THE AFFORDABILITY OF A UK ZERO CARBON TARGET

 Here are some back of the envelope calculations that demonstrate the credibility of the assertion that action to mitigate climate change, and progress to a low carbon economy, can be achieved at a containable cost. It aims to provide a simple intuitive defence of conventional estimates for the general reader, but serious students of the subject are invited to delve deeper into some of the excellent material produced under the aegis of the Committee on Climate Change[1].

One of the arguments mounted against taking effective action on climate is that the economic cost is unaffordable. The obvious response is that this has to be compared with the cost of not taking action, the costs of adaptation, and the possibility of existential climate threats on an unimaginable scale. However rather than engage with the occasionally hysterical accusations of alarmism from those in denial on the climate science, it is worth trying to get a sense of the scale of what may be involved in meeting a UK zero carbon target by 2050. Some sense of proportion should start to defuse the issue and calm any fears of national bankruptcy.[2]

This can be a confusing exercise, not least because estimates (of mitigation costs) tend to get tossed around in very different contexts. For example, it’s most common for costs to be discussed in very broad terms as a percentage of GDP. The Stern Review indicated costs of up to 2.0 % of GDP per annum, and some people have argued that this would be a very damaging and unsustainable burden in macro-economic terms.  The Committee on Climate Change currently makes a similar estimate (of 1-2 % of GDP). Others argue that Green investment can actually be used to boost economic growth and domestic employment[3]. There can be at least a partial truth in this argument, even if it can be misrepresented as arguing that the low carbon economy pays for itself. It is not an argument I intend to deploy here.

Some will be more concerned with the public expenditure implications, although that issue should be seen much more in terms of more political questions of how we choose to fund transformational change. For example, much of the cost of transition to low carbon may be carried by private consumers, in their utility bills or more expensive motoring choices, or it may include publicly funded infrastructure investment and extensive grants and subsidies.

Macro-economic shocks and UK GDP numbers

2019 GDP (last year before pandemic)                                                              £ 2170 billion pa

Estimated permanent loss of GDP due to 2008 financial crisis                          £  300 billion pa
The economy is 16%, or £300 billion, smaller than it would have
been had it followed the pre-crisis trend. (IFS 2018[4])

Typical impact of an oil price shock[5] in 1970s, 1980s and 1990s.                   £ 100 billion pa
(an order of magnitude estimate, based on spikes and falls in
the oil price of $100/ bbl, UK consumption of 100 mn tonnes pa,
and scaling up to an equivalent percentage of 2019 GDP)

Assumption of a 2% of 2019 UK GDP devoted to GHG reduction                      £ 43 billion pa
and low carbon transition.

I have not included the significantly larger shifts in resources associated with different government priorities on taxation and spending. Even so, the conclusion we might draw here is that the expenditure on a low carbon economy, while substantial, is far from catastrophic and unmanageable when viewed in macro-economic terms. We have coped with much larger and less predictable economic shocks than what we now face in eliminating emissions.

Public expenditure choices

Expenditure budget 2021:                                                                          £ 908 bn.

Defence                                                                                                      £  54 bn pa

Defence in 1951 (Korean War) accounted for 
10% of GDP. Equivalent percentage of 2019 GDP                                    £ 217 bn pa

Overseas aid (0.7% of GDP target)                                                           £   15 bn pa

Overseas aid (after current cuts)                                                               £  10.85 bn pa

Reported cost of UK Track and Trace system[6]                                       £   37 bn
(spread over two years but seems to be essentially
a 12 month figure). Minimal identified benefit.

Assumption of a 2% of 2019 GDP devoted to GHG                                  £ 43 bn pa
reduction and low carbon transition. (as above)

But what can you buy for 2% of GDP?

It turns out you can do quite a lot for decarbonisation with around £ 40 billion a year. Here is one allocation of that money:

Decarbonising the power sector.                                                               £ 18 bn pa

Retrofitting UK housing stock. 28 million households                                £ 20 bn pa
Grant of £ 20,000 per household for retrofitting, at one million
households a year for 28 years

Charging infrastructure for electric vehicles (EVs)                                    £ 2.5 bn pa

Total                                                                                                           £ 40.5 bn pa

This covers the three main sources of UK emissions, and the main areas for investment to achieve net zero by 2050. Assumptions to justify the plausibility of these numbers are as follows

Power Sector

Sizewell C has an estimated capital cost of around £ 18 billion for 3.2 GW of capacity. Nuclear is currently regarded as one of the more expensive options for low carbon capacity, and Sizewell is “first of a kind” but this at least gives us an order of magnitude. The equivalent of one Sizewell a year for 25 years delivers around 80 GW of capacity and more than 600 TWh pa of energy, more than enough, even after allowing for significant growth, to effectively decarbonise a power sector which already has a significant proportion of renewable low carbon energy. [Current UK annual consumption less than 350 TWh]

Alternative renewable sources are also widely seen as likely to be much cheaper than this, although there will be other major costs associated with energy storage. However we might interpret this as at least a first approximation, or an upper limit to the capital cost for low carbon generation. A great deal of new investment would of course be required in any case, so much of this will not be a truly incremental cost.

Heating of buildings

Retro-fitting of buildings, especially residential property, for energy efficiency and low carbon heat pumps or heat network solutions, is one of the biggest problems for achieving zero carbon. The cost of air or ground source heat pump installations are currently advertised at around £ 6000-8000 and up to £ 16000 respectively, while heat networks are collective typically municipal investments which can also be quite costly. But even adding on a substantial allowance for insulation improvement, £ 20000 per household would look like an extremely generous grant to a householder, especially as there would be a continuing benefit in lower running costs.

Electric vehicles

“The UK by 2040 needs 1-2.5 million new charging points. An average public charging point costs 25-30,000 euros so it would need to invest 33-87bn euros from now until 2040,” said Wood Mackenzie’s Wetzel. Interpreting this as two million over twenty years and assuming a cost per installation of £ 25000, this implies an annual investment of £ 2.5 billion.

The price of EVs is likely to fall dramatically with increasing scale, so we should not need to worry unduly about the capital costs of fleet replacement, which will be borne by motorists as they retire their existing vehicles.

Conclusions

Current estimates of expenditure required for a zero-carbon economy are plausible. In no sense can they be considered unattainable or damaging in macro-economic terms, as the sums are smaller and more predictable than the much bigger economic shocks we have endured in recent decades from other sources. Viewed as public expenditure choices the sums are commensurate with other choices we make and have made, such as the unfortunate “test and trace” scheme. An it is quite easy to hypothesise major elements in the composition of that expenditure.

Caveat. Sharp-eyed readers will have noticed that I have omitted some of the notoriously difficult, but smaller, sectors, such as aviation and shipping. But I believe the biggest additional issue will be the funds that high income countries will need to find in order to support low carbon strategies in the developing world.  That is a different story, and one that I have addressed in earlier posts this year.

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[1] Advisory-Group-on-Costs-and-Benefits-of-Net-Zero.pdf (theccc.org.uk) for example

[2] This post concentrates on UK statistics but the same arguments, and similar orders of magnitude, will apply to most developed economies.

[3] Retrofitting the UK housing stock, and many other infrastructure investments, will be labour intensive.

[4] 10 years on - have we recovered from the financial crisis? - Institute For Fiscal Studies - IFS. Paul Johnson and Jonathan Cribb. 2018

[5] The UK became a net oil exporter during this period, so the macro-economic consequences for the UK relate both to price shocks and significant changes in production.

[6] “Chancellor Rishi Sunak’s Budget last week included an additional £15bn for test and trace, taking the total bill to more than £37bn over two years.” [Independent. 10 March 2021]