.
Current private investor activity in CCS in the
UK and elsewhere is focussed on R&D and
pilot plants at around one tenth scale, which
clearly help to advance CCS, but not at the
pace needed to prove the technology for
commercial deployment in the 2020s.
Support for demonstration will enable
learning and technological development,
reduce costs and risks and help to establish
CCS as a commercially proven low carbon
technology. The Government launched a first
CCS demonstration competition in 2007,
and in 2009 announced plans to provide
financial support for a total of up to four
commercial-scale demonstrations in the UK,
on a range of technologies.52 This funding sits
as part of a packing of financial and regulatory
measures that are intended to bring forward
CCS as an operational technology earlier
than the market would otherwise. As the
financial mechanism will be funded via a levy
on electricity suppliers, support for these
demonstration projects could increase prices
for electricity consumers by around 2% in
2020. However, investment today will reduce
the long term costs of the transition to a
low carbon energy mix, support security of
supply by enabling coal to be part of a diverse
low carbon mix, and offer industrial benefits
through first mover advantage.
Support for innovation in the grid
For regulated monopoly energy infrastructure,
the incentives in the regulatory framework
may need to be adjusted to provide greater
incentives on companies to innovate and trial
new technologies. Regulatory incentives
have been put in place for Distribution
Operators to trial new ‘smarter’
technologies on their networks. Ofgem are
proposing to increase the amount of funding
available to around £500 million to 2015.
Direct funding for innovation is also provided
through the Energy Technologies Institute
which aims to invest up to £1bn over the next
10 years in low carbon energy technologies,
including networks.
51 Carbon Trust, 2008, Offshore wind: big challenge, big opportunity. 29GW is the Carbon Trust estimate of offshore wind
capacity in 2020, which is on the high side of estimates and may be realised after 2020.
52 A framework for the development of clean coal: consultation document. DECC. June 2009. Available at
http://www.decc.gov.uk/en/content/cms/consultations/clean_coal/clean_coal.aspx
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53
11
Chapter 4:
Aggregate costs
of the package
of policies
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54
The UK Low Carbon Transition Plan
Analytical Annex
The package of policies set out in this
Transition Plan will impose costs on the
UK but also deliver benefits, beyond the
delivery of our climate change goals. The
costs include investments in low carbon
technologies which are more expensive
relative to the more polluting alternatives,
and the administration and compliance costs
of the policies. The benefits include reduced
energy consumption, ancillary benefits (such
as improved air quality) and, where the
policy reduces UK emissions in the traded
sector, a reduced requirement to import EU
allowances to the UK.
Present value of the costs of the
package of policies
Table 5 lists the present value of the costs
of the policies excluding a valuation of
the avoided damages from reducing GHG
emissions.53 In the traded sector the resource
costs to the UK of complying with the EU
ETS cap are valued, but the avoided damages
associated with reduced EU wide emissions
in the traded sector are not. The overall costs
of the package presented here therefore
represent the UK’s share of the global burden
of stabilising emissions within acceptable
levels, but do not include the benefits of
achieving that global stabilisation level.
The resource costs of low carbon
technologies are relative to the costs of
technologies that would have been used in
the baseline counterfactual. More details on
the baseline are presented in Chapter 3
(see section entitled ‘The baseline used in
this analysis’).
The present values are calculated over
the lifetime of the measures that the
policies implement.
The package is projected to achieve sufficient
reductions to meet the first three carbon
budgets, on central estimates, and the
measures implemented by the policies
will deliver reductions on into later budget
periods. The first three budgets cover
15 years of the 43 year period of 2008
to 2050. The total cost of the package is
estimated at £25 to £29 billion. Different
policies will incentivise measures with
different lifetimes, and so the aggregate
costs of the package cannot be simply
converted into a percentage of GDP for a
particular period (as is done with macroeconomic modelling). However, the costs can
be judged to be consistent with the overall
costs of delivering the long term target that
were estimated in the Climate Change Act
Impact Assessment of £324 to £404 billion.
The effort from the UK provides substantial
net benefits once the avoided damage costs
from GHG emissions are considered.
The over-arching Impact Assessment
published alongside the setting of the first
three carbon budgets in April 2009 provided
a best estimate of the net benefit of the UK
action on climate change over the first three
carbon budgets of £221.5 billion.54
53 The costs and benefits of technologies implemented as a result of the Transition Plan package of climate change
policies are relative to the counterfactual baseline.
54 The overarching IA can be found at the following web site:
http://decc.gov.uk/en/content/cms/what_we_do/lc_uk/carbon_budgets/carbon_budgets.aspx
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Aggregate costs of the package of policies
55
11
Table 5
Overall costs of the package
Policy
Net Present Cost of Policy (excluding
valuation of avoided damages through
reducing GHG emissions) (£million 2009)55
International Emissions Trading
EU Emissions Trading System
3480
Power Sector and Renewable Heat
Carbon Capture and Storage Demonstration
Carbon Capture Readiness
5300 to 9200
-400 to 20
Large Scale Renewable Electricity
31400
Small Scale Renewable Electricity
8890
Renewable Heat
11700
Transport
Extension of Bio-fuels to 10% (by energy)
3100
EU new car average fuel efficiency standards
of 130g/km
-450
New van average efficiency standards of
160g/km
180
Additional impact of further new car efficiency
improvements to 95g/km
3600
Gear Shift Indicators
-230
SAFED bus driver training
-280
Low carbon emissions buses
-50
Low rolling resistance tyres
-50
Low rolling resistance tyres (HGV’s)
-190
More efficient air conditioning
400
Tyre Pressure Monitoring
290
Low viscosity Lubricants
-4
Illustrative electrification of 750km of single
track rail line
–56
55 Values have been rounded to the nearest £10million
56 An assessment of the NPV will be worked up as the policy is developed further.
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The UK Low Carbon Transition Plan
Analytical Annex
UK Trading schemes and Energy Efficiency Policy
Carbon Reduction Commitment
Energy Intensive business package
-2150
-ve
CERT
-12700
New Supplier Obligation (successor to CERT)
-19200
Community Energy Savings Programme
Zero Carbon Homes57
Smart Metering (households)
Smart Metering (SMEs)
Energy Performance of Buildings Directive
Product policy
-100
450058
-2180 to -3250
-1330
730
-9020
One-off interest free loans to SMEs
20
One-off interest free public sector loans
-50
Non-CO2 GHG and Land Use Change
Agriculture proposals
–59
Waste proposals – Food to AD60
40
Waste proposal – Diverting wood waste away
from landfill
60
Total
The present value of costs for policies,
shown in Table 6, does not allow the
relative merit of policies to be judged.
The policies may achieve differing levels
of GHG abatement. Judgement of the
relative merits of the policies requires their
contribution to meeting emissions reduction
targets to be taken into account.
£25bn to £29bn
Net present value of the
package of policies
The full net present value of the policies
to deliver emissions reductions in the
non-traded sector, shown in Table 6, includes
a valuation of the GHG reductions that the
policies deliver. GHG reductions in the
57 The figures quoted for zero carbon homes cover all homes built to 2025, including homes built to forthcoming changes
to Building Regulations in 2010 and 2013, as well as the zero carbon homes built from 2016. Due to the potential
for duplication of costs between the zero carbon homes policy and the costs of feed-in tariffs and renewable heat
incentives, the costs and benefits of all onsite and offsite renewable energy generated by zero carbon homes have been
removed. Since the definition of zero carbon homes is still being finalised post-consultation, the figures presented in
this document refer to the 70% carbon compliance onsite option as this is an illustrative ‘middling’ option. Note that the
44%, 70% and 100% options should have broadly similar onsite energy efficiency elements anyway owing to the same
indicative Advanced Practice Energy Efficiency requirements they all face.
58 Only related to energy efficiency aspects of ZCH and building regulations for building built up to 2025 – i.e. excluding
renewables costs
59 Resource costs are estimated to be negative, but there is uncertainty over the level of policy costs to deliver abatement.
60 Waste Net Present Cost figures in Table 5 are based on resource costs alone and are based on an illustrative 5-year
period for the policy therefore they are not comparable with policy Net Present Costs from other sectors. They are
included here for illustrative purposes.
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Chapter 4:
Aggregate costs of the package of policies
non-traded sector have been valued using
the non-traded price of carbon. This is part of
the Government’s revised carbon valuation
methodology published in July 2009.61 The
non-traded price of carbon is an estimate
of the marginal cost of delivering emissions
reductions in the non-traded sector. If a policy
is part of a least cost delivery of the target,
valuing the carbon impact at the non-traded
57
11
price of carbon will result in a positive net
present value. Those policies with a positive
NPV will reduce emissions in the non traded
sector with a lower cost per tonne of carbon
dioxide than the non-traded price of carbon.62
The schedule of the non-traded price of
carbon over the carbon budget period is
shown in the chart below.
Chart 14
Non Traded Carbon Price 2008-2022 period
£2009
Sensitivity – high
Sensitivity – low
100
90
80
70
60
50
40
30
20
10
0
2008
2010
2012
2014
2016
2018
2020
2022
Source: Department of Energy and Climate Change (2009)
It will be noted that not all the policies have a
positive net present value. This is particularly
the case for the renewable heat, bio-fuel
and zero carbon homes policies. In part this
is because they are justified partly on their
contribution to supporting global low carbon
technology innovation and the innovation
benefits have not been valued in the
appraisals for the policies. The importance of
innovation in lowering the costs of mitigation
targets has been highlighted above.
61 6601 Carbon Valuation in the UK Policy Appraisal: A Revised Approach (July 2009). Available at www.decc.gov.uk
62 More formally, it is compared against the weighted average non traded price of carbon, which provides a costeffectiveness benchmark that accounts for the profile of the carbon savings that the policy delivers and the non-traded
price of carbon in the respective years.
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The UK Low Carbon Transition Plan
Analytical Annex
Table 6
Net Present Value and cost-effectiveness of policies achieving savings in the
non-traded sector
Net Present Value
(£million 2009)
(+ve = benefit)63
Cost-effectiveness
(£/tCO2 Non-Traded)
-6900
90
Extension of Bio-fuels to 10% (by energy)
-1700
80
EU new car average fuel efficiency
standards of 130g/km
2400
-9
New van average efficiency standards of
160g/km
490
11
-1100
55
Gear Shift Indicators
330
-114
SAFED bus driver training
420
-82
Low carbon emissions buses
220
-7
Low rolling resistance tyres
120
-36
Low rolling resistance tyres (HGV’S)
280
-77
More efficient air conditioning
-300
173
Tyre Pressure Monitoring
-230
225
Low viscosity Lubricants
90
-5
Illustrative electrification of 750km of
single track rail line
–64
-40
3400
-38
Not available
Not available65
CERT
16300
-155
New Supplier Obligation (successor to
CERT)
30000
-89
150
-80
Policy
Power Sector and Renewable Heat
Renewable Heat
Transport
Additional impact of further new car
efficiency improvements to 95g/km
UK Trading schemes and Energy Efficiency Policy
Carbon Reduction Commitment
Energy Intensive Business Package
Community Energy Savings Programme
63 NPVs have been rounded to the nearest £10million.
64 An assessment of the NPV will be worked up as the policy is developed further.
65 Extensions to the CCAs will be negotiated in Spring 2010
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Chapter 4:
Aggregate costs of the package of policies
Zero Carbon Homes66
-1300
128
3050 to 4160
-109
Smart Metering (SMEs)
2150
-74
Energy Performance of Buildings
Directive
-340
75
One-off interest free loans to SMEs
4
38
One-off interest free public sector loans
50
-392
Crop management/fertiliser use67
–
-153 to +46
Livestock68
–
-3603 to -21
Manure management
–
-6 to +25
Food to AD
40
19
Diverting wood
away from landfill
-20
94
Smart Metering (households)
59
11
Non-CO2 GHG and Land Use Change
69
Waste Proposals
66 New homes to be zero carbon from 2016. Figures presented here also include Building Regulations changes in 2010
and 2013 tightening energy efficiency requirements and only reflect onsite energy efficiency measures, i.e. any costs
and benefits of renewables have been removed to avoid duplication with FITs and RHI.
