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Non-printing Colours Non-print 1 Non-print 2 Analytical Annex JOB LOCATION: PRINERGY 3 The UK Low Carbon Transition Plan DEC-PB13289_AnAnnex.indd 1 24/7/09 07:36:16 DEC-PB13289_AnAnnex.indd 2 24/7/09 07:36:17 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 DEC-PB13289_AnAnnex.indd 1 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 24/7/09 07:36:17 2 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 DEC-PB13289_AnAnnex.indd 2 74 24/7/09 07:36:17 2Contents 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 DEC-PB13289_AnAnnex.indd 3 24/7/09 07:36:18 DEC-PB13289_AnAnnex.indd 4 24/7/09 07:36:18 5 Executive Summary DEC-PB13289_AnAnnex.indd 5 24/7/09 07:36:18 6 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 DEC-PB13289_AnAnnex.indd 6 24/7/09 07:36:18 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 DEC-PB13289_AnAnnex.indd 7 7 11 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/ 24/7/09 07:36:19 DEC-PB13289_AnAnnex.indd 8 24/7/09 07:36:19 9 11 Structure of the Annex DEC-PB13289_AnAnnex.indd 9 24/7/09 07:36:19 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. 24/7/09 07:36:19 Structure of the Annex UÊ Ê>Þ]ÊÌ iÊwider 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, DEC-PB13289_AnAnnex.indd 11 11 11 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. 24/7/09 07:36:20 DEC-PB13289_AnAnnex.indd 12 24/7/09 07:36:20 13 11 Chapter 1: The Long Term DEC-PB13289_AnAnnex.indd 13 24/7/09 07:36:20 14 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 DEC-PB13289_AnAnnex.indd 14 24/7/09 07:36:21 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). DEC-PB13289_AnAnnex.indd 15 24/7/09 07:36:22 16 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 DEC-PB13289_AnAnnex.indd 16 24/7/09 07:36:22 17 11 Chapter 2: Getting There Transforming the UK Economy and Energy System to 2050 DEC-PB13289_AnAnnex.indd 17 24/7/09 07:36:23 18 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 DEC-PB13289_AnAnnex.indd 18 24/7/09 07:36:23 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. DEC-PB13289_AnAnnex.indd 19 24/7/09 07:36:23 20 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 DEC-PB13289_AnAnnex.indd 20 24/7/09 07:36:24 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. 24/7/09 07:36:25 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. DEC-PB13289_AnAnnex.indd 22 24/7/09 07:36:25 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. 24/7/09 07:36:25 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) DEC-PB13289_AnAnnex.indd 24 24/7/09 07:36:26 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) DEC-PB13289_AnAnnex.indd 25 24/7/09 07:36:27 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. DEC-PB13289_AnAnnex.indd 26 24/7/09 07:36:27 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 DEC-PB13289_AnAnnex.indd 28 24/7/09 07:36:28 29 11 Chapter 3: Reducing UK Emissions of Greenhouse Gases from 2008-2022 DEC-PB13289_AnAnnex.indd 29 24/7/09 07:36:28 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. DEC-PB13289_AnAnnex.indd 30 24/7/09 07:36:28 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. DEC-PB13289_AnAnnex.indd 31 24/7/09 07:36:29 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. DEC-PB13289_AnAnnex.indd 32 24/7/09 07:36:29 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 DEC-PB13289_AnAnnex.indd 33 24/7/09 07:36:29 34 The UK Low Carbon Transition Plan Analytical Annex 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; 24/7/09 07:36:29 Chapter 3: Reducing UK Emissions of Greenhouse Gases from 2008-2022 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, 35 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. DEC-PB13289_AnAnnex.indd 35 24/7/09 07:36:30 36 The UK Low Carbon Transition Plan Analytical Annex 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. DEC-PB13289_AnAnnex.indd 36 24/7/09 07:36:31 Chapter 3: Reducing UK Emissions of Greenhouse Gases from 2008-2022 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 37 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. 24/7/09 07:36:31 38 The UK Low Carbon Transition Plan Analytical Annex 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 DEC-PB13289_AnAnnex.indd 38 24/7/09 07:36:32 Chapter 3: Reducing UK Emissions of Greenhouse Gases from 2008-2022 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). DEC-PB13289_AnAnnex.indd 39 24/7/09 07:36:32 40 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. DEC-PB13289_AnAnnex.indd 40 24/7/09 07:36:32 Chapter 3: Reducing UK Emissions of Greenhouse Gases from 2008-2022 41 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 DEC-PB13289_AnAnnex.indd 41 24/7/09 07:36:33 42 The UK Low Carbon Transition Plan Analytical Annex 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. 24/7/09 07:36:33 Chapter 3: 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 DEC-PB13289_AnAnnex.indd 43 24/7/09 07:36:33 44 The UK Low Carbon Transition Plan Analytical Annex 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. 24/7/09 07:36:34 Chapter 3: 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. DEC-PB13289_AnAnnex.indd 45 24/7/09 07:36:34 46 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. DEC-PB13289_AnAnnex.indd 46 24/7/09 07:36:35 Chapter 3: Reducing UK Emissions of Greenhouse Gases from 2008-2022 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. DEC-PB13289_AnAnnex.indd 47 24/7/09 07:36:35 48 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 DEC-PB13289_AnAnnex.indd 48 24/7/09 07:36:35 Chapter 3: 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. DEC-PB13289_AnAnnex.indd 49 24/7/09 07:36:35 50 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 DEC-PB13289_AnAnnex.indd 50 24/7/09 07:36:36 Chapter 3: Reducing UK Emissions of Greenhouse Gases from 2009-2022 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 52 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 DEC-PB13289_AnAnnex.indd 52 24/7/09 07:36:37 53 11 Chapter 4: Aggregate costs of the package of policies