John Rhys
May 2007
The following notes were prepared as a basis for written evidence to be submitted to the Joint Committee on the Draft Climate Change Bill in May 2007. The comments are addressed to the themes of the Committee’s inquiry.
1. The main aims and purposes of the Bill and why it is needed.
A recent BIEE Climate Change Policy Group paper[2] summarized the case for urgency of action on climate change. The following extract provides a neat summary of at least part of the case for action in relation to the institutional framework.
Policy has over the last two decades been set in a “liberalised market framework”, with a mixture of competitive markets and regulation, and many economists and politicians continue to rely exclusively on market driven solutions. While recognising the fundamental importance and powerful advantages of markets, we believe the current framework, unamended, is unlikely to be capable of promoting large scale investments in new low carbon technologies or fundamental long-term change in complex UK (or for that matter international) energy systems, since:
· “Climate change represents the greatest market failure the world has seen” (Stern).
· “Carbon valuation”, to internalise the costs of CO2, is not embedded in the economic system, and it has so far proved very difficult to implement in a manner that will give confidence to investors in long term assets, eg in power generation, by ensuring that the reward for carbon reduction will remain over the life of the asset.
· R&D investment may be particularly susceptible to market failure problems in industries where it is difficult for individual firms to capture the benefits. The energy sector has been notable for low and declining R&D in recent years, and the potential for market failure is enhanced by the absence of a clear and stable framework to put a value on the benefit of “low carbon”.
· Solutions based on the creation of market structures, such as for the trading of carbon, must play a hugely important role; but, to be effective, they will require not only Government endorsed targets for emission reduction, but also carefully designed policy interventions and regulatory supervision.
· In a number of cases decisions on infrastructure may have a profound effect on the economic and commercial choices of preferred technology, eg on the form of the electricity grid or on a pipe network for CO2 capture and disposal, requiring some degree of centralised decision making.
All these factors suggest the need for some amendment to existing regulatory and competitive market structures. Indeed small-scale incremental adjustments to existing market and institutional frameworks are unlikely to suffice and additional policy instruments are likely to be required.”
Club of Rome. Lord Lawson, in his recent evidence to the Committee, drew parallels with the “alarmist” projections of the Club of Rome. The failure to materialise of these early prophecies of doom led, unsurprisingly, to their characterisation as neo-Malthusian fallacies. However global warming in relation to man-made climate change has one economic characteristic which destroys any possible analogy. In the main the Club of Rome addressed the subject of natural resources, such as oil and minerals, for which actual or potential shortages are translated rapidly into price movements. Higher prices can and do induce substitution and both supply and demand responses. However when the scarce resource is a common good, like many aspects of what we choose to call “environment”, it does not, absent intervention, have a market price and users do not have to bear or respond to the external costs of their own consumption. The normal checks and balances of prices related to costs, and of supply and demand response, simply do not operate. In the absence of mechanisms to internalise the externalities of excess usage of an environmental resource, in essence what CO2 emissions are, there is nothing to curb demand or increase supply.
2. Appropriate to legislate? Balance between compulsory and voluntary action.
We should recall that “voluntary” action on energy conservation has been a feature of the energy policy landscape since the mid-1970s’ and that its achievements have been at best limited and partly undermined, perhaps, by falling real energy prices. Given the urgency that now attaches to real action to reduce emissions, it is clear that a new framework is required, and that legislation is likely to be necessary for many of the market based or regulatory initiatives that will be required. Climate change legislation also provides an opportunity to inject momentum into CO2 policy.
The balances that will need to be found in the future are between “compulsory” and “voluntary” measures, when so described in relation to individual choices by consumers or other economic actors. The most important distinction that can be drawn is between “voluntary” action in response to market pressures and new market signals, admittedly helped and reinforced by public education, and “compulsory” measures based on regulation, relevant examples of which might be building standards, planning requirements or motorway speed limits.
While there may be a general preference for “market” solutions, and the scope for new markets is covered in the Bill, it is likely that there will be a significant dimension of “regulation” required in future policy. One question to address therefore is whether possible future measures in respect of regulation are adequately covered by the Bill.
3. Inclusion of GHG; and the adequacy of the proposed 60% reduction.
In principle, and in the longer term, it will be important to move to a broader and more comprehensive system of greenhouse gas control. This should therefore be kept under review. The practical case for maintaining the immediate focus on CO2 is that it allows earlier progress to be made on the largest single element of the problem. To wait on resolution of the scientific, technical and political questions associated with a full GHG system might result in unnecessary delay to essential action that can be taken now.
The position on the adequacy of a 60% target is analogous, in that
- the most recent scientific consensus[3] indicates the need to aim for atmospheric concentrations of CO2 of less than 550 ppm
- with the lack of progress in reducing emissions over the last decade there are real doubts[4] as to whether a 60% target would deliver cumulative emission reductions adequate to achieve even the less demanding target of 550 ppm in 2050.
- the BIEE Climate Change Policy Group has expressed the view that “we should at least consider the implications of a more challenging 80% target, as well as the more conservative 60% UK reduction considered hitherto”.
The essential issue is that a limit based on an 80% reduction would be a further major reduction in carbon emissions, implying only half the allowable emissions of CO2 in 2050 compared with a 60 % reduction. As such it almost certainly implies significantly higher adjustment costs, and is also likely to imply measures which would impinge on the nearer term targets. It would therefore be harder to justify an 80 % reduction as a UK unilateral measure at this juncture.
Thus, if risks of delay to the passage of the Bill are to be avoided, the most appropriate compromise or practical approach is to proceed for the time being with limits based on the 60% target as outlined in the Bill, but to recognise the probability that the UK will wish or indeed need to move to a tighter limit in the future, most probably as part of a coordinated international response. This does not appear to call for any obvious major adjustments to the Bill, other than to ensure that both Government departments, in their monitoring and policy development, and the Committee on Climate Change, in its advisory role, do take into account the implications of tighter international objectives as exemplified by an 80% path.