67 These figures, taken from a report for Defra by ADAS in May 2009, represent one estimate of the likely range of
average private on farm resource cost (savings), and are still subject to considerable uncertainty and debate. However,
the measures and costs are assessed on a stand-alone basis; potential positive or negative interactions of measures
implemented together are not reflected.
68 The lower bound cost (saving) in the livestock category relates to improved genetic resources in beef animals, the full
realisation of which would most likely lie beyond the end of the third period; and which is not directly under the control
of individual farmers, depending crucially on the wider agricultural breeding and research support sectors.
69 Waste NPV figures in table 6 are based on resource costs alone and are based on an illustrative 5 year period for
the policy therefore they are not comparable with policy NPVs from other sectors. They are included here for
illustrative purposes.
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UK Low Carbon Transition Plan
Analytical Annex
Policy Marginal Abatement
Cost Curve
Chart 15 shows a policy MAC curve for
the non-traded sector in 2020. Each box
relates to a particular policy or proposal in
the Transition Plan package that achieves
reductions in non-traded sector emissions
in 2020.
This MAC curve shows that policies are
delivering approximately 23MtCO2e of
abatement in the non-traded sector in the
year 2020 at below the non-traded price of
carbon. A further 17 MtCO2e of abatement is
being achieved through renewable heat and
bio-fuel policy at a lifetime cost-effectiveness
of £80-£90/tCO2e. Though this is higher
than the cost-effectiveness benchmark for
policy, these policies carry un-quantified
innovation benefits.
The cost-effectiveness figure for each of the
policies represents the cost-effectiveness of
the whole policy per tonne of abatement in
the non-traded sector. Where the policy has
an impact in the traded sector, the costs and
benefits of this impact are included in the
Chart 15
Policy MAC curve for policies that deliver savings in the non-traded sector
£/tCO2e
240
220
Public sector loans
CESP
CRC
Zero carbon homes
CERT
SO
EPBD
Smart metering (households)
SME (loan scheme)
Transport
RHI
Smart metering (SME’s)
200
180
160
140
120
100
80
Central non-traded price of carbon
60
40
20
0
0
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41
-20
-40
MtCO2e
-60
-80
-100
-120
-140
-400
Source: Department of Energy and Climate Change (2009)
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61
11
Chapter 5:
Estimated impacts
of the package
of policies and
proposals on energy
prices and bills
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The UK Low Carbon Transition Plan
Analytical Annex
The package of climate change measures
is likely to have a significant impact on
consumers across the UK. The impact from
the policies to households and businesses
will be through higher prices for goods
and services and changing patterns of
consumption. However, the most significant
impact on consumers will be an increase in
energy bills.
This section presents analysis carried out to
estimate the overall impacts of the policies
set out in this plan on consumers.
The results of two models are included,
one which estimates the average impact on
energy prices and bills for domestic and
non-domestic energy consumers and a
second which estimates the distributional
impacts on energy bills for the UK domestic
sector. The two models are methodologically
different and therefore their results are not
directly comparable.
Many of the climate change policies analysed
involve transfers from one part of the
economy to another. For instance, under the
EU Emissions Trading Scheme (ETS), money
is transferred from consumers who pay
higher energy prices to the energy suppliers
(if there is no auctioning of rights) or to the
exchequer (if allowances are auctioned). It
must be noted that auction revenue to the
exchequer helps support public spending,
including investment in public transport and
energy efficiency.
Policies will also lead to transfers between
different sections of the population.
Experience suggests that households in
general will only take up measures if they are
subsidised. These subsidies are funded by all
DEC-PB13289_AnAnnex.indd 62
energy consumers (through increased energy
bills). The cost of the measures and limitations
on their implementation mean that not
everyone will receive a measure and benefit
from reduced energy bills. The package will
therefore lead to transfers of benefits to those
who take up measures and from those who
do not, but pay for the subsidies.
The impact of these policies will not be
uniform across the UK economy. Domestic
and non-domestic energy consumers will not
be subject to exactly the same policies and
so will face differing costs and benefits.
This analysis is not a complete view of
the impacts of the package on consumers,
only a partial one. The analysis only considers
the impact on average energy prices and bills
and energy bills across different groups of
households – it doesn’t incorporate any other
transfers, benefits or costs resulting from a
policy, which accrue over and beyond energy
bills (for example a direct subsidy paid as
cash by energy companies to households to
take up a measure).
Only those policies already in place or
planned to a sufficient degree of detail
(i.e. with quantified estimates of costs
and benefits) have been included in the
modelling. Table 7 below presents the
policies analysed in the two models.
The baseline is consistent with that used
throughout the Transition Plan (for more
detail see Chapter 3).
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Chapter 5:
Estimated impacts of the package of policies and proposals on energy prices and bills
63
11
Table 7
Policies assessed in the Department of Energy and Climate Change models on
Climate Change Impacts
Policies included in distributional analysis
and average price and bill analysis
Additional policies included when
estimating average price impact
European Emissions Trading System (EU ETS)70
Grid reinforcement required for RES
Extended Renewable Obligation (extended RO)
Carbon Capture and Storage
Demonstration (CCS)
Renewable Heat Incentive (RHI)
Better billing
Feed-in-tariff (FIT)
Carbon Reduction Commitment (CRC)
Carbon Emissions Reduction Target (CERT)
The energy intensive business package
Further Energy Efficiency Supplier Obligations to
2020 (SO)
Smart meters
Community Energy Saving Programme (CESP)
Products policy71
Estimated impacts on
average retail energy prices
and bills
The average energy retail prices and bills
model produces estimates of the impact
of climate change policies on domestic
and non-domestic energy consumers.72
Average, in this case, means that any price
or consumption impact is spread evenly,
on a per MWh basis, across all consumers
affected by the policy, either domestic,
non-domestic or both.
The results for domestic and non-domestic
consumers are based on average consumption,
as opposed to an ‘average’ household or
business. Results for energy prices faced by
non-domestic consumers are based on the
consumption of a medium fuel user in industry
(as defined by Eurostat), whereas, for the
non-domestic energy bills, results are shown for
small, medium and large energy consumers.
The estimated baseline price is calculated by
summing future estimates of the wholesale
price, transmission, distribution and metering
costs, pre-EWP 2007 policies, such as the
original Renewables Obligation and the
Climate Change Levy, and the supplier’s
costs and margin for each year. The estimate
of the baseline bill is calculated using the
baseline price, including VAT and multiplying
by baseline consumption.
70 For the EU ETS the base case is a flatline cap over the three carbon budget periods. Owing to anticipated surplus of
allowances in future phases it is assumed in the baseline the effective price of EUAs is zero and there is therefore
no pass through cost of allowances onto energy bills. To assess the with package impacts the EU allowance price
projections are taken from the Government’s revised carbon valuation methodology, published July 2009.
71 Only the impacts of products policy on energy bills have been modelled. However the cost of any increases in the
prices of the products, resulting from the policy, is not presented here. The improved energy efficiency delivered
through the EU’s minimum standards for the energy efficiency of products saves households and businesses significant
amounts of money over the lifetime of these measures. There are upfront costs to the end user to deliver this overall
lifetime saving, which are estimated to be around £2 billion for manufacturers needing to comply with higher standards
72 Non-domestic energy consumers include industry, transport, public administration, commercial and agriculture.
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The UK Low Carbon Transition Plan
Analytical Annex
Energy suppliers are likely to pass through
a larger proportion of the costs of policies
to the domestic sector and a smaller
proportion to the non-domestic sector, as the
domestic sector is likely to be more inelastic
to price changes than the non-domestic
sector. However, in the absence of any firm
evidence of differential pass through to
domestic and non-domestic sectors, this
model assumes that these costs are spread
evenly across total energy consumption
in the UK.73 This assumption implies that
the non-domestic bill impacts may be
overestimated and the domestic bill impacts
may be underestimated.
The overall impact on household and
business energy bills is a combination of
changes in prices as a result of the costs
of the policies and changes in energy
consumption due to the impacts of policies
on consumption and consumers’ responses
to changing prices.
Estimated impact on average
electricity and gas prices
Charts 1674 and 1775 illustrate the estimated
increase in energy retail prices for domestic
and non-domestic consumers due to climate
change policies, to 2020. These price
increases are primarily due to the EU ETS
and the policies in the RES. The increase in
gas and electricity prices accelerates closer
to 2020, as the ambition of the policies that
are rolled out increases. However, a number
of the policies are already reflected in existing
retail prices so domestic consumers will not
face all these increases over the time frame.
Chart 16
Retail gas price (£/MWh)
Estimated impact of the package of climate change policies on domestic and
non-domestic retail gas prices
60
50
40
30
20
10
0
Domestic
Non-domestic
Domestic
Current
Non-domestic
Domestic
2015
Non-domestic
2020
Domestic retail gas price without package
Non-domestic retail gas price without package
Price impact of CERT
Price impact of CESP
Price impact of SO
Price impact of Better Billing
Price impact of Smart Metering
Price impact of RHI
Source: Department of Energy and Climate Change (2009)
73 We assume that 100% of the costs of the climate change policy borne by the energy suppliers are passed on
to consumers.
74 Due to the timing of the analysis data presented here on the price impacts of the Renewable Energy policies (both
electricity and heat) may not be fully consistent with data on costs presented in earlier sections of this Annex. This is
due to revisions in the carbon price projections that have not been incorporated in analysis underlying the electricity
and gas price impacts.
75 The impact on electricity prices for the Grid Extension for RES is included in the price impacts for the extended RO.
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Chapter 5:
Estimated impacts of the package of policies and proposals on energy prices and bills
The increase in baseline prices up to 2020 is
owing to increases in the wholesale price and
transmission, distribution and metering costs.
Retail gas prices in 2020 are estimated to
be 31% higher in the domestic sector and
65
11
35% higher in the non-domestic sector as a
result of the plan. Retail electricity prices in
2020 are estimated to be 34% higher in the
domestic sector and 30% higher in the
non-domestic sector.
Chart 17
Retail energy price (£/MWh)
Estimated impact of the package of climate change policies on domestic and
non-domestic retail electricity prices
180
160
140
120
100
80
60
40
20
0
Domestic
Non-domestic
Domestic
Now
Non-domestic
Domestic
2015
Non-domestic
2020
Domestic retail electricity price without package
Non-domestic retail electricity price without package
Price impact of EU ETS
Price impact of CERT
Price impact of CESP
Price impact of SO
Price impact of Better Billing
Price impact of Smart Metering
Price impact of extended RO – large scale
Price impact of FIT
Price impact of CCS
Source: Department of Energy and Climate Change (2009)
Estimated impact on average
domestic electricity and gas bills
percentage increase comes from the rise in
domestic gas bills.
The total increase in average bills for each
year is proportionally smaller than the price
increases, owing to the impact of energy
efficiency policies which reduce energy
consumption.
We are already feeling the impact of some of
these policies. This impact is largely made up
of the impact of three policies – CERT, products
policy and the EU ETS. Though the impact of
these policies currently is likely to differ from
that which has been modelled, the 2010 impact
can be used as a proxy for the current impact
of the package. The validity of this proxy is
supported by Ofgem’s most recent estimate of
the environmental costs included in consumer
bills for CERT and the EU ETS.76 Ofgem
estimate the costs in 2008 were £68.77
The table below shows the impact of the
package on domestic energy bills. In total
they are expected to increase bills by £125
(or 9%) compared to the baseline in 2020.