DEC-PB13289_AnAnnex.indd 53 24/7/09 07:36:37 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 DEC-PB13289_AnAnnex.indd 54 24/7/09 07:36:38 Chapter 4: 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. DEC-PB13289_AnAnnex.indd 55 24/7/09 07:36:38 56 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. DEC-PB13289_AnAnnex.indd 56 24/7/09 07:36:38 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. DEC-PB13289_AnAnnex.indd 57 24/7/09 07:36:39 58 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 DEC-PB13289_AnAnnex.indd 58 24/7/09 07:36:39 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. DEC-PB13289_AnAnnex.indd 59 24/7/09 09:58:13 60 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) DEC-PB13289_AnAnnex.indd 60 24/7/09 07:36:40 61 11 Chapter 5: Estimated impacts of the package of policies and proposals on energy prices and bills DEC-PB13289_AnAnnex.indd 61 24/7/09 07:36:41 62 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). 24/7/09 07:36:41 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. DEC-PB13289_AnAnnex.indd 63 24/7/09 07:36:41 64 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. DEC-PB13289_AnAnnex.indd 64 24/7/09 07:36:42 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”. DEC-PB13289_AnAnnex.indd 65 24/7/09 07:36:43 66 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. DEC-PB13289_AnAnnex.indd 66 24/7/09 07:36:43 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. DEC-PB13289_AnAnnex.indd 67 24/7/09 07:36:43 68 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 DEC-PB13289_AnAnnex.indd 68 24/7/09 07:36:44 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. DEC-PB13289_AnAnnex.indd 69 24/7/09 07:36:44 70 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. DEC-PB13289_AnAnnex.indd 70 24/7/09 07:36:44 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% 24/7/09 07:36:45 72 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 DEC-PB13289_AnAnnex.indd 72 24/7/09 07:36:45 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). DEC-PB13289_AnAnnex.indd 73 24/7/09 07:36:46 74 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. 24/7/09 07:36:46 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. 24/7/09 07:36:47 76 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. DEC-PB13289_AnAnnex.indd 76 24/7/09 07:36:48 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 77 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. 24/7/09 07:36:48 DEC-PB13289_AnAnnex.indd 78 24/7/09 07:36:48 79 11 Chapter 6 High level summary of impacts on energy security DEC-PB13289_AnAnnex.indd 79 24/7/09 07:36:48 80 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. DEC-PB13289_AnAnnex.indd 81 24/7/09 07:36:50 82 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). DEC-PB13289_AnAnnex.indd 82 24/7/09 07:36:50 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). DEC-PB13289_AnAnnex.indd 83 24/7/09 07:36:50 84 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. 24/7/09 07:36:51 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. DEC-PB13289_AnAnnex.indd 85 24/7/09 07:36:52 86 The UK Low Carbon Transition Plan Analytical Annex 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. 24/7/09 07:36:52 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. DEC-PB13289_AnAnnex.indd 87 87 11 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. 24/7/09 07:36:52 DEC-PB13289_AnAnnex.indd 88 24/7/09 07:36:53 89 11 Chapter 7 Macro-economic cost of climate change mitigation measures DEC-PB13289_AnAnnex.indd 89 24/7/09 07:36:53 90 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. DEC-PB13289_AnAnnex.indd 90 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 24/7/09 07:36:53 Chapter 7: 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 91 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. DEC-PB13289_AnAnnex.indd 91 24/7/09 07:36:53 92 The UK Low Carbon Transition Plan Analytical Annex 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. DEC-PB13289_AnAnnex.indd 92 24/7/09 07:36:54 Chapter 7: Marco-economic costs of climate change mitigation measures 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. 93 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. DEC-PB13289_AnAnnex.indd 93 24/7/09 07:36:54 94 The UK Low Carbon Transition Plan Analytical Annex 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 DEC-PB13289_AnAnnex.indd 94 24/7/09 07:36:55 Chapter 7: 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 95 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 DEC-PB13289_AnAnnex.indd 95 24/7/09 07:36:56 96 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) DEC-PB13289_AnAnnex.indd 96 24/7/09 07:36:56 Chapter 7: Marco-economic costs of climate change mitigation measures 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. DEC-PB13289_AnAnnex.indd 97 97 11 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. 24/7/09 07:36:57 DEC-PB13289_AnAnnex.indd 98 24/7/09 07:36:57 99 11 Chapter 8 Sustainability DEC-PB13289_AnAnnex.indd 99 24/7/09 07:36:57 100 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. DEC-PB13289_AnAnnex.indd 100 24/7/09 07:36:57 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 101 11 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 DEC-PB13289_AnAnnex.indd 101 24/7/09 07:36:58 102 The UK Low Carbon Transition Plan Analytical Annex 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. DEC-PB13289_AnAnnex.indd 102 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 24/7/09 07:36:58 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. 103 11 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/ DEC-PB13289_AnAnnex.indd 103 24/7/09 07:36:58 104 The UK Low Carbon Transition Plan Analytical Annex 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. DEC-PB13289_AnAnnex.indd 104 24/7/09 07:36:59 Chapter 8: Sustainability 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 105 11 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 DEC-PB13289_AnAnnex.indd 105 24/7/09 07:36:59 DEC-PB13289_AnAnnex.indd 106 24/7/09 07:37:00