Finally it is important that CO2 targets align with the true underlying objective. This is to minimise cumulative emissions, not to achieve a particular level by a given date. A target such as 60% reduction in annual emissions by 2050 may be a useful indicator of what is required, but it should not obscure the primary objective, reinforced by Stern, of keeping cumulative emissions within “safe” limits. Exclusive preoccupation with ultimate 2050 targets ignores the importance of the path of emissions reduction both in determining ultimate emissions and the “exemplary value” of UK action. There is therefore a case for expressing targets in terms of cumulative emissions.
4. What difficulties face the Government in controlling UK carbon?
The carbon budgeting system, and its associated accountability and monitoring arrangements, should facilitate public scrutiny of the whole corpus of policies and measures concerned with the low carbon issue. Effective accountability will need to consider not only recent emissions against budget but also those steps being taken to create the conditions for necessary long term technological and system changes.
The carbon budgeting system should therefore have space for detailed descriptions, endorsed by Government, on how the emission targets (both short and long term) are to be achieved, subject to necessary flexibility and with due regard to “urgency”. The concern here is not only with direct action by Government but also with action by other agents for change operating within policy frameworks set or influenced by Government
In this context the ideas set out by the BIEE Climate Change Policy Group[5] on time critical pathways, essentially documents that set out expectations on how sectoral targets are to be achieved, could play an important role in making the proposed carbon budgeting system fully effective. There are two specific points of entry.
(i) Section 6 requires the Government, whenever a carbon budget is set, to produce a report setting out its proposals and policies for meeting the carbon budgets for current and future budgetary periods. Note 34 to the Bill states that “this clause aims to enshrine transparency in the system so that Parliament is clear about how the Government intends to achieve its new obligations”.
(ii) Section 21 requires that the Committee on Climate Change report annually to Parliament its views on progress being made towards meeting not only the carbon budgets already set, but also the long term target for 2050.
It is difficult to see how these duties could be discharged satisfactorily without reference to something like Government-endorsed “time critical pathways” for the main sectors of electricity, transport and buildings.
Economic Costs of Adjustment. While one should not underestimate the scale of the task, I believe that the purely economic costs of adjustment, either to GDP or to consumers, are frequently overstated. As an example, the electricity sector accounts for some 35% of UK CO2 emissions and clearly has to become virtually carbon-free by 2050 if even a 60% target is to be achieved. However this is a sector in which a very large replacement programme would in any case be required over the next 20/30 years just to replace aging nuclear and coal stations.
Just to get a feel for the magnitude of the economic impacts for this sector, it is instructive to look at the French economy, which effectively converted electricity to carbon neutrality in two decades, from c 1980 on, while at the same time maintaining some of the most competitive power prices in Europe. France, apparently, made at least half the progress associated with a 60% target, within two decades, without any obvious excessive cost burden or adverse economic consequences.
5. Use of credits from overseas investment projects should be permitted ?
The BIEE Climate Change Policy Group has addressed this question directly in its submission to Government.
“We recognise that emissions reduction is properly regarded as a global issue, and this requires in principle that there should be no restriction or disincentive to UK agents making genuine cost effective investments to reduce CO2 or GHG emissions in other countries, especially where these may be more cost effective than UK investments. However the use of overseas credits does raise a number of serious practical questions that need to be resolved.
First, the integrity, credibility and additionality of such schemes needs to be assured, as any revelations of schemes of dubious validity will serve to undermine both the domestic political consensus for action on CO2, and any exemplary value of UK action internationally.
Second, if the purchase of even soundly based international credits was on a scale that left only minimal “domestic” reductions, then the exemplary value of UK action would be severely damaged.
Third, analysis suggests that the availability of international credits will be very difficult to predict, as it will depend both on the implementation of projects in countries with sometimes difficult regulatory regimes, and also on the demand from other developed countries whose policies are still evolving. Unconstrained use of such credits could create significant uncertainty about the level of domestic emission reduction that is required, and undermine the stability of the CO2 price, with a damaging impact on investment.”
6. Constitution, remit, powers, and resources of the Committee on Climate Change.
Remit. There is a good case for separating the design and implementation of climate change policy, on the one hand, from monitoring and accountability on the other; this would increase the credibility of the monitoring agency and thus improve the enforcement of emission targets. However the Committee is likely to develop considerable expertise and may be drawn into an advisory role on policy. This may create tensions for its main role.
Factors to consider (section 5.55). While all these factors are relevant, they are rather all-encompassing and should not all have equal weight in the Committee's deliberations. The Committee needs primary objectives more narrowly defined in terms of climate, technological, and energy policy issues within a sound framework of economic analysis.
Composition. The focus should be primarily on expertise. Stakeholders would not carry credibility and would inevitably be drawn into protection of special interest positions.
Resources and expertise. In 5.57 of the consultation document, part (e) should be redefined as energy production, supply and utilisation. Energy policy should also be included explicitly as an area of expertise. Most importantly, the list should include expertise in regulatory or regulatory economics issues. The Committee itself needs considerable strength on these issues as well as some sound grounding in climate science and technology. Some areas will inevitably need to be supplemented in the supporting staff and perhaps in commissioning additional research.
[1] The group consists of a number of energy experts, but does not claim to represent the views of the BIEE membership as a whole.
[2] Bringing Urgency Into UK Climate Change Policy. BIEE Climate Change Policy Group, December 2006
[3] The recent IPCC report for example suggests that lower concentrations, of between 445ppm and 490ppm, would keep the temperature rise in a range of 2.0-2.4C. This compares with EU policy of seeking to avoid rises of more than 2C.
[4] Tyndall Briefing Note 17, March 2007
[5] Bringing Urgency Into UK Climate Change Policy. Paper by the BIEE Climate Change Policy Group, December 2006, and also Time Critical Pathways For UK CO2 Reduction, Supplementary Note, February 2007
Sunday, March 30, 2008
BEYOND STERN. FORECASTING, COST EFFECTIVENESS, CLIMATE CHANGE
John Rhys
April 2007
The following notes were prepared as the basis for written evidence to be submitted to the Environmental Audit Committee in April 2007. The comments are addressed to the themes of the Committee’s inquiry.
KEY POINTS
Targets should retain focus on the key objective - the control of the level of global cumulative emissions; annual emissions in particular years such as 2020 or 2050 are useful landmarks but are ultimately only secondary or intermediate targets.