The breakdown of bills into gas and electricity
components shows that the biggest
76 Ofgem, Factsheet 78, March 2009 “Wholesale and retail energy prices explained”.
77 Ofgem estimate that environmental costs are approximately equal to £60 for electricity bills (including EU ETS,
CERT and RO) and £19 for gas bills (CERT). Removing the RO from the impact on bills gives us a total environmental
component impact of £68. A detailed breakdown of these estimates can be found in Ofgem Factsheet 66, January 2008,
“Updated household energy bills explained”.
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The UK Low Carbon Transition Plan
Analytical Annex
The additional impact in 2020 of the policies
in this Transition Plan, relative to today is £76,
which is approximately 6% of current energy
bills.
Table 8
Estimated impact of the package on average domestic energy bills78
Current79
2015
2020
Estimated average bill without any
policies set out in this plan
1,135
1,244
1,348
Estimated average bill with policies
1,184
1,258
1,473
49
14
125
(4%)
(1%)
(9%)
£ (real 2009 prices)
Impact of policies
( % impact)
Table 9
Estimated impact of package on average domestic gas bills80
£(real 2009 prices)
Current
2015
2020
657
717
771
Bill impact of CERT
8
-18
-22
Bill impact of CESP
1
0
0
Bill impact of further Supplier Obligations
to 2020
0
-1
-24
Bill impact of Better Billing
-2
-2
-2
Bill impact of Smart Metering
0
-1
-14
Bill impact of RHI
0
34
179
Bill impact of products policy
2
7
16
Estimated average bill with policies
667
736
903
Estimated impact of policies
10
19
132
% impact (on baseline)
1%
3%
17%
Estimated average bill without policies
set out in this plan
78 The average energy bill is only an indication estimated by adding together gas and electricity bills. In reality bills will
vary depending on consumers’ usage, and also depend on consumers tariffs. For example consumers on dual fuel bills
may pay less than consumers with separate gas and electricity bills. Estimates of total bills may not be fully consistent
with adding gas and electricity bills together due to rounding.
79 Throughout this chapter, figures for “current” use a modelling bill in 2010, which is a reasonable approximation to the
current breakdown of a bill as estimated by Ofgem. This is discussed further in the text preceding Table 8.
80 NB Numbers in this and following tables may not add up as a result of rounding.
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Chapter 5:
Estimated impacts of the package of policies and proposals on energy prices and bills
67
11
Table 10
Estimated impact of energy and climate change policies on average domestic
electricity bills
£(real 2009 prices)
Current
2015
2020
Estimated average bill without policies
set out in this plan
477
527
577
Bill impact of EU ETS
47
51
55
Bill impact of CERT
-1
-32
-38
Bill impact of CESP
2
-1
-1
Bill impact of further Supplier Obligations
to 2020
0
2
-21
Bill impact of Better Billing
-1
-2
-2
Bill impact of Smart Metering
0
-2
-15
Bill impact of extended RO – large scale81
5
6
64
Bill impact of FIT
0
6
14
Bill impact of CCS
0
6
14
Bill impact of Products Policy
-12
-39
-77
Estimated average bill with policies
517
522
570
Estimated impact of policies
40
-5
-7
% impact (on baseline)
8%
-1%
-1%
Estimated impact on average
non-domestic electricity and
gas bills
The percentage increase in bills in the
non-domestic sector is higher than the
increase in the domestic sector.
This difference arises in part because the
baseline gas and electricity prices for nondomestic users are on average lower than
for domestic users. There are some policies,
such as EU ETS, which affect both domestic
and non-domestic consumers and, owing
to our assumption that costs are spread
evenly, this makes the additional cost larger
in percentage terms for non-domestic
consumers. Also, as described previously,
domestic and non-domestic consumers
are not subject to exactly the same climate
change policies.
There are a number of energy efficiency policies
for non-domestic consumers which will have
an impact on energy consumption and thus
reduce energy bills. The results below include
the impacts of products policy, the CRC and
the energy intensive business package. The
costs associated with these policies are not
reflected in energy bills. They will only affect
certain eligible non-domestic users, however
81 The impact on electricity bills for the Grid Extension for RES is included in the bill impacts for the extended RO – large scale.
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The UK Low Carbon Transition Plan
Analytical Annex
the impact has been modelled as an average
cost across all non-domestic users. This will
therefore underestimate the bill savings for
eligible non-domestic users and overestimate
the bill savings for ineligible non-domestic
users.
There will be further reductions in energy
consumption owing to smart-metering for
SMEs. It has not been possible to model
these so the impacts are not included in
the presented results. However, estimates
suggest that SMEs will save approximately
£250million per year by 2020 as a result
of Smart Meters. There are also plans to
consider cost effective policy options to
unlock further SME energy efficiency.
The impact on industrial bills is more complex
to model than domestic bills. This is because
of the diversity of energy usage and energy
prices faced by consumers in this sector. The
classifications of non-domestic consumers
are illustrative and are based on the Eurostat
definitions presented in table 11. The
midpoints of the ranges were used in the
model.
Overall, the policies are expected to increase
bills by almost 21% compared to the baseline
in 2020.
Table 11
Industrial Gas Eurostat size band Annual consumption (MWh)
Lower bound
Upper bound
Small
12
278
2,777
Medium
13
2,778
27,777
Large
14
27,778
277,777
Table 12
Industrial Electricity Eurostat size band Annual consumption (MWh)
Lower bound
Upper bound
Small
IB
20
499
Medium
ID
2,000
19,999
Large
IE
20,000
69,999
Very Large
IF
70,000
150,000
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Chapter 5:
Estimated impacts of the package of policies and proposals on energy prices and bills
Consumers are already paying for some
of the climate change polices set out in
this plan. For an illustrative medium sized
industrial user, implementing our full package
69
11
by 2020 will add a further £200,000 to their
energy bill; an increase of 15% relative to the
bill they would be paying now.
Table 13
Estimated impact of package on average non-domestic energy bill at varying
levels of energy consumption82
(£ ‘000s)
Current
2015
2020
Small
Medium
Large
Small
Medium
Large
Small
Medium
Large
consumer consumer consumer consumer consumer consumer consumer consumer consumer
Estimated
average
bill without
policies set
out in this
plan
60
1,281
7,502
64
1,396
8,124
68
1,499
8,672
Estimated
energy
bill with
policies
62
1,383
7,909
67
1,506
8,621
83
1,813
10,560
Estimated
impact of
package (%)
2
101
406
3
110
497
15
314
1,888
% impact
4%
8%
5%
5%
8%
6%
22%
21%
22%
Table 14
Estimated impact of package on average non-domestic gas bill for medium
sized consumers
(£ ‘000s)
Current
2015
2020
383
408
430
Bill Impact of RHI
0
26
135
Bill Impact of Products Policy
2
6
14
Bill Impact of CRC
0
-7
-22
Bill Impact of energy intensive business package
-4
-18
-25
381
416
532
-1
8
102
0%
2%
24%
Estimated average gas bill without policies set out
in this plan
Estimated gas bill with policies
Estimated impact of policies
% impact (on baseline)
82 The average energy bill is only indicative, estimated by adding together average gas and electricity bills. In reality bills
will vary depending on consumers’ usage and also depending on consumers’ tariffs. Estimates of total bills may not be
fully consistent with adding gas and electricity bills together due to rounding.
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The UK Low Carbon Transition Plan
Analytical Annex
Table 15
Estimated impact of package on average non-domestic electricity bill for
medium sized consumers
(£ ‘000s)
Current
2015
2020
Estimated average electricity bill without policies
set out in this plan
899
998
1,069
Bill Impact of EU ETS
105
110
116
Bill Impact of Extended RO83
10
13
136
Bill Impact of products policy
-9
-25
-53
Bill Impact of CCS
0
14
31
Bill Impact of FIT
1
13
29
Bill Impact of CRC
0
-8
-27
Bill Impact of Energy Intensive Business Package
-3
-15
-19
1,002
1,090
1,281
Estimated impact of policies
103
102
212
% increase on base
11%
10%
20%
Estimated electricity bill with policies
While there is limited evidence on how
suppliers’ costs would be split between
domestic and non-domestic consumers,
it is not expected that very large industrial
consumers of energy would pay energy bills
as outlined in the above table. It is believed
that, owing to their bargaining power,
very large industrial consumers will pay close
to the wholesale price. This means that their
bills will only be affected by those climate
change policies which affect the wholesale
price of energy. In 2020, it is estimated that
the energy bill for very large industrial energy
consumers will be approximately 12% higher
(mainly affecting electricity) compared to the
counterfactual of no policies set out in this
Transition Plan.
Overall energy bill impacts
– including all climate
change policies
The package of measures assessed in the
Transition Plan do not present a complete
picture of all the climate change policies
feeding into energy bills. For example, the
existing Renewables Obligation (introduced
in 2002) currently features in both domestic
and non-domestic bills and the Climate
Change Levy (introduced in 2001) features in
current industrial bills.
83 The impact on electricity bills for the Grid Extension for RES is included in the bill impacts for the extended RO.
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Chapter 5:
Estimated impacts of the package of policies and proposals on energy prices and bills
By 2020, the impact of all climate change
policies, both existing and those in the
Transition Plan, will add, on average, an
additional 8% to today’s household bills and
17% to today’s non-domestic bills which
already include some costs associated
71
11
with climate change policies. The increase
compared to a counterfactual of no climate
change policies is 12% for the domestic
sector and 34% for the non-domestic sector.
Further details are provided in the tables
below.
Table 16
Estimated impact of energy and climate change policies on average domestic
energy bill
% change
% change
in bill
Difference
Bill in 2020
from
relative to
in impacts
current bill baseline in
2020
2009 prices
Current
bill
Pre TP baseline
£1,135
£1,348
With package
£1,184
£1,473
Impact of Package
£49
£125
Without all climate
change policies
£1,117
£1,314
With all climate change
policies
£1,184
£1,473
£67
£159
Impact of all climate
change policies
£76
£92
% change
£76/£1184
% change
£125/£1348
6%
9%
% change
£92/£1184
% change
£159/£1314
8%
12%
Table 17
Estimated impact of energy and climate change policies on average nondomestic energy bill for medium sized consumers
2009 prices
Current
bill (£000)
% change
Difference % change
in bill
Bill in 2020
relative to
in impacts
from
(£000)
(£000)
current bill baseline in
2020
Without package
baseline
£1,282
£1,499
With package
£1,383
£1,813
Impact of Package
£101
£314
Without all climate
change policies
£1,165
£1,356
With all climate change
policies
£1,383
£1,813
£218
£457
Impact of all climate
change policies
DEC-PB13289_AnAnnex.indd 71
% change % change
£213/£1383 £314/£1499
£213
15%
21%
% change % change
£239/£1383 £457/£1356
£239
17%
34%
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The UK Low Carbon Transition Plan
Analytical Annex
Sensitivity analysis of the
price and bill impacts
The above analysis is uncertain as it is based
on many assumptions, including fossil fuel
prices (gas, coal and oil), which are the
primary drivers of energy prices and bills,
currently making up over 50% of domestic
energy prices. Fossil fuel prices affect the
wholesale price and the cost of EU ETS
allowances, and alter the cost of the climate
change policies. So far the analysis has
assumed a scenario of a sustained oil price of
$80/bbl in 2020.
The fossil fuel price profile that the above
analysis is based on is estimated assuming a
scenario where there is timely investment in
energy related infrastructure and moderate
demand for fossil fuels. Two alternative
scenarios are considered. In the first, a
sustained oil price of $150 per barrel is
assumed owing to high fossil fuel demand
coupled with significant supply constraints.
In the second, a sustained oil price of $60
per barrel is assumed due to low global
energy demand.84
With higher fossil fuel prices policies, the
cost of the package is reduced. Higher fossil
fuel prices mean that the cost of some
climate change policies, such as the RES,
is cheaper, so less is passed through to
consumers. With higher fossil fuel prices,
the subsidy required to incentivise
investment in technologies is less.
This, combined with the impact of energy
efficiency measures is estimated to lead to
a slight reduction in domestic energy bills
in 2020 with a sustained oil price of $150
per barrel. Conversely, with lower fossil fuel
prices, the impact of climate change policies
is both proportionately and absolutely larger
owing to changes in the costs of policies.
Chart 18
Average estimated domestic
energy bill (£)
Estimated impact of the package of climate change policies on domestic
energy bills at varying sustained fossil fuel prices
2000
1800
1600
1400
1200
1000
800
600
400
200
0
Sustained oil price of
$150/bbl
Counterfactual
Sustained oil price of
$80/bbl
Sustained oil price of
$60/bbl
Effect of package of climate change policies
Source: Department of Energy and Climate Change (2009)
84 This is based on Department of Energy and Climate Change fossil fuel price assumptions, available at:
http://www.berr.gov.uk/energy/environment/projections/recent/page26391.html
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Chapter 5:
Estimated impacts of the package of policies and proposals on energy prices and bills
Distributional impacts of
the package
The average impact of these policies on
prices and bills does not present the full
picture. Many households will not take
up measures unless they are subsidised.
Some low income households will be
able to access fully subsidised measures
whilst other households will be able to
buy measures at subsidised prices. These
subsidies will be funded by all energy
consumers (through increased energy bills).
Households who take up insulation and
renewable energy measures will generally
have lower energy bills as a result.85
The benefits from lower energy bills
will typically be larger than the costs to
households which benefit from these policies
while the costs will be spread across all
households.
It should be noted that this analysis is partial,
in that it only focuses on the impact of
climate change policies on energy bills.
Climate change policies are likely to have
other costs and benefits that will impact
energy consumers outside their energy
bills. For example, the costs of household
appliances will increase to meet higher
energy efficiency standards owing to
products policies implemented by the
Government. In addition, this analysis
includes neither costs to households of
buying new technology, nor the beneficial
effect of incentive payments on income.
73
11
To assess the distributional impacts of
climate change polices, a model was
developed by Government analysts,
supported by the Centre for Sustainable
Energy,86 which simulates how the impacts
on household energy bills are likely to be
allocated across the population.
All energy bill impacts are calculated against
a counterfactual energy bill in 2020 that
excludes the package of policies in this
Transition Plan.
Distributional impacts of policies
across income deciles
When assessing distributional impacts, it is
important to look at the increase in energy
bill as a percentage of income, as well as the
absolute and percentage increase in the bill.
This gives a better idea of the affordability
of the impact for households with different
incomes. To estimate income in 2020 we
used income growth forecasts87 – the same
income growth rate has been assumed for
all households.
As outlined above, the costs of energy
policies are passed on by energy suppliers
as an increase in price. Households with
higher levels of energy consumption will face
a larger bill increase from the same increase
in price. People on higher incomes generally
consume more energy; they typically live in
larger houses which require more heating
and have more electrical appliances.
High-income households are therefore
likely to face a larger absolute increase
in their energy bill than low-income
households.
85 It must be noted that only a small proportion of the population will be able to avail of both renewable heat and
insulation measures.
86 Centre for Sustainable Energy, Distributional Impacts Model for Policy Scenario Analysis (DIMPSA), 2009 for DECC
and HMT.
87 Consistent with assumptions for household income growth used in the long-term public finance report
(http://www.hm-treasury.gov.uk/bud_bud08_longterm.htm).
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The UK Low Carbon Transition Plan
Analytical Annex
Chart 19
Increase in energy bills in 2020 for different income deciles
16%
14%
Percent of income
12%
10%
8%
6%
4%
2%
0%
Bottom
2nd
3rd
4th
5th
6th
7th
8th
9th
Top
Income decile
Increase in share of income spent on energy bills with policies
Share of Income spent on energy bill without policies
Source: Department of Energy and Climate Change (2009)
The absolute increase in bills does not give a
complete picture of the impact on different
types of household. Although higher income
households may face a higher absolute
increase in their bill, this increase is likely
to be a much smaller proportion of their
income than for lower income households,
as demonstrated in Chart 19.
According to the analysis, the most
significant difference in the impact on energy
bills is between those households that take
up insulation and renewable heat measures
and those that do not. Therefore, not only do
households that receive measures face much
lower increases in their bills but also the
difference in the impact between higher and
lower income households is much smaller.
Chart 20 shows the difference in impact as
a percentage of income for households that
take up measures and those that do not.
DEC-PB13289_AnAnnex.indd 74
Comparative impacts across
households – based on uptake
of measures
The analysis of the distributional impacts of
the package demonstrates that there is a
differential impact across different sections
of the population, depending on income,
type of household and whether or not they
take up measures, amongst other factors.
Even among households which take up at
least one measure there is considerable
variation in the impact on energy bills.
Households that switch to biomass boilers
will face no increase in their heating bill
because the costs of climate change policies
will be passed to electricity, gas and other
fossil fuels. Also, if biomass is cheaper than
their original fuel, household switching may
save money. Households which take up both
renewable heat and insulation measures may
even see their energy bills fall.
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Chapter 5:
Estimated impacts of the package of policies and proposals on energy prices and bills
75
11
Chart 20
Impact of climate change policies for household that take up insulation and
renewable energy measures
Increase in energy bill as a percent of
income
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
Bottom
2nd
3rd
4th
5th
6th
7th
8th
9th
Top
Income decile
Household receives measures
Household receives no measures
Average of all households
Source: Department of Energy and Climate Change (2009)
The following chart shows possible
estimates of how the increase in bill could
vary depending on what measures a
household takes up. Based on initial analysis,
households that take up an insulation
measure only could face an increase in their
energy bills of approximately 10%, compared
to 18% for those that do not. Households
that take up both renewable heat and
insulation measures could see their energy
bills fall by roughly 18%, compared to a
counterfactual of no climate change policies
(see Chart 21). The actual impact on bills
will depend on the costs of the renewable
heat scheme that will be passed through to
consumers. The support levels for renewable
heat technologies that will drive these costs
are yet to be decided. It should be noted that
only a small section of the population is likely
to receive a renewable heat measure as well
as an insulation measure.
DEC-PB13289_AnAnnex.indd 75
Distributional Impacts in the
Business Sector
Energy-intensive industries facing a
clear carbon price, for example through
the EU Emissions Trading Scheme, are
potentially at risk from “carbon leakage”,
where industries move or relocate
investment to an area without carbon
constraints. The risk of carbon leakage
depends on the ability of the sector
concerned to pass on costs without losing
market share and its degree of exposure to
international competition. Sectors identified
as being at particular risk of carbon leakage
include steel, aluminium, cement and paper.
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The UK Low Carbon Transition Plan
Analytical Annex
Government recognises that those sectors
where international competitiveness is
potentially at risk from higher energy costs
may be concentrated in particular regions.
Analysis at 3-digit sectoral level indicates
that in 2006 there were 16 sectors for which
expenditure on electricity and gas account for
more than 10% of gross value added.
In total these sectors, which in addition
to those mentioned above include glass,
chemicals and man-made fibres, account for
around 0.9% of UK employment. The sectors
are, however, disproportionately located
in certain regions and countries of the UK.
Around 1.9% of employment in Wales is
accounted for by these sectors, 1.7% in the
North East and 1.5% in Yorkshire and the
Humber region. In contrast these sectors
account for only 0.2% of employment in
London and 0.6% of employment in the
South East. To the extent that any carbon
leakage occurs in these sectors, it is likely
to worsen regional imbalances in the UK
economy. However, these regions may also
benefit from some of the new business
opportunities in emerging sectors such as
renewable energy. The transition to a low
carbon economy must be managed so that
all parts of the UK are able to strengthen
their performance, and without reinforcing
existing disparities.
Chart 21
Percentage change in energy bill
Percentage change in energy bills for household that take up renewable heat
and insulation measures88
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
No
Yes
Takes up insulation
measure
No
Yes
Takes up renewable heat
measure
No
Yes
Takes up renewable heat
and insulation measure
Source: Department of Energy and Climate Change (2009)
88 To note, the blue and the pink bars in each case represent different sections of the population. For example in the
scenario where we assess the average energy bills of people who take up insulation measures and those who don’t, we
are comparing the average energy bills of the section of the population which has not taken up any insulation measures
compared to the average energy bills of the population which have taken up some form of energy efficiency measure.
It must be noted that either population group in this case can include households which have also taken up a renewable
heat measure.
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Chapter 5:
Estimated impacts of the package of policies and proposals on energy prices and bills
In the longer term, securing a strong
international climate change agreement
incorporating binding emissions reductions
targets for developed economies and
significant reductions in developing
economies will be key to tackling the risk
of carbon leakage. The UK supports the
development of a global carbon market as
an important way to encourage emissions
reductions in a cost-effective way.
The Government’s objectives for a global deal
include agreeing new sectoral carbon trading
systems in energy-intensive sectors in the
DEC-PB13289_AnAnnex.indd 77
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11
more economically advanced developing
countries, with the aim of increasing the
scope and coverage of the carbon market in
a way that reduces competitive distortions
and reduces the global cost of mitigation.
The Government notes that a few industrial
sectors are making some progress in
negotiating their own global sectoral
agreements. Such agreements, if sufficiently
robust and leading to real emission
reductions, could help to reduce the risk of
carbon leakage.
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11
Chapter 6
High level
summary of
impacts on energy
security
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The UK Low Carbon Transition Plan
Analytical Annex
This section looks at the key impacts of the
policies in this Transition Plan on the UK
security of supply position.
Chapter 3) will lead to increased use of
wind, wave and solar power, as well as of
biomass (both for heating and for electricity
generation) and bio-fuels. Together these
will lead to a significant reduction in the use
of fossil fuels in our energy mix. The chart
below shows the production and demand
of coal, oil and gas before and after the
package of policies.
Demand for fossil fuels
The security of our fuel supplies is an
important aspect of our overall security
of supply. The policies set out in this plan
(defined against the baseline set out in
Chart 22
mtoe
Actual and Projected UK Fossil Fuel Demand and Production
150
140
130
120
110
100
90
80
70
60
50
40
30
20
10
0
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
Oil Demand (incl. bunkers) (pre-TP baseline)
Net Gas Demand (pre-TP baseline)
Coal Demand (pre-TP baseline)
Oil Production
Coal Production
Oil Demand (incl. bunkers) (post-TP)
Net Gas Demand (post-TP)
Coal Demand (post-TP)
Net Gas Production
Source: Department of Energy and Climate Change analysis (2009)
By reducing our demand for gas, oil and coal,
we reduce our exposure to security of supply
risks, including the risks associated with
imported energy given competition for energy
resources and politicisation of supply. Table 18
summarises our assessment of the aggregate
impact of the package of policies on gas, oil and
coal consumption and Table 19 summarises
DEC-PB13289_AnAnnex.indd 80
the impact on the percentage of UK gas, oil
and coal consumption that would be imported
before and after the policies in this Transition
Plan. These figures are based on central
projections of demand and production both of
which are inherently uncertain and subject to
wide margins of error.
24/7/09 07:36:49
Chapter 6:
High level summary of impacts on energy security
81
11
Table 18
Projected Impact of Transition Plan Measures on Fossil Fuel Consumption89
Change in Consumption (%)
2010
2015
2020
2025
Gas
-2%
-11%
-29%
-29%
Oil
-1%
-4%
-10%
-10%
Coal
-4%
-13%
-22%
-34%
Total Fossil Fuel (mtoe)
-2%
-9%
-19%
-22%
Source: Department of Energy and Climate Change analysis
Table 19
Projected Percentage of UK Consumption Imported Before and After
Transition Plan Measures90
Import Dependency Before TP
Import Dependency After TP
2010
2015
2020
2025
2010
2015
2020
2025
Gas
32%
49%
61%
72%
31%
43%
45%
61%
Oil
16%
34%
49%
61%
15%
31%
44%
57%
Coal
68%
69%
65%
60%
67%
64%
56%
39%
Source: Department of Energy and Climate Change analysis
Some policies could lead to increases in the
demand for gas (for example, through the
so-called ‘heat replacement effect’).91
However, these increases are dwarfed by
savings due to other policies such as those
improving the energy efficiency of buildings
(for example, the Community Energy Savings
Programme or replacing demand for gas for
renewable sources.
Reductions in oil consumption are largely
driven by transport policies which make
vehicles more efficient and the increase
in the use of bio-fuels as a result of the
Renewable Transport Fuels Obligation.
The reduction in coal consumption is driven
by the reduction in electricity demand.
However, the numbers in Table 18 do not
include possible future increases in electricity
(or fall in oil) demand due to electric vehicles
89 The impact includes all the policies set out in this plan (see Chapter 3 for more detail).
90 Calculations assume a one-for-one reduction in imports with a reduction in consumption.
91 The ‘Heat Replacement Effect’ is when a more efficient energy product (such as an energy efficient light bulb) gives out
less heat which leads (under some circumstances) to an increased demand for space heating.
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The UK Low Carbon Transition Plan
Analytical Annex
or rail electrification. It is still not clear what
the impact of these could be on the total
demand for electricity given the uncertainties
around how, for example, the deployment of
electric vehicles will evolve.
Security of Renewable
Energy Supply
Whilst reducing demand for fossil fuels will
have a positive impact on security of supply,
increasing demand for bio-energy i.e. biofuels
and biomass could create new security of
supply challenges.
Biofuels
The Renewable Transport Fuel Obligation
will increase the demand for biofuels used
for transport. Our analysis to date suggests
that while there are also risks associated with
the import of biofuels (such as crop failures,
supply disruption in countries that produce
biofuels, and reduced incentives to invest in
fossil fuel infrastructure), overall biofuels are
likely, at the margin, to have a positive impact
on the UK’s security of supply. This would
be through:
UÊ Reducing the imported oil needed from
regions associated with geopolitical risks,
as biofuel imports are expected to come
from countries with less geopolitical risk.
UÊ Reducing the impact of crude oil supply
disruptions, with biofuels most likely
reducing the proportion of total transport
fuel supply disrupted by any given global
supply disruption.
UÊ Alleviating the petrol and diesel retail price
impact of spikes in crude or petroleum
product prices.
Analysis for the RES indicates that nearly
a quarter of the UK renewable energy
target could come from bioenergy in the
heat and electricity sectors (not including
the contribution from biofuels). Delivering
the RES is therefore expected to increase
the demand for biomass feedstocks in
these sectors. Our analysis suggests that
there could be sufficient biomass resource
potential in the UK to meet this demand in
2020 and the import market for biomass will
grow as biomass increasingly becomes a
traded commodity. Whether the domestic
potential is fully developed will depend on
how the market responds to the financial
incentives being introduced in the RES, and
to supporting measures aimed at developing
the UK biomass supply chain and overcoming
supply side constraints.
Our analysis indicates that several biomass
sources, such as wood pellet and wood
chip and food processing residues such
as seed husks and olive cake are already
traded internationally, and as supply and
demand for bioenergy increases worldwide,
it is likely that a global market will develop,
and biomass will increasingly become an
internationally traded commodity.
As a result, demand and supply of some
biomass sources (particularly homogeneous
products such as woody resources) should
be considered globally, rather than locally.
Others, particularly those difficult to
transport, or where there are high standards
for sustainability, will still operate largely
within local markets. Our analysis showed
that global woody biomass sources could
potentially be very large – sufficient to meet
UK demand for RES even with increasing
pressure for biomass from the rest of Europe.
Biomass
Policies such as the Renewable Heat
Incentive will increase biomass consumption
(for example, by leading to biomass fuelled
stoves and boilers).
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Chapter 6:
High level summary of impacts on energy security
Overall, these factors are likely to have
positive security of supply implications for
the UK, through:
UÊ Reducing reliance on imported oil and
gas, towards locally produced or imported
biomass feedstocks. This will tend to
reduce the geopolitical risk associated with
the former.
UÊ Developing sustainable global biomass
supply chains could help biomass to
become a fundamental part of the
UK energy mix and one which can be
employed in a flexible manner. Greater
diversity and flexibility of electricity and
heat fuels can help to make the system
more resilient and able to respond to
shocks or price spikes.
Security of Electricity
Supply and Intermittency
The decarbonisation of our electricity supply
necessary to meet our climate change goals
will lead to significant changes in how we
generate electricity. The majority of the
increase in renewable generation is likely
to come from wind. The nature of wind
generation means that supply will be
intermittent and to a large extent unpredictable.
The variability of wind generation means that
it cannot replace conventional plants on a
like for like basis and results in an increasing
requirement for the system to carry flexible
plants to provide back-up which implies
a declining load factor for conventional
generation technologies. This has implications
for investment decisions by market
participants and, therefore, security of supply.
83
11
Renewable generation is likely to change the
shape of electricity prices. An independent
multi-client study on intermittency
undertaken by Pöyry consultants92 suggests
that the volatility of spot prices is likely to
increase dramatically as a result of wind
generation. In Pöyry’s central scenario with
33 GW of wind in 2020 rising to 43 GW
in 2030 (compared to 26.4 GW in 2020
in the Renewable Strategy lead scenario)
wholesale prices may fluctuate from negative
prices (due to wind generation bidding at its
opportunity cost of -1 ROC) to above £1,000/
MWh and peak around £1,300/MWh for a
few hours in 2020, and that by 2030 peak
prices could reach around £7,700/MWh and
last for an hour during the tightest supply
periods. In comparison, prices reached a high
of around £500/MWh last year (see Chart
24 below). Analysis undertaken by Redpoint
for the Renewable Strategy Consultation93
suggests similar variations in prices for lower
levels of renewable generation. Both studies
show that the probability of lower and
negative prices is likely to increase as well as
the probability of higher peak prices.
While price volatility is likely to increase and
prices are likely to become more peaky,
average wholesale electricity prices would
not necessarily increase (compared to a
scenario of lower renewable deployment)
since the average short run generation
cost is likely to be lower as the amount of
renewable generation increases.
92 Impact of Intermittency: How wind variability could change the shape of the British and Irish electricity market.
Pöyry (July 2009).
93 Implementation of EU 2020 Renewable Target in the UK Electricity Sector: Renewable Support Schemes.
Redpoint et al (2008).
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The UK Low Carbon Transition Plan
Analytical Annex
Chart 23
Price Duration Curves for 2020 and 2030 for Great Britain
2030
150
3,000
3,000
2,500
2,500
£/MWh (real 2008 money)
£/MWh (real 2008 money)
2020
2,000
1,500
150
1,000
1,500
1,000
500
500
110
110
0
0.0%
0
0.5%
1.0%
£/MWh (real 2008 money)
0.0%
£/MWh (real 2008 money)
2,000
70
30
-10 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
0.5%
1.0%
70
30
-10 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
MonteCarlo00
MonteCarlo01
MonteCarlo02
MonteCarlo03
MonteCarlo00
MonteCarlo01
MonteCarlo02
MonteCarlo03
MonteCarlo04
MonteCarlo05
MonteCarlo06
MonteCarlo07
MonteCarlo04
MonteCarlo05
MonteCarlo06
MonteCarlo07
-50
-50
Source: Impact of Intermittency: How wind variability could change the shape of the British and Irish
electricity market. Pöyry (July 2009).
Note: each coloured line represents one Monte Carlo simulation of price behaviour.
Higher price spikes are needed to remunerate
those generators that are only able to run
for a few hours during the year. Since our
electricity system has never experienced this
level of plant intermittency and price volatility
before, there is a lot of uncertainty as to how
prices will behave in reality. This uncertainty
DEC-PB13289_AnAnnex.indd 84
may affect the confidence of investors in
conventional generation that peak prices will
reach sufficiently high levels on a sufficient
number of occasions to allow them to recover
their costs. They also need to have confidence
in their ability to capture those prices.
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Chapter 6:
High level summary of impacts on energy security
Analysis undertaken by Redpoint for the
Renewable Strategy Consultation94 and the
Renewable Strategy95 suggests that if the
market provides adequate price signals,
market participants will invest in sufficient
conventional generation, including back-up
generation, under the assumptions made.
The chart below shows the de-rated capacity
85
11
margins (i.e. the percentage by which
generation exceeds expected peak demand
taking into account the probability that plants
of different types will be unavailable) for the
lead scenario of the Renewable Strategy
i.e. 29% large scale renewable generation
scenario by 2020 (26.4 GW of wind in 2020).96
Chart 24
Capacity Margins (%) under 29% large scale renewable electricity generation
25.0%
Capacity Margin (%)
20.0%
15.0%
10.0%
5.0%
2029
2027
2025
2023
2021
2019
2017
2015
2013
2011
2009
0.0%
Source: Redpoint (2009)
Chart 25 below shows the expected energy
unserved (EEU) (i.e. this combines possible
levels of shortfall between supply and
demand with their probabilities to give a
probability weighted amount of unserved
energy) for the same scenario. The figure
shows that EEU remains low until 2016 and
reached a peak in 2025 of around 7 GWh.
This peak is driven by old coal and gas plants
closures due to the Industrial Emission
Directive (IED).
94 Implementation of EU 2020 Renewable Target in the UK Electricity Sector: Renewable Support Schemes. Redpoint et al
(2008)
95 Implementation of the EU 2020 Renewables Target in the UK Electricity Sector: RO Reform. A Department of Energy
and Climate Change, June 2009.
96 The analysis assumed that the Industrial Emission Directive (IED) was implemented in 2016 and there would be a NERP
option. However, the IED is still under negotiation and a more flexible agreement of the IED would likely increase the
capacity margins.
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Chart 25
Expected Energy Unserved (GWh) under 29% large scale renewable
electricity generation
8
7
EEU (GWh)
6
5
4
3
2
1
29
20
27
20
25
20
23
20
21
20
19
20
17
20
15
20
20
13
11
20
20
09
0
Source: Redpoint (2009)
While capacity margins are likely to be
lower than today and consequently EEU
higher, the equivalent expected volume of
unmet demand is relatively small compared
to demand lost annually through network
failures each year (around 10 GWh per year).
This result is critically dependent on several
factors such as the exact distribution of wind
generation, the amount of reserve contracted
by National Grid, and the level of demand side
response. In addition, the analysis assumes
that investors in flexible plants expect to earn
a return on their investment by operating
flexibly, generating more at times when the
system is tight and so benefiting from the
high prices at those times.
Our analysis suggests that the risks to
electricity security of supply from the
increase in intermittent wind generation
implied by the renewables targets are
manageable before 2020, but that it could
DEC-PB13289_AnAnnex.indd 86
potentially become a problem after 2020 due
to the closure of old gas and coal plants and
additional renewable deployment.
We will do further work to determine
the scale and nature of the challenges of
intermittent generation and consider ways
of reducing the impact such as encouraging
more demand-side response. We will call
for stakeholders’ views on our assessment
of intermittency in a call for evidence on
electricity later this year. In the light of
responses, and as levels of renewable
generation increase, we will work closely
with the National Grid, Ofgem, industry and
academics to consider what further steps
might be necessary to address issues arising
from intermittency.
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Chapter 6:
High level summary of impacts on energy security
Other Security of Supply
Impacts
There are other policies in this Transition
Plan that are likely to have an impact on the
security of our energy supply:
UÊ Coal-fired power plants (as well as gas
plants) not only provide reliable electricity
production, but are also potentially a
“swing producer” of electricity (production
can increase or fall as required) and could
be therefore be a useful complement to
increasing levels of renewables, such as
wind, which have variable supply.