Official forecasts sometimes do not appear to have the benefit of detailed end use analysis. This is essential to monitoring many aspects of policy, particularly those that depend on influencing consumer behaviour; a comprehensive research programme to remedy this could be established for a comparatively modest cost.
Statistics highlight the fundamental importance of the electricity sector, not only as the largest current source of CO2 emissions, but because of its potential future “carbon-free” contribution in buildings and transport; a successful long term strategy demands an essentially carbon-free power sector.
Cost effectiveness; a significant economic issue in the Stern analysis suggests Stern might have attached an even higher social cost to current CO2 emissions.
There are some limitations to the use of cost effectiveness analysis, including the danger of inconsistency between public policy and private sector decisions; a corollary is that the value of carbon should feed through to the supply chain and into consumer prices.
Short term incremental measures provide important but limited reductions in emissions. Ambitious longer term targets imply systemic change both in supply and in demand; this attaches key importance to more urgency in long term plans.
For the longer term, annual forecasts are likely to be significantly less important than the monitoring of actions against a credible pathway for each sector, with long lead times involved. Monitoring arrangements need to reflect this.
Competitiveness issues have been exaggerated, given the relatively small emissions from industrial fossil fuel use and the small or indirect impacts on competitiveness from policy initiatives in the key sectors.
FORECASTING AND TARGETS.
A first requirement of CO2 targets is that they should align with the objective. This is to minimise cumulative emissions, not to achieve a particular level by a given date. Targets such as 60% or 80% reductions in annual emissions by 2050 may be useful indicators of what is required but they should not obscure the primary objective, reinforced by Stern, of keeping cumulative emissions within “safe” limits.
This distinction is important for two practical reasons. First, the shape of the path from the baseline to a given 2050 annual emission level has a very large impact on cumulative emissions over 43 years. To illustrate the point, a 60% reduction over 45 years requires a 2% pa reduction. However a 3.5% pa reduction for 20 years followed by a 1% pa reduction for 25 years yields the same annual emissions after 45 years, but a cumulative emissions total that is lower by the equivalent of 9 years emissions at the end of the period, loosely speaking “gaining” an additional 9 years of time.[1]
Second, the undeniable primacy of cumulative emissions implies that a rational approach to the design of an international regime and associated market mechanisms is also likely to be based on cumulative emissions from a baseline, with carryover of emission rights/savings between time periods, not on rigid annual numbers. Aligning national targets consistently with the shape and structure of future international regimes, including the ETS, will be essential.
Larger early reductions, if they can be achieved and sustained, are disproportionately beneficial in reducing cumulative emissions, and hence in delaying adverse climate impacts and/or easing the pace of transition to low carbon in later periods. This is one of the factors behind the recent call by a group of UK energy economists for a greater urgency in UK climate change policy.[2]
Question 1. Government approach to forecasting.
The Government’s forecasting methods may be the best that is available for a high level view of energy trends. However there are issues in forecasting and monitoring targets, which are difficult to address without significant improvements to the knowledge base. This is particularly the case with “aspirational” targets or forecasts of non-specific “efficiency” gains.
Medium and long term forecasts normally fall down either because key economic assumptions prove to be wrong, for example on GDP growth or relative fuel prices, or because of new trends and relationships, including technical change. In a policy context this creates the risk of not very useful debates around the “counterfactual”, a hypothetical “what might have happened but for…”, rather than the policies themselves.
The real priority has to be the effectiveness of policy and the achievement of targets. Monitoring short term targets should be about evaluating the effects of particular initiatives and policies. This requires more attention to the detail and understanding of exactly how energy is used in particular sectors. Some aspects are relatively easy, such as modelling how changes in relative fuel prices for gas and coal impact on the carbon emissions from a given capital stock of electricity generation. By contrast it is much harder to assess the factors impacting on household use of electricity and gas.
I am not aware for example of any regular publication of estimates of how much energy is used by households for major sources of consumption such as space and water heating, cooking, refrigeration, lighting and other uses, let alone any monitoring of trends. One consequence of this may be exaggerated estimates of the carbon savings available from apparently trivial behavioural changes, for example in charging cell-phones. More seriously it makes it more difficult to assess accurately the impact of more significant changes, such as low energy lighting, or the impact of the housing stock on consumption for domestic heating. The less well founded any original savings estimates are in concrete assumptions about physical parameters, the more unreliable any monitoring will become.
An incidental but unfortunate by-product of the energy sector privatisations was the fragmentation and abandonment of the consumer research programmes carried out by the nationalised fuel industries. I would therefore recommend re-establishment of a comprehensive programme of load[3] and market research monitoring the nature of gas and electricity usage by consumers, and perhaps enhancing programmes aimed at better understanding of the dynamics of fuel use in the transport sector. Such a programme would be a relatively inexpensive form of “hard-edged”, quantified social research and could provide important inputs to policy formation across the board. Carried out on an annual basis it could provide considerable assistance in monitoring the effectiveness of policies to promote fuel efficiency, and give an early indication of, for example, the rebound effects that occur if extra efficiency is absorbed in extra consumption.
Question 2. Independent check, uncertainty and inclusion of international aviation.
The BIEE Climate Change Policy Group proposed[4] that “there should be an early and rigorous independent check on the feasibility of CO2 savings to 2020 projected to result from the enhanced ‘climate change programme’ of the July 2006 Energy Review”. Given the very limited real progress over two decades (as opposed to fortuitous reductions unrelated to carbon policy, notably the “dash for gas” or UK de-industrialisation), we need to be much more confident that this aspiration is achievable. Such an independent review might be commissioned by the new Carbon Committee.
Uncertainty should be set in the wider context of evaluating how targets are to be achieved. The correct response to uncertainty is emphasis on target achievement, not on hypothetical evaluations of excuses and counterfactuals.
International aviation and shipping are critical to a successful global outcome. Their exclusion reduces the credibility of other achievements. Hence they clearly need to be monitored, but as a distinct and separate component of the overall task, a component in which progress to international agreement will be a key factor.
Question 3. Projections to 2020 and 2050.
While alternative forecasts and scenarios for the longer term development of the energy sector can be instructive, the view of the BIEE group has been that the emphasis needs to shift to focus on the pathways required to achieve the overall target, and the policies that need to be put in place to implement them. The task of monitoring progress then becomes that of monitoring progress for a number of sectors, of which by far the most significant are electricity, buildings and transport, to ensure that the required changes are happening, and that the relevant infrastructure, market and regulatory arrangements are in place to support progress to sector targets.
To illustrate the point, I believe the arithmetic of current emissions makes it very clear that UK carbon targets can only be met if the electricity sector becomes virtually carbon free. If the position can be reached by (say) 2020 that no new generating capacity is being constructed other than renewables, nuclear or fossil with full carbon capture, then the range of possible outcomes for electricity demand in 2050, while still important, becomes much less relevant to carbon policy per se. If the sector is by then intrinsically carbon free, higher or lower levels of demand in 2050 may still have investment implications, but will be accommodated mainly by market-led adjustments to construction programmes.
SOCIAL COST OF CARBON. COST EFFECTIVENESS. APPROACH TO POLICY.
Question 4. For the purposes of policy discussion we need to distinguish carefully between the incremental social cost, the incremental costs of mitigation, and the “market price” of carbon under particular sets of emission control arrangements, all of which are important measures. Stern makes it clear that the social cost of carbon emissions is very high, and has indicated a current value of around $85/ tonne of CO2. However Stern also makes it clear that in many sectors the cost of mitigation is well below this cost.
There is an important point on the social cost of carbon where the generally sound Stern analysis may be flawed. The Stern report suggests that the social cost of CO2 emissions rises over time because damage increases as the ppm limit is approached. I believe this is misleading. Evaluation of the economic cost of current emissions must reflect a central feature of the physical models of climate, namely the identification of the cumulative concentration of gases as the main driver of climate change and hence of negative economic consequences. If an incremental tonne of carbon emitted today results in an incremental tonne of carbon in 2050, then its future impact after 2050 is essentially the same as a tonne emitted in that year. [5] It follows that its total social cost impact will be greater by the extent to which it has already contributed to a higher concentration[6]. If this argument is correct, then $85/ tonne might be a significant understatement of the cost of current emissions.
As a very broad policy instrument, it would appear right for the government to recognise a high social cost of carbon, as part of the rational underpinning for a number of necessary policies both short term and long term, and for choices between options and sectors. However there are a number of caveats attaching that should inhibit uncritical use of the approach.
a. Regular review of carbon valuation will be needed as both the science and the economic analysis is developed. A more pessimistic outlook emanating from the science is likely to translate into higher valuations of social cost. Technical advance by contrast could reduce mitigation costs and market valuations of carbon.
b. Consistency should obtain between public policy and private economic decisions. In principle both should be based on the same valuation of carbon. Inconsistencies will arise if a high value of carbon is put into public policy making, but not into the price that consumers pay for fuel. It may for example be cost effective to subsidise a consumer to insulate a large heated garage or a heated but unoccupied second home, when the same householder, if forced to bear the cost of carbon directly in fuel prices, would choose a cheaper and more effective solution.
c. A corollary of the above is the general principle that an appropriate value of carbon should be allowed to feed through into consumer prices and into supply chains, so that consumers can make genuine economic choices informed by the high real cost of carbon. Potential hardship resulting for particular fuel-dependent sections of the community can and should be addressed through other policies.
d. Other aspects of policy choice are involved. Policy needs to be set in a context that compares relative costs of mitigation, particularly where these are in competition for the same market. Policy has to be assessed not only on cost effectiveness but also on consistency with overall delivery of carbon targets. For example a policy built around a new technology that cut by 25% the carbon emissions from fossil fired power generation might appear cost effective with a high valuation of CO2. But it would not be consistent with a CO2-free power sector; if the latter were a pre-requisite of achieving the overall target, then the technology would not pass muster as a long term solution.
Questions 5, 6. Approach to Policy.
The government needs to move quickly to put more emphasis on the policy measures that will be needed to achieve the longer term targets. We need to recognise that relatively “easy” short term measures, which include some “low hanging fruit”, can only deliver a small part of the total reduction that will be required. Longer term measures that require major systemic and infrastructure changes, or major investments, should be given at least as much urgency, and will deliver much more of the ultimate reductions required.
A sectoral approach should focus on electricity, transport and buildings.[7]
The Main Sources of UK Carbon Emissions
An estimate of current UK carbon emissions can be constructed from official fuel use data, using conventional assumptions of each fuel’s CO2 content, to show how sectoral policies and targets might be framed and prioritised. Excluding emissions within the oil and gas industries themselves, an admittedly imperfect but reasonable approximation, based on 2004 data, is the following
power generation (for final use in all sectors) xxxxxxxxxxxxxxxxxxx 34 %*
transport (mainly road but including rapidly growing aviation) xxx33 %**
domestic use of fossil fuels, mainly gas xxxxxxxxxxxxxxxxxxxxxxxx x17 %
general industrial use of fossil fuels (excl energy industries) xxxxxxx12 %
other, including commercial and public sector xxxxxxxxxxxxxxxxxx 4 %
total xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx x100%
* NB this excludes power already taken from nuclear and renewables
** aviation is often excluded from aggregate numbers for UK
Given the absence of proven near term alternatives in transport, and the inertia inherent in the building stock, this indicates very strongly that even a 60% reduction target implies that electricity has to be carbon free, and underscores the huge importance of getting electricity right. Electricity would constitute an even bigger share but for the 20% of generation that is already carbon free (some renewables but mainly nuclear). Its future importance is accentuated by its potential role to substitute in transport (electric vehicles or as a primary source for hydrogen), and to replace direct use of oil or gas in heating buildings.
Electricity is also significant because international experience shows that the capital stock could be turned over within comparatively short timescales, of one or two decades, to be virtually carbon free. The French experience (admittedly with nuclear power) is very instructive in this respect. This is also a market in which comparatively easy and very cost-effective policy initiatives to reduce uncertainty, such as a policy commitment or a floor price for CO2, could lead to significant increases in CO2 reducing investment.
More generally the BIEE group concluded[8] that the need for urgency in policy making requires that the government should demonstrate a singleness of purpose, at the earliest opportunity, by emphasising the importance of carbon targets within a “joined up government” approach. Wherever possible, policies to meet other objectives (eg fiscal, housing and other policies) should be consistent with and should not obstruct CO2 reduction. Where other policies do run counter to CO2 reduction, it should be made explicit that additional countervailing measures will be needed.
ACCOUNTABILITY TARGETS AND REPORTING.
Questions 7,8. The BIEE group[9] argued that there is a strong case for aligning the main sectoral targets with government departments and introducing ministerial responsibility for them. Annual cumulative emissions should be monitored and any excess over the target path should be justified and addressed convincingly in the evolution of policy.
It is important that reporting and monitoring should be viewed not only in terms of the annual reduction of emissions against the required trend, but also in terms of progress with measures necessary to secure sustainable momentum in future years. The use of an independent agency to monitor whether policies of individual ministries deliver on an annual basis, and also on mid-term targets, is attractive. Separating design and implementation from monitoring could increase the credibility of the monitoring agency and thus improve the monitoring and enforcement of targets.
The composition of the Carbon Committee should not be based on special interest groups, as this would weaken its independence and its credibility. It is important that it should include a substantial body of scientific, engineering and economic expertise to provide a good practical understanding of the many complex issues with which it will have to engage.
COMPETITIVENESS ISSUES.
Question 9. I believe that, in the context of measures by the UK to combat emissions, the significance of competitiveness, as an issue inhibiting unilateral action, has been greatly exaggerated. First, an analysis of the sources of emissions makes it clear that direct industrial use of fossil fuels (other than for power generation) is quite a small part of the total, so targeting industry is not a first priority. Second, the measures necessary to contain emissions in the most important sectors, electricity[10], housing and transport, will mostly have only small and indirect effects on industry costs, and in terms of competitiveness are dwarfed by the much more direct and overarching effects of exchange rate movements. Third, those fuel intensive industries which are subject to international competition account for only a small percentage of GDP. In this context it is useful to distinguish intra-EU and extra-EU competition. UK power costs for industry are already higher[11] than in much of the EU. In shaping the EU ETS we should certainly aim to prevent economic distortions that merely “export” emissions to countries outside the EU with lower energy efficiencies, but this is best done either by limited “ring fencing” for the few industries concerned, or by pursuing wider international agreement.
SETTING SHORT TERM TARGETS
Question10. Targets should be framed to reflect emphasis on the longer term objective of cumulative emissions; they should have a sectoral element to reflect individual ministerial responsibilities, be realistic on short term achievements and be capable of being monitored in fairly concrete terms; they should cover not only CO2 emissions but also progress with the fundamental longer term systemic aspects of policy.
[1] Likewise a back-end loaded reduction path adds a similar and substantial amount to cumulative emissions.
[2] BIEE Climate Change Policy Group. Bringing Urgency Into UK Climate Change Policy. December 2006
[3] For electricity, load research is based on sample recordings of load on individual circuits or appliances.
[4] BIEE Climate Change Policy Group. Bringing Urgency Into UK Climate Change Policy. December 2006
[5] A possible partial counter argument to this might apply if the extra emission were to increase the re-absorption rate; however with limited re-absorption or positive feedbacks it is perhaps more likely that an incremental tonne of carbon emission results in more than one incremental tonne in 50 years time.
[6]The comparison ignores time discounting in the context of this particular argument.
[7] Note that, if we exclude its share of electricity, industry is of less significance.
[8] BIEE Climate Change Policy Group. Bringing Urgency Into UK Climate Change Policy. December 2006
[9] Ibid.
[10] In the case of electricity, it may also be noted that French electricity for industry, already essentially carbon-free, has been very competitively priced.
[11] Arguably just part of an exchange rate issue.
April 2007
The following notes were prepared as the basis for written evidence to be submitted to the Environmental Audit Committee in April 2007. The comments are addressed to the themes of the Committee’s inquiry.
KEY POINTS
Targets should retain focus on the key objective - the control of the level of global cumulative emissions; annual emissions in particular years such as 2020 or 2050 are useful landmarks but are ultimately only secondary or intermediate targets.
Official forecasts sometimes do not appear to have the benefit of detailed end use analysis. This is essential to monitoring many aspects of policy, particularly those that depend on influencing consumer behaviour; a comprehensive research programme to remedy this could be established for a comparatively modest cost.
Statistics highlight the fundamental importance of the electricity sector, not only as the largest current source of CO2 emissions, but because of its potential future “carbon-free” contribution in buildings and transport; a successful long term strategy demands an essentially carbon-free power sector.
Cost effectiveness; a significant economic issue in the Stern analysis suggests Stern might have attached an even higher social cost to current CO2 emissions.
There are some limitations to the use of cost effectiveness analysis, including the danger of inconsistency between public policy and private sector decisions; a corollary is that the value of carbon should feed through to the supply chain and into consumer prices.
Short term incremental measures provide important but limited reductions in emissions. Ambitious longer term targets imply systemic change both in supply and in demand; this attaches key importance to more urgency in long term plans.
For the longer term, annual forecasts are likely to be significantly less important than the monitoring of actions against a credible pathway for each sector, with long lead times involved. Monitoring arrangements need to reflect this.
Competitiveness issues have been exaggerated, given the relatively small emissions from industrial fossil fuel use and the small or indirect impacts on competitiveness from policy initiatives in the key sectors.
FORECASTING AND TARGETS.
A first requirement of CO2 targets is that they should align with the objective. This is to minimise cumulative emissions, not to achieve a particular level by a given date. Targets such as 60% or 80% reductions in annual emissions by 2050 may be useful indicators of what is required but they should not obscure the primary objective, reinforced by Stern, of keeping cumulative emissions within “safe” limits.
This distinction is important for two practical reasons. First, the shape of the path from the baseline to a given 2050 annual emission level has a very large impact on cumulative emissions over 43 years. To illustrate the point, a 60% reduction over 45 years requires a 2% pa reduction. However a 3.5% pa reduction for 20 years followed by a 1% pa reduction for 25 years yields the same annual emissions after 45 years, but a cumulative emissions total that is lower by the equivalent of 9 years emissions at the end of the period, loosely speaking “gaining” an additional 9 years of time.[1]
Second, the undeniable primacy of cumulative emissions implies that a rational approach to the design of an international regime and associated market mechanisms is also likely to be based on cumulative emissions from a baseline, with carryover of emission rights/savings between time periods, not on rigid annual numbers. Aligning national targets consistently with the shape and structure of future international regimes, including the ETS, will be essential.
Larger early reductions, if they can be achieved and sustained, are disproportionately beneficial in reducing cumulative emissions, and hence in delaying adverse climate impacts and/or easing the pace of transition to low carbon in later periods. This is one of the factors behind the recent call by a group of UK energy economists for a greater urgency in UK climate change policy.[2]
Question 1. Government approach to forecasting.
The Government’s forecasting methods may be the best that is available for a high level view of energy trends. However there are issues in forecasting and monitoring targets, which are difficult to address without significant improvements to the knowledge base. This is particularly the case with “aspirational” targets or forecasts of non-specific “efficiency” gains.
Medium and long term forecasts normally fall down either because key economic assumptions prove to be wrong, for example on GDP growth or relative fuel prices, or because of new trends and relationships, including technical change. In a policy context this creates the risk of not very useful debates around the “counterfactual”, a hypothetical “what might have happened but for…”, rather than the policies themselves.
The real priority has to be the effectiveness of policy and the achievement of targets. Monitoring short term targets should be about evaluating the effects of particular initiatives and policies. This requires more attention to the detail and understanding of exactly how energy is used in particular sectors. Some aspects are relatively easy, such as modelling how changes in relative fuel prices for gas and coal impact on the carbon emissions from a given capital stock of electricity generation. By contrast it is much harder to assess the factors impacting on household use of electricity and gas.
I am not aware for example of any regular publication of estimates of how much energy is used by households for major sources of consumption such as space and water heating, cooking, refrigeration, lighting and other uses, let alone any monitoring of trends. One consequence of this may be exaggerated estimates of the carbon savings available from apparently trivial behavioural changes, for example in charging cell-phones. More seriously it makes it more difficult to assess accurately the impact of more significant changes, such as low energy lighting, or the impact of the housing stock on consumption for domestic heating. The less well founded any original savings estimates are in concrete assumptions about physical parameters, the more unreliable any monitoring will become.
An incidental but unfortunate by-product of the energy sector privatisations was the fragmentation and abandonment of the consumer research programmes carried out by the nationalised fuel industries. I would therefore recommend re-establishment of a comprehensive programme of load[3] and market research monitoring the nature of gas and electricity usage by consumers, and perhaps enhancing programmes aimed at better understanding of the dynamics of fuel use in the transport sector. Such a programme would be a relatively inexpensive form of “hard-edged”, quantified social research and could provide important inputs to policy formation across the board. Carried out on an annual basis it could provide considerable assistance in monitoring the effectiveness of policies to promote fuel efficiency, and give an early indication of, for example, the rebound effects that occur if extra efficiency is absorbed in extra consumption.
Question 2. Independent check, uncertainty and inclusion of international aviation.
The BIEE Climate Change Policy Group proposed[4] that “there should be an early and rigorous independent check on the feasibility of CO2 savings to 2020 projected to result from the enhanced ‘climate change programme’ of the July 2006 Energy Review”. Given the very limited real progress over two decades (as opposed to fortuitous reductions unrelated to carbon policy, notably the “dash for gas” or UK de-industrialisation), we need to be much more confident that this aspiration is achievable. Such an independent review might be commissioned by the new Carbon Committee.
Uncertainty should be set in the wider context of evaluating how targets are to be achieved. The correct response to uncertainty is emphasis on target achievement, not on hypothetical evaluations of excuses and counterfactuals.
International aviation and shipping are critical to a successful global outcome. Their exclusion reduces the credibility of other achievements. Hence they clearly need to be monitored, but as a distinct and separate component of the overall task, a component in which progress to international agreement will be a key factor.
Question 3. Projections to 2020 and 2050.
While alternative forecasts and scenarios for the longer term development of the energy sector can be instructive, the view of the BIEE group has been that the emphasis needs to shift to focus on the pathways required to achieve the overall target, and the policies that need to be put in place to implement them. The task of monitoring progress then becomes that of monitoring progress for a number of sectors, of which by far the most significant are electricity, buildings and transport, to ensure that the required changes are happening, and that the relevant infrastructure, market and regulatory arrangements are in place to support progress to sector targets.
To illustrate the point, I believe the arithmetic of current emissions makes it very clear that UK carbon targets can only be met if the electricity sector becomes virtually carbon free. If the position can be reached by (say) 2020 that no new generating capacity is being constructed other than renewables, nuclear or fossil with full carbon capture, then the range of possible outcomes for electricity demand in 2050, while still important, becomes much less relevant to carbon policy per se. If the sector is by then intrinsically carbon free, higher or lower levels of demand in 2050 may still have investment implications, but will be accommodated mainly by market-led adjustments to construction programmes.
SOCIAL COST OF CARBON. COST EFFECTIVENESS. APPROACH TO POLICY.
Question 4. For the purposes of policy discussion we need to distinguish carefully between the incremental social cost, the incremental costs of mitigation, and the “market price” of carbon under particular sets of emission control arrangements, all of which are important measures. Stern makes it clear that the social cost of carbon emissions is very high, and has indicated a current value of around $85/ tonne of CO2. However Stern also makes it clear that in many sectors the cost of mitigation is well below this cost.
There is an important point on the social cost of carbon where the generally sound Stern analysis may be flawed. The Stern report suggests that the social cost of CO2 emissions rises over time because damage increases as the ppm limit is approached. I believe this is misleading. Evaluation of the economic cost of current emissions must reflect a central feature of the physical models of climate, namely the identification of the cumulative concentration of gases as the main driver of climate change and hence of negative economic consequences. If an incremental tonne of carbon emitted today results in an incremental tonne of carbon in 2050, then its future impact after 2050 is essentially the same as a tonne emitted in that year. [5] It follows that its total social cost impact will be greater by the extent to which it has already contributed to a higher concentration[6]. If this argument is correct, then $85/ tonne might be a significant understatement of the cost of current emissions.
As a very broad policy instrument, it would appear right for the government to recognise a high social cost of carbon, as part of the rational underpinning for a number of necessary policies both short term and long term, and for choices between options and sectors. However there are a number of caveats attaching that should inhibit uncritical use of the approach.
a. Regular review of carbon valuation will be needed as both the science and the economic analysis is developed. A more pessimistic outlook emanating from the science is likely to translate into higher valuations of social cost. Technical advance by contrast could reduce mitigation costs and market valuations of carbon.
b. Consistency should obtain between public policy and private economic decisions. In principle both should be based on the same valuation of carbon. Inconsistencies will arise if a high value of carbon is put into public policy making, but not into the price that consumers pay for fuel. It may for example be cost effective to subsidise a consumer to insulate a large heated garage or a heated but unoccupied second home, when the same householder, if forced to bear the cost of carbon directly in fuel prices, would choose a cheaper and more effective solution.
c. A corollary of the above is the general principle that an appropriate value of carbon should be allowed to feed through into consumer prices and into supply chains, so that consumers can make genuine economic choices informed by the high real cost of carbon. Potential hardship resulting for particular fuel-dependent sections of the community can and should be addressed through other policies.
d. Other aspects of policy choice are involved. Policy needs to be set in a context that compares relative costs of mitigation, particularly where these are in competition for the same market. Policy has to be assessed not only on cost effectiveness but also on consistency with overall delivery of carbon targets. For example a policy built around a new technology that cut by 25% the carbon emissions from fossil fired power generation might appear cost effective with a high valuation of CO2. But it would not be consistent with a CO2-free power sector; if the latter were a pre-requisite of achieving the overall target, then the technology would not pass muster as a long term solution.
Questions 5, 6. Approach to Policy.
The government needs to move quickly to put more emphasis on the policy measures that will be needed to achieve the longer term targets. We need to recognise that relatively “easy” short term measures, which include some “low hanging fruit”, can only deliver a small part of the total reduction that will be required. Longer term measures that require major systemic and infrastructure changes, or major investments, should be given at least as much urgency, and will deliver much more of the ultimate reductions required.
A sectoral approach should focus on electricity, transport and buildings.[7]
The Main Sources of UK Carbon Emissions
An estimate of current UK carbon emissions can be constructed from official fuel use data, using conventional assumptions of each fuel’s CO2 content, to show how sectoral policies and targets might be framed and prioritised. Excluding emissions within the oil and gas industries themselves, an admittedly imperfect but reasonable approximation, based on 2004 data, is the following
power generation (for final use in all sectors) xxxxxxxxxxxxxxxxxxx 34 %*
transport (mainly road but including rapidly growing aviation) xxx33 %**
domestic use of fossil fuels, mainly gas xxxxxxxxxxxxxxxxxxxxxxxx x17 %
general industrial use of fossil fuels (excl energy industries) xxxxxxx12 %
other, including commercial and public sector xxxxxxxxxxxxxxxxxx 4 %
total xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx x100%
* NB this excludes power already taken from nuclear and renewables
** aviation is often excluded from aggregate numbers for UK
Given the absence of proven near term alternatives in transport, and the inertia inherent in the building stock, this indicates very strongly that even a 60% reduction target implies that electricity has to be carbon free, and underscores the huge importance of getting electricity right. Electricity would constitute an even bigger share but for the 20% of generation that is already carbon free (some renewables but mainly nuclear). Its future importance is accentuated by its potential role to substitute in transport (electric vehicles or as a primary source for hydrogen), and to replace direct use of oil or gas in heating buildings.
Electricity is also significant because international experience shows that the capital stock could be turned over within comparatively short timescales, of one or two decades, to be virtually carbon free. The French experience (admittedly with nuclear power) is very instructive in this respect. This is also a market in which comparatively easy and very cost-effective policy initiatives to reduce uncertainty, such as a policy commitment or a floor price for CO2, could lead to significant increases in CO2 reducing investment.
More generally the BIEE group concluded[8] that the need for urgency in policy making requires that the government should demonstrate a singleness of purpose, at the earliest opportunity, by emphasising the importance of carbon targets within a “joined up government” approach. Wherever possible, policies to meet other objectives (eg fiscal, housing and other policies) should be consistent with and should not obstruct CO2 reduction. Where other policies do run counter to CO2 reduction, it should be made explicit that additional countervailing measures will be needed.
ACCOUNTABILITY TARGETS AND REPORTING.
Questions 7,8. The BIEE group[9] argued that there is a strong case for aligning the main sectoral targets with government departments and introducing ministerial responsibility for them. Annual cumulative emissions should be monitored and any excess over the target path should be justified and addressed convincingly in the evolution of policy.
It is important that reporting and monitoring should be viewed not only in terms of the annual reduction of emissions against the required trend, but also in terms of progress with measures necessary to secure sustainable momentum in future years. The use of an independent agency to monitor whether policies of individual ministries deliver on an annual basis, and also on mid-term targets, is attractive. Separating design and implementation from monitoring could increase the credibility of the monitoring agency and thus improve the monitoring and enforcement of targets.
The composition of the Carbon Committee should not be based on special interest groups, as this would weaken its independence and its credibility. It is important that it should include a substantial body of scientific, engineering and economic expertise to provide a good practical understanding of the many complex issues with which it will have to engage.
COMPETITIVENESS ISSUES.
Question 9. I believe that, in the context of measures by the UK to combat emissions, the significance of competitiveness, as an issue inhibiting unilateral action, has been greatly exaggerated. First, an analysis of the sources of emissions makes it clear that direct industrial use of fossil fuels (other than for power generation) is quite a small part of the total, so targeting industry is not a first priority. Second, the measures necessary to contain emissions in the most important sectors, electricity[10], housing and transport, will mostly have only small and indirect effects on industry costs, and in terms of competitiveness are dwarfed by the much more direct and overarching effects of exchange rate movements. Third, those fuel intensive industries which are subject to international competition account for only a small percentage of GDP. In this context it is useful to distinguish intra-EU and extra-EU competition. UK power costs for industry are already higher[11] than in much of the EU. In shaping the EU ETS we should certainly aim to prevent economic distortions that merely “export” emissions to countries outside the EU with lower energy efficiencies, but this is best done either by limited “ring fencing” for the few industries concerned, or by pursuing wider international agreement.
SETTING SHORT TERM TARGETS
Question10. Targets should be framed to reflect emphasis on the longer term objective of cumulative emissions; they should have a sectoral element to reflect individual ministerial responsibilities, be realistic on short term achievements and be capable of being monitored in fairly concrete terms; they should cover not only CO2 emissions but also progress with the fundamental longer term systemic aspects of policy.
[1] Likewise a back-end loaded reduction path adds a similar and substantial amount to cumulative emissions.
[2] BIEE Climate Change Policy Group. Bringing Urgency Into UK Climate Change Policy. December 2006
[3] For electricity, load research is based on sample recordings of load on individual circuits or appliances.
[4] BIEE Climate Change Policy Group. Bringing Urgency Into UK Climate Change Policy. December 2006
[5] A possible partial counter argument to this might apply if the extra emission were to increase the re-absorption rate; however with limited re-absorption or positive feedbacks it is perhaps more likely that an incremental tonne of carbon emission results in more than one incremental tonne in 50 years time.
[6]The comparison ignores time discounting in the context of this particular argument.
[7] Note that, if we exclude its share of electricity, industry is of less significance.
[8] BIEE Climate Change Policy Group. Bringing Urgency Into UK Climate Change Policy. December 2006
[9] Ibid.
[10] In the case of electricity, it may also be noted that French electricity for industry, already essentially carbon-free, has been very competitively priced.
[11] Arguably just part of an exchange rate issue.
Response to Draft Climate Change Bill. May 2007
These notes were prepared as the basis for a written response by the BIEE Climate Change Policy Group to the Draft Climate Change Bill in May 2007.
1. Introduction. We welcome the introduction of the draft Climate Change Bill as indicating the importance Government attaches to climate change policy, particularly the creation of a new institutional framework to back a system of carbon budgets and to set statutory limits to carbon emissions. Concerns are not so much with possible amendments to the Bill as the need for clarity on the Government’s position on certain key issues which may well arise during the passage of the Bill and will influence the effectiveness of the carbon budgeting system in due course.
2. However, notwithstanding the above level of agreement with the main framework of the Bill, we have comments which we believe will be very important in making the proposed carbon budgeting system fully effective. These concern:
a. The CO2 reduction target proposed for 2050, and its effect on the intermediate target for 2020 and the trajectory of 5 year budgets.
b. The extent to which effort purchased by the UK from other countries should be eligible in contributing towards UK emission reduction.
c. How the whole corpus of detailed policies/ measures to reduce emissions can be incorporated within the carbon budgeting process, and thus clearly linked with accountability.
We deal with each of these in turn.
3. Unilateral Legal Target of CO2 reduction by 2050 and associated trajectory. The proposed unilateral legal target of 60% CO2 reduction by 2050 derives from the RCEP report published in 2000 and was adopted in the 2003 Energy White Paper on the basis that it was consistent with a global strategy of limiting the ultimate atmospheric concentration of CO2 to 550 ppm. As such it has been very helpful in promoting a national consensus on the scale of the actions required. On these grounds alone there is a strong case for embedding this 60% target in the proposed legislation.
However this position is not without difficulty, since
-the most recent scientific consensus indicates the need to aim for atmospheric concentrations of CO2 of less than 550 ppm [1]
-in the light of the lack of progress in reducing emissions over the last decade there are real doubts as to whether a 60% target would deliver cumulative emission reductions consistent with 550 ppm in 2050. [2]
Accordingly in an earlier paper [3]we expressed the view that “we should at least consider the implications of a more challenging 80% target, as well as the more conservative 60% UK reduction considered hitherto”.
The question is how should these concerns be dealt with within the proposed framework in the Bill? Clearly this has to be done in such a way as to minimise long term uncertainty on the government’s position. Otherwise many of the advantages of three rolling 5 year budgets could be prejudiced.
The essential issue is that a limit based on an 80% reduction would be a further major reduction in carbon emissions, implying only half the allowable emissions of CO2 in 2050 compared with a 60 % reduction. As such it almost certainly implies significantly higher adjustment costs, and is also likely to imply measures which would impinge on the nearer term targets. It would therefore be harder to justify an 80 % reduction as a UK unilateral measure at this juncture.
Thus, if risks of delay to the passage of the Bill are to be avoided, the most appropriate compromise or practical approach is to proceed for the time being with limits based on the 60% target as outlined in the Bill, but to recognise the probability that the UK will wish or indeed need to move to a tighter limit in the future, most probably as part of a coordinated international response. This does not appear to call for any obvious major adjustments to the Bill, other than to ensure that both Government departments, in their monitoring and policy development, and the Committee on Climate Change, in its advisory role, do take into account the implications of tighter international objectives as exemplified by an 80% path. The combination of explicit legal limits, with a recognition that the UK may need to adjust to even tighter targets in the future, should effect a substantial reduction in the uncertainty facing investment in CO2 emission reduction.
Because of the difficulty of these issues we would also propose that:
(i) at the earliest opportunity the Secretary of State should decide whether there had in fact been significant developments in scientific knowledge about climate change such as to raise doubts on the validity of the 60 % target [section 1.4]
(ii) the Secretary of State should seek the advice of the Committee on Climate Change [section 22.1] on:
1. Introduction. We welcome the introduction of the draft Climate Change Bill as indicating the importance Government attaches to climate change policy, particularly the creation of a new institutional framework to back a system of carbon budgets and to set statutory limits to carbon emissions. Concerns are not so much with possible amendments to the Bill as the need for clarity on the Government’s position on certain key issues which may well arise during the passage of the Bill and will influence the effectiveness of the carbon budgeting system in due course.
2. However, notwithstanding the above level of agreement with the main framework of the Bill, we have comments which we believe will be very important in making the proposed carbon budgeting system fully effective. These concern:
a. The CO2 reduction target proposed for 2050, and its effect on the intermediate target for 2020 and the trajectory of 5 year budgets.
b. The extent to which effort purchased by the UK from other countries should be eligible in contributing towards UK emission reduction.
c. How the whole corpus of detailed policies/ measures to reduce emissions can be incorporated within the