Carbon Capture and Storage
Demonstration will help to deliver reliable
clean coal technology helping to keep
coal part of the future generation mix and
maintaining diversity and flexibility.
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UÊ The Planning Act (2008) introduces a
“single consent” regime which will
streamline the application process,
alongside improved public consultation,
before any planning application is made.
Changes in the planning regime will
facilitate market players bringing forward
timely investment in infrastructure.
UÊ Smart Meters could play a part in
developing dynamic electricity markets, by
facilitating demand responsiveness which
would reduce peak demand.
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11
Chapter 7
Macro-economic
cost of climate
change mitigation
measures
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The UK Low Carbon Transition Plan
Analytical Annex
Adapting the UK economy to meet our
climate change and energy goals will
incur significant costs. Several modelling
approaches have been used to assess the
macroeconomic costs for the UK of the
short and long term climate change targets.
Overall, results have suggested that the
impact of mitigation policies is likely to be
manageable in both the short and long term.
The HMRC Computable General
Equilibrium (CGE) model was used to
estimate the impact of short and long term
targets (see box below for a description
of the HMRC CGE model). The main
scenario includes an EU ETS cap consistent
with an EU GHG reduction of 20% in
2020, the renewable energy target and
international credit limits equal to those in the
Commission proposal. In addition, from 2030
all sectors are assumed to be part of a global
trading system and the long term target of
80% reduction in GHG by 2050 is forced onto
the model.
Box 1
HMRC Computable General Equilibrium (CGE) model
The HMRC Computable General Equilibrium (CGE) model is a large scale dynamic
model of the UK economy. It has explicitly defined linkages between sectors, the
Government and households and uses equations derived from microeconomic
relationships which maximise consumer welfare and industry profits. It ensures that
(after the economy has adjusted, depending on structural rigidities in the form of
factor employment, adjustment costs and time lags) the supply and demand of all
factors and products are balanced.
The model has a relatively simple representation of the energy system, distinguishing
between industry sectors supplying electricity, oil, gas, coal, nuclear and renewable
energy. An environmental extension of the model has been developed to allow
analysis of changes in economic variables and emissions in response to environmental
policy changes (including carbon pricing and a range of abatement measures).
The model describes the behavioural adjustments of the economy back towards
a general equilibrium through feedback loops between agents after policies are
introduced, incorporating any direct, indirect and induced impacts of relative price
changes on the economy. This makes the model suitable for assessing the longer term
impact of such policy changes once adjustments back to equilibrium have occurred.
Under the main scenario the modelling
results show a manageable impact on
GDP and welfare. The results show a
GDP reduction of about 0.35% (relative to
baseline) in 2020 and about 0.85%
(below baseline) in 2050. Note the model
does not capture the benefits of reducing
GHG emissions.
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Models are sensitive to the data inputs and
assumptions they use. Extensive sensitivity
testing of the model (not shown) has been
undertaken, in particular around the areas
of carbon caps, fossil fuel/carbon prices and
economic growth, however, these factors are
less important in determining the economic
outcome. Instead it was noted that the results
are particularly sensitive to the degree to which
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Marco-economic costs of climate change mitigation measures
agents desire a smooth consumption path
over time (i.e. the elasticity of inter-temporal
substitution), the productivity of energy
technology and supply constraints. In sum,
GDP costs will be higher if agents react to the
reduction in purchasing power by saving large
amounts to maintain fairly constant levels of
consumption (i.e. low elasticity of inter-temporal
substitution). The effect on GDP will also be
higher in the presence of supply constraints
in implementing abatement technology e.g.
shortages of skilled labour in the construction
sector. However, it was found that the potential
adverse economic effects of implementing
carbon caps and renewable technology can
be significantly reduced with relatively low
increases in the productivity of technology.
Recent analyses based on the HMRC model
are broadly consistent with previous
modelling results.
Analyses undertaken for the Energy White
Paper (2007) using the UK MARKAL –
Macro model found that the long run costs
of reducing carbon dioxide emissions by 80%
by 2050 were about 1.6% of GDP (assuming
central fossil fuel price scenarios).
Using the bottom up MARKAL MED model,
the Committee on Climate Change (CCC)
estimated that a reduction of net GHG
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11
emissions by 33% in 2020 and by 80% in
2050 for the UK could cost between 1-2%
GDP in 2050.97 The CCC examined a range
of sensitivities. The results were found to be
particularly sensitive to assumptions on the
existence of international credits, technology
cost, emissions pathway and fossil fuel prices.
The CCC analysis also highlighted the
sensitivity of costs in the long term to
the level of innovation and availability of
low carbon technologies. More precisely,
in a scenario with no developments in
technological innovation beyond 2010,
the impact of the 80% reduction in 2050
was more than double the impact under the
scenario with unrestricted innovation.
Costs of meeting the targets increase
substantially if at least two of renewables,
nuclear and CCS are not used to decarbonise
power generation. MARKAL modelling
conducted by the CCC suggested that if CCS
were unavailable at a reasonable cost then a
large expansion of nuclear power would be
the least cost option. If in addition to CCS
nuclear is also unavailable, then MARKAL
indicates the 80% reduction target would still
be possible but at significantly higher costs
(approximately 60% of electricity generation in
2050 should come from renewable sources)
and with greater energy demand reduction.
Table 20
MARKAL-MED cost estimates for scenarios
All scenarios meet emissions constraints of a 33% CO2 reduction in 2020 and an 80%
reduction in 2050 on 1990 levels.
Scenario
Present Value of Costs
2008-2050
Nuclear, Renewables and CCS all available
£379 billion
Nuclear and Renewables available (No CCS)
£433 billion
Renewables only (No CCS or nuclear)
£663 billion
97 Committee on Climate Change Building a low carbon economy – the UK’s contribution to tackling climate change’
December 2008. Please see link: http://www.theccc.org.uk/reports.
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In practice it would be very challenging to
achieve the 80% target without either CCS
or nuclear. The CCC commissioned MARKAL
modelling matches overall demand for
electricity with generation, but does
not fully account for the intermittency
associated with renewable energy,
particularly wind generation.
Frontier Economics98 note the importance
of learning rates to the likely cost reduction
from deploying various technologies.
The learning rate shows the likely cost
reduction from a given technology if the level
of its deployment doubles. For a relatively
mature technology such as hydroelectricity,
costs have fallen by around 2% from a
doubling of installed capacity over recent
years. For younger technologies, such as
solar photovoltaic electricity, costs have fallen
by nearly 20% by doubling capacity. Whether
past learning rates are a good indication of
the future, and more particularly how to
increase learning rates for a given technology,
are key issues in affecting the cost of the
UK’s path towards a low carbon future.
MARKAL results are dependent on assumed
learning rates for low carbon technologies.
Although future rates cannot be known,
historical learning rates by technology99 are
shown in Table 21, below. The table also
shows the level of global deployment (as
a multiple of current deployment levels)100
necessary to deliver the cost reductions
assumed in the CCC’s MARKAL analysis if
historical learning rates persist.
Table 21
Technologies, learning rates and cost-reductions in the MARKAL model
Learning
Rate
Cost Change
Between Now and
2050 assumed in
MARKAL model
Implied
Deployment
Multiple over
Current Installed
Capacity
Solar PV
18%
-70%
71
Onshore Wind below
7%
-26%
18
Offshore Wind
9%
-14%
3
Coal-Fired with Carbon
Capture and Storage
3%
-22%
284
Technology
Table 21 shows the important role learning
rates play. A low learning rate, such as for
Coal CCS, requires a much larger deployment
multiple and delivers a smaller cost reduction,
compared to solar PV’s high learning rate
that delivers deep cost reductions at a
smaller deployment multiple. Given historical
learning rates for offshore wind, the assumed
cost reductions by 2050 of 14% appear
conservative. Global deployment of offshore
wind would be expected to increase more
than threefold before 2050.
98
Frontier Economics, July 2009 “Alternative Policies for Promotive Low Carbon Innovation”, published alongside the
Transition Plan.
99
Source: “Energy Technology Perspectives: Scenarios and Strategies to 2050”, International Energy Agency, 2008
100 For those technologies that are not yet deployed, such as Carbon Capture and Storage, the deployment multiples and
learning rates relate to the number of plants currently being developed using the latest technologies.
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The impact of a learning rate shock on the
costs of mitigation for the UK was further
investigated using the HMRC CGE model,
where a change in learning rates is expected
to lead to an increase in productivity that
will offset some of the costs of carbon
mitigation.
Results highlighted the potential for
innovation to reduce medium and long term
costs of moving to a low carbon economy
when technologies improve faster than
expected in the base scenario (see Chart 26).
The following scenarios were modelled:
UÊ An increase in the learning rate of 1
percentage point for all carbon abatement
technologies. This leads to a 3.7%
reduction in costs of energy generation
equipment by 2020 compared to the
baseline forecast, and a subsequent fall
in the cost of electricity. This reduces
the cost of the UK achieving its carbon
budgets, which leads to a smaller GDP
penalty of -0.18% by 2020, compared to
-0.35% without the learning rate shock.
The learning rate improvement also feeds
through to a consequent improvement
in the sector’s productivity, which further
reduces the GDP penalty to -0.17%
by 2020, as resources are redeployed
throughout the economy.
UÊ A 1 percentage point increase in the
learning rate of onshore and offshore wind
powered electricity generation. This is a
subset of the first scenario and leads to
a cost reduction of 4.1% below the level
projected in the baseline. Again, this leads
to a smaller decline in GDP as the carbon
abatement can be achieved more cheaply.
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11
The learning rate effect cuts the GDP fall
from of 0.05% percentage points by 2020,
from -0.35% to -0.30%. Productivity would
also increase in the sector but, because it
is a small sector compared electricity as a
whole, there is little change in the net
GDP impact.
UÊ A 10% improvement in the productivity
of energy storage.101 This increases
the efficiency of current electricity
production and expands the amount of
usable energy generated by intermittent
technologies such as wind power. This
leads to a marginally smaller decline in
GDP of -0.34% compared to -0.35% by
2020. There are two significant effects
underpinning this result: first, the reduced
cost of energy supply boosts GDP by
more than the 0.2% shown above; the
second is the impact of this efficiency
gain redeploys a significant amount of the
sector’s resources, creating a transitional
drag on GDP while those resources are
being redeployed.
UÊ A 1 percentage point improvement in the
learning rate for electric cars. This reduces
the cost of electric cars by 3.8% below the
baseline estimate by 2020, which enables
electric cars to become closer substitutes,
in terms of cost, to existing liquid fuelled
vehicles, although the take-up of electric
cars is still relatively small. It is the small
size of the sector that means there is
little discernable impact on GDP from this
improved learning rate. There is still an
improvement in productivity, however,
which leads to a marginally smaller
GDP penalty of -0.34% by 2020, as car
manufacturers’ profitability on electric
cars improves.
101 The CGE model did not model a learning rate for energy storage technologies because it affects the efficiency of
existing energy generation capacity, rather than new installations to which learning rates apply. so an independent
productivity shock is applied, where cheaper energy storage will increase the amount of usable energy for the
energy sector.
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Chart 26
Innovation and the costs of
mitigation (GDP impact in 2020)
% GDP
Wind
Cars
Electricity
Storage
0
-0.1
-0.2
-0.3
-0.4
Baseline (ETS and RES)
Learning Rate Shock (1% point)
Productivity Shock (10%)
Source: HMRC analysis
The Department of Energy and Climate
Change commissioned the ONS to
undertake a survey into the level of low
carbon innovation in the UK during 2008,
although, as it is the first survey of its type,
the results should be treated with caution.
The survey covered 4,000 organisations
who undertake Research, Development,
Demonstration and Deployment spending
in the public and private sectors, and had a
response rate of over 50%. This was then
grossed up to derive a UK spending figure.
It estimates that the UK spent around £340
million on low carbon innovation (£240m of
R&D and £100m in later stage demonstration
and deployment), nearly 1.5% of total UK
R&D innovation spending, as estimated
by the ONS’s annual Business Enterprise
Research and Development (BERD) survey
during 2007. Around 70% of this was spent
on early stage R&D and the rest spent on
demonstration and deployment. The survey
also revealed that around 40% of innovating
companies do not utilise any form of
Government-sponsored support. Of those
that do, around a fifth receive grant or R&D
tax credit support.
The survey also asked companies about the
main focus of their low carbon innovation
activity. The biggest focus was on reducing
energy consumption, with over 60% citing
this, followed by around a third innovating in
renewable energy. Around a fifth innovated in
reducing the cost of low carbon technologies
and in low carbon enabling technologies.
Recent analyses undertaken by the OECD
have highlighted the important incentive
power of carbon pricing on R&D and
technology deployment. More precisely,
using the World Induced Technological
Change Hybrid (WITCH) model,102 it was
found that a world carbon price consistent
with a 450ppm long run stabilisation target
would approximately quadruple (relative
to baseline) energy R&D expenditure and
investments in deployment of renewable
power generation. Moreover, this effect
was forecast to increase over time following
stringent targets that are likely to translate
into higher carbon prices.
The MARKAL model relies on the very strong
assumption of perfect foresight about the
future availability of technologies. Analyses
conducted by Oxford Economics (OE) to
inform the Energy White Paper (2007)
suggested that short and medium term
adjustment effects of the targets might
be significant. Assuming an illustrative
homogeneous price across the whole
economy sufficient to achieve a carbon
emission reduction of 30% by 2020 (relative
102 OECD (2008), “The Economics of Climate Change Mitigation: Policies and Post-2012 Options”, OECD Working Party on
Global and Structural Policies, ENV/EPOC/GSP(2008)16
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Marco-economic costs of climate change mitigation measures
to 1990), OE found transition costs between
1.3% and 2% of GDP in 2020. Similarly,
turning off capital adjustment costs (a proxy
for adjustment costs)103 in the HMRC CGE
model would lead to a reduction in GDP
costs from 0.96% to 0.5% of GDP in 2050
suggesting that adjustment costs have a
relatively limited macroeconomic impact.
Sectoral impacts
Despite aggregate costs on the UK being
manageable, impacts vary widely across
sectors. More precisely, results obtained
with the HMRC CGE model suggested that
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11
energy production and distribution sectors
would be hardest hit (Chart 27). For instance,
oil extraction, electricity production and
distribution, and gas extraction contract
(relative to baseline) in 2020 (2050) of 8.4%
(13.7%), 2.6% (14.2%) and 8.1% (9.7%)
respectively.There are two main reasons
behind the relative higher adverse impact
on these sectors than others. Firstly, these
sectors are relatively small so a given change
is proportionately bigger. Secondly, they
shrink since most of the fuel savings in the
MACC are from electricity (58% in 2050),
gas (14% in 2050) and oil (21% in 2050).
Chart 27
GDP costs (relative to baseline) by sector
20%
Agriculture and forestry
Extraction of natural gas
Extraction of oil
10%
Light industry
Refined petroleum
Non nuclear renewables
0%
2020
2050
Nuclear fuel and power generation
Other carbon intense industry
-10%
Non carbon-intense heavy industry
Non-renewable electricity
production and distribution
-20%
Gas distribution
Construction
-30%
Land transport
Air transport
Public sector
-40%
Health and education
Other services
Source: HMRC CGE model (2009)
103 The Climate Change Act 2008 Impact Assessment can be found at http://www.defra.gov.uk/environment/
climatechange/uk/legislation/pdf/ccbill-ia-final.pdf
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The UK Low Carbon Transition Plan
Analytical Annex
The unilateral carbon price in the EU created
by the EU ETS creates the potential for
emissions intensive sectors to shift to
production to areas with no or lower carbon
costs. Through imposing an additional cost
of EU production, the EU ETS may reduce
the profitability of production in the EU,
and increase the level of imports from the
rest of the world. EU companies will face
greater competition from non-EU producers,
and reduced profits from operating in the
EU. Shifting emissions outside the EU, also
known as ‘carbon leakage’, would undermine
the effectiveness of the EU ETS.
international competition, where there are
high transport costs, or other barriers to
imports, or where imports are not perfect
substitutes for domestic products. Analysis,
for example by Climate Strategies (2007)
has found that the risk of carbon leakage is
determined by a sector’s carbon intensity and
trade intensity. Chart 28 presents the change
in cost (as a proportion of the sector gross
value added) for sectors as a result of a `20
carbon price in the EU ETS. It suggests that
the risk of leakage, while significant for some
sectors, is confined to a few energy-intensive
sectors, such as iron and steel, aluminium and
cement, which account for a small proportion
of overall UK GDP. However, given the sectors
most at risk, the potential loss of GDP as
a result of leakage is significant but small.
The risk of carbon leakage will depend on
the specific characteristics of the sector.
The risk of leakage will be lower in sectors
which do not face a high degree of
Chart 28
CO2 cost screen: sectors potentially exposed under unilateral CO2 pricing
65
Electricity dependent (indirect) CO2 costs / GVA
Lime
Allocation dependent (direct) CO2 costs / GVA
Potential Maximum Value at Stake (MVAS) and
Net Value at Stake (NVAS), %
60
55
50
Finishing of
textiles
45
Cement
35
30
Basic iron &
steel
25
Industrial
gases
Fertilisers &
nitrogen
Flat
glass
Non wovens
Aluminium
20
Copper
Household
paper
Other inorganic
basic chemicals
40
Coke oven
15
Veneer sheets
Rubber tyres
& tubes
Hollow
glass
Malt
10
0
0.0
Pulp &
paper
Refined petroleum
5
0.1
0.2
0.3
0.4
Casting
of iron
0.5
0.6
0.7
0.8
0.9
1.0
1.1
UK GDP, %
Price increase assumption: CO2 = €20/tCO2, Electricity = €10/MWh
Source: Climate Strategies (2008)
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The regional distributional implications are
considered in the distribution section above.
The most effective solution to the problem
of carbon leakage is to reach an appropriate
international deal which ensures a consistent
carbon price signal between regions. While
this remains the ultimate objective of the UK
and the EU, the revised Directive for the EU
ETS provides for continuing free allocations to
sectors at risk of leakage. By December 2009
the Commission will determine which sectors
will receive free allocation based on energy
and trade intensity.
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In the short term, the global recession has
created the need for a package of fiscal
stimulus measures. Budget 2009 provided
over £1.4bn of additional targeted support for
the low carbon economy. This, together with
announcements made since Autumn 2008,
will enable an additional £10.4bn of low carbon
and energy investment over the next three
years. This will employ around 20,000 people
in construction and installation in the short
term and provide the foundations for strong
growth of the green sector in the future.
Overall the macro-economic impact is
manageable with the right policy mix, and
preferable to the costs of inaction.
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11
Chapter 8
Sustainability
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The UK Low Carbon Transition Plan
Analytical Annex
Section 13(3) of the Climate Change Act 2008
states that proposals and policies for meeting
carbon budgets must, when taken as a whole,
‘be such as to contribute to sustainable
development’.
The Government Economics Service (GES) is
currently undertaking a review of Sustainable
Development in policy appraisal, which will
provide supplemental Green Book guidance.
The group undertaking this work is chaired
by the Chief Economist of the Department
for Environment, Food and Rural Affairs,
with experts on environmental, social and
economic appraisal drawn from across
Government. Whilst this group has not
formally reported its findings, their research
into current appraisal practices starts to
consider how to take a more structured
approach to the consideration of Sustainable
Development.
Consideration of Sustainable Development
should demonstrate whether a policy, as
a whole, makes the UK and its economy
more or less sustainable, and by how
much. This is no small task, but it is most
likely appropriate to use Social Cost-Benefit
Analysis (SCBA) as a tool if the impacts of a
policy are purely marginal and affect only the
current generation. However, where impacts
are non-marginal or affect more than one
generation,104 supplementary tools may be
necessary to complete a policy appraisal.
In practice, though, and as noted previously,
the incorporation of values for these
impacts is often not possible, and hence
consideration of sustainable development
requires us to be explicit about the
trade-offs and long-term impacts of a policy
decision on the environment, society and
the economy. Previous chapters have looked
at some of these potential impacts and
trade-offs, such as distributional issues and
effects on the wider economy. This chapter
considers a number of further impacts
which all form part of the framework of
sustainable development, focussing on
some of the potential wider environmental
impacts of policies, including landscape,
biodiversity, water, noise and air quality; and
on congestion impacts.
Wider Environmental
Impacts
Climate change poses one of the most
significant risks to the environment, but
in taking measures to reduce greenhouse
gas emissions we need to ensure that this
does not compromise other environmental
priorities and legal obligations that
Government has. Existing legislation such
as the EU Habitats Directive, the Water
Framework Directive and the legislation
that underpins the Air Quality Strategy set
environmental standards and targets for
the UK, with consequences for both the
environment and health. These need to
be maintained as we move towards a low
carbon economy.
The sections below provide an assessment
of the synergies and tensions with the wider
environment of the measures set out in the
Transition Plan to reduce greenhouse gas
emissions. There are difficulties in monetising
these impacts as they often do not have
market prices, although methods to value
non market impacts do exist and can provide
robust evidence. Further difficulty arises
where we are unsure of the exact decisions
that will be taken, as policies are designed to
offer incentives that allow commercial players
to meet targets and obligations in the most
cost effective way to them.
104 For a positive NPV to represent a Pareto improvement, it must be possible for the winners of a policy to compensate
the losers. It is clearly not sensible to assume that future generations can compensate us for lower utility today, so
CBA is not necessarily appropriate for showing whether a policy represents a net improvement in wealth.
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Chapter 8:
Sustainability
Landscape
There are potentially a number of impacts
on the landscape as a result of proposed
measures to tackle climate change.
Particular areas of focus are where policy
change involves any material change to the
appearance of the landscape either from
changes in land use or visually intrusive
construction, and where impacts affect
National Parks or Areas of Outstanding
Natural Beauty.
The need for more renewable energy
infrastructure and biomass and bio-fuels
has the potential to significantly affect the
landscape. Increased size and number of
wind farms in the UK will alter the landscape
as will land use changes brought about by
increasing production of bio-energy.
The Government is strongly of the view that
all bio-fuels and biomass used in the UK
should come from sustainable sources and
we are active in the EU and internationally
in seeking agreed definitions. Energy crops
which benefit from the Energy Crops
Scheme are also subject to environmental
assessment. Policies aimed at improving the
efficiency of products, buildings, vehicles
and production processes will reduce overall
demand for energy, and therefore the need
for new energy sources and infrastructure.
There could be impacts on the urban
landscape through policies aimed at
increasing the uptake of renewable energy
technologies, where these are applied
domestically and at the neighbourhood level
to generate renewable energy through solar
panels and wind turbines.
Biodiversity
Impacts on biodiversity arise where
policy change leads to changes in habitat,
fragmentation or disturbance, and loss in
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habitat. Unabated climate change will lead
to significant biodiversity loss. Therefore,
successfully combating climate change (and
planning to adapt to that change that is already
locked in) is key to the long term future of
biodiversity domestically and globally.
Climate change mitigation activity can
have both positive and negative impacts
for biodiversity. Adverse impacts can be
minimised through avoidance, mitigation,
and, where the former are not possible,
through offsetting.
Eutrophication occurs in natural freshwater
lakes, other freshwater bodies, estuaries,
coastal waters and marine waters, and
can affect a range of priority species and
habitats identified under the UK Biodiversity
Action Plan. Reduced eutrophication,
through reduced nitrogen fertiliser use in
agriculture,105 or reductions in combustionbased power generation due to an increased
use of renewable energy and energy
efficiency, can help to reduce any negative
impacts.
Renewable energy generation may
have negative impacts on biodiversity
if construction of infrastructure leads to
disturbance of habitat or significant land
use changes. Any introduction of tidal
power generation and the associated
infrastructure requirements would have
the potential to significantly impact the
natural environment, including habitats and
species. The extent of these impacts would
depend upon the location and scale (as with
other renewable energy infrastructure) of
the project. The Government will also be
assessing the potential implications of the
projected increase in biomass demand with
a view to introducing additional safeguards
as necessary. The extent to which this is
needed will depend upon the success of
105 Analysis on the environmental impacts of reducing nitrate loss from agriculture can be found in the Impact Assessment
of proposals to revise the Nitrates Action Programme and extend the Nitrate Vulnerable Zones (NVZ), August 2008.
Available at:http://www.ialibrary.berr.gov.uk/ImpactAssessment/?IAID=2936af84c8834d538c0b11f5cd6a4cbf
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policies which reduce energy demand, as the
renewables target relates to the proportion of
final energy use. Avoiding indirect biodiversity
impacts therefore strengthens the case for
energy efficiency policies.
Water, including quality, quantity
and flood risk
A wide range of human activity can impact on
water quality. Policy change may impact on
the degree of water pollution (surface water,
ground water and coastal and marine), levels
of abstraction of water or the risk of flood or
coastal erosion.
Moving to a low-carbon economy offers
opportunities for other Government
objectives under the Water Framework
Directive. Combustion-based power
generation leads to acidification and
eutrophication of water. Therefore, reducing
our reliance on this form of energy, through
energy efficiency policies and renewable
energy generation, will reduce damage
to water bodies, along with the need for
additional measures to meet the Directive.
Mitigation measures in the AFLM sector will
look to focus on fertiliser use, efficiency and
timing, and manure management. Synergies
may exist with improving water quality where
reductions in overall nitrogen use lead to a
reduction in diffuse nutrient pollution in areas
where eutrophication occurs.
Water stress in the UK may benefit if policies
aimed at promoting domestic energy efficiency
(such as the Supplier Obligation and Carbon
Emissions Reduction Target where energy
companies can achieve their obligations
by promoting energy saving measures to
consumers) raise awareness of resource usage
and promote behaviour change. For example,
if individuals act to save water by taking
showers instead of baths.
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Noise
Impacts on noise arise from changes in policy
that produce unwanted sound. Consideration
should be taken of the characteristics of the
sound, such as volume and duration, and of
the people who are likely to be affected.
Community renewable generation could
result in impacts on noise if, for example,
through the Community Emissions Reduction
Target community wind turbines are used in
urban settings. Consideration will need to be
given to appropriate locations.
Policies set out in the Transport Strategy
may lead to improvements in noise levels
by encouraging cycling and walking, where
this reduces the number of vehicles on the
road. Any increase to the cost of driving due
to the increased use of biofuels could lead
to similar benefits. These benefits may be
offset due to car efficiency standards that will
likely lead to a reduction in the cost of driving.
More detail on the impacts of the transport
strategy are set out in the subsequent
congestion section.
Air Quality
There are three key drivers to air quality
management; health effects, short and
medium term environmental damages
(such as acidification and eutrophication of
ecosystems), and long term environmental
consequences – primarily climate change.
It is important that when evaluating options
to mitigate climate change, consideration is
also given to the short and medium term air
quality impacts of the abatement options.
In most cases there are notable synergies
between actions to reduce carbon emissions
and short and medium term air quality.
However, in some circumstances there
may be tensions – for example the location
of a source of air pollutants is a major
determinant of the health effects yet it has
no impact on the climate change potential of
the emissions. The tensions and synergies
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Chapter 8:
Sustainability
are discussed in detail in the 2007 Air Quality
Expert Group (AQEG) report “Air quality and
climate change: a UK perspective”.106
To help maximise the synergies and avoid
such tensions from the package of policies,
research was commissioned using the
MARKAL model to consider and value
the potential impacts of climate change
measures on air quality under a costminimisation scenario to reach our climate
change targets.
Given the range of climate change measures
included within the model, it was necessary
to focus on the three key sectors that were
likely to have notable overlaps between
air quality and climate change. Therefore
marginal air quality costs were developed
across electricity generation, road transport
and domestic and non domestic buildings.
It was also decided to focus on particulate
matter (PM), oxides of nitrogen (NOX),
sulphur dioxide (SO2) and ammonia (NH3) as
pollutants of primary concerns.
The modelling results presented below
should be seen as the result of a costminimising model run using the MARKAL
model, based on particular assumptions
about the costs and availabilities of
technologies. They are therefore not
projections of changes in air quality to 2022
as a result of the measures in the Transition
Plan. In the transport sector, for example, the
Carbon Reduction Strategy for Transport sets
out the policies that will deliver transport’s
contribution to the carbon budgets. The
Impact Assessment for the Strategy sets out
the expected air quality impacts of the actual
measures in the Strategy to 2022.
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The modelling results shown here reflect
the air quality impacts of one scenario for
achieving our carbon budgets. The core
approach was to firstly develop marginal
air quality impacts for all the activities
and technologies under consideration.
The marginal air quality impact estimates
followed the standard impact-pathway
approach calculating emissions and then
valuing the resultant impacts on human
health and the natural and man-made
environment. To estimate the emissions
associated with activities, data was
sourced from the National Atmospheric
Emissions Inventory (NAEI)107 while the
value of the emissions were valued using
the Interdepartmental Group on Costs and
Benefits (IGCB) damage costs.108
Overall the results from this analysis
demonstrated a clear and substantial synergy
between air quality and climate change
policies. Chart 29 provides the key high level
results by sector for the three time periods
of carbon budgets 2012, 2017 and 2022.
The following diagram and text excludes the
impacts of increased uptake of residential
biomass, the reasons for this are discussed
at the end of this section.
Chart 29 clearly shows the net air quality
benefit associated with the climate change
measures increasing over time. The total net
benefit is estimated at around £150 million
in 2012 increasing to £425 million in 2017
and £775 million in 2022. The 2022 figure is
estimated to be equivalent to saving 20,000
life years 109 annually by 2022. Over the
period the share of the benefit from each
sector remains relatively constant at between
106 Available from www.defra.gov.uk/environment/airquality/publications/airqual-climatechange/index.htm
107 More information on the NAEI is available from www.naei.org.uk.
108 Information on the methodology underpinning the IGCB damage costs is available from www.defra.gov.uk/evidence/
economics/igcb/index.htm
109 Improvements in air quality are associated with a range of health benefits most notable being the increase in life
expectancy and quality of life. These impacts have been estimated in accordance with best practice as set by the
Interdepartmental Group on Costs and Benefits air quality subject group. For further information please see:
http://www.defra.gov.uk/environment/airquality/panels/igcb/
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Chart 29
The net air quality benefit associated
with Climate Change measures
£900
£800
£700
£600
£500
£400
£300
£200
£100
£0
Road
2012
2017
Domestic
Power
2022
Source: the Department for Environment, Food and
Rural Affairs Analysis (2009)
55% – 60% from the power sector,
35% – 40% from the domestic sector and
5% from road transport.
Underlying these high level impacts it is
then possible to identify the key findings for
the different activities within the sectors.
These are briefly summarised below:
The benefits from the power sector are
dominated by the modelled reductions in the
use of coal plants which account for around
80% of the total benefit. The second largest
contributor is biomass burning around 15%
followed by reduced gas combustion which
accounted for around 3% of the benefit.
The key trade-off identified in this sector
related to the increase in co-firing with
biomass which was seen to increase notably.
However as the additional biomass burning
is expected to replace coal it is expected to
provide a net air quality benefit.
For the domestic sector the air quality
impacts were spread over a much
wider range of technologies. The largest
contributors are increases in solar
water heating and reducing household
temperatures by 1 degree which accounted
in total for around 55% of the benefit, at
30% and 25% respectively. The remaining
benefits were distributed across a range of
technologies but particular recognition should
be given to the contribution of wall insulation
and heat pumps. The key tension between
air quality and climate change was in relation
to residential biomass discussed below.
Finally road transport contributed a
relatively small amount of the net impact.
The benefits that were identified were split
relatively evenly between power train and
non-power train technologies. The relatively
low impacts can be seen to be largely due
to the increasingly robust vehicle emission
controls over this period with the introduction
of latter European emission standards.
The final key result from this analysis,
omitted from the results up to this point,
identified the potential consequences of
an unmanaged major uptake of residential
biomass. The initial analysis indicated that
this change alone would outweigh the air
quality benefits from all the other changes
identified across all the sectors. Taken
together the package was estimated to
impose a net air quality cost of £112 million
in 2012 rising to £2.6 billion in 2022.
However, it must be noted that changes to
the modelled uptake of residential biomass,
primarily constraining location and technology
type, reduces the negative air quality impact
by around 95%. These constraints thereby
mean the package of measures is expected
to significantly improve air quality by almost
£600 million per annum in 2022.110
110 More information on the approach to manage the air quality impacts of residential biomass is provided in the
Renewable Energy Strategy, July 2009.
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Congestion
Where policy measures reduce the costs
of driving per kilometre, this is expected
to result in an increase in the amount of
mileage driven, thereby adding to congestion.
Congestion results in a cost to the economy
as a result of increasing journey times and
reducing the reliability of journeys. Slow
moving traffic and stop/start conditions also
have a negative impact on emissions.
The measures within the Carbon Reduction
Strategy for Transport111 that are expected to
reduce the cost of driving per kilometre are
the EU new car regulation and the expected
EU regulation for new vans. The modelling
undertaken for the EU new car regulation
suggests that increases in congestion would
be relatively small, but would increase over
time as more fuel efficient cars make up a
greater proportion of the total fleet relative to
the baseline.
Other measures within the Strategy will
tend to reduce congestion. For example, an
increase in the amount of transport fuel from
biofuels would be expected to lead to an
increase in the cost of driving, compared to
the baseline, as the pre-tax cost of biofuels is
generally higher than the cost of fossil fuels.
This increase in cost is expected to decrease
the amount of mileage travelled, offsetting
some of the reduction in the cost of driving
as a result of the EU new car regulation.
Other measures that will tend to decrease
congestion include those aimed at increasing
the amount of walking and cycling, as well as
investment in public transport and schemes
to encourage car sharing, which reduce
the number of journeys undertaken by car.
Improvements in technology which reduce
the need to undertake business and
commuting journeys (such as teleconferencing
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or tele-working) and reduce the number of
car trips will also have a beneficial impact on
congestion. Similarly, freight modal shift
grants that shift freight from the roads to
other modes of transport will tend to reduce
congestion on the roads.
Overall assessment
Measures to reduce carbon emissions and
hence avoid dangerous climate change
offer some strong synergies with other
Government objectives to protect the wider
environment. As the above assessment
details, decarbonising power generation
generates significant improvements in air
quality, and can bring about benefits to water
quality through reduced eutrophication,
indirectly leading to further potential
improvements for biodiversity.
Reducing energy demand through the
various policies aimed at promoting energy
efficiency of products, buildings, vehicles
and production processes will lead to further
gains in these areas, along with additional
benefits of avoiding the need for new
technologies and mitigating any tensions
these might pose.
Where tensions do exist, such as through
the need to rapidly expand renewable
energy generation and the potential adverse
consequences for biodiversity and the
landscape, safeguards that exist need to
be maintained and monitored to ensure
they offer the appropriate protection for
the local environment, while still ensuring
we effectively reduce greenhouse gas
emissions. As such, Government will be
assessing the potential implications of the
projected increase in biomass demand with a
view to introducing additional safeguards
as necessary.
111 Available at: www.dft.gov.uk/carbonreduction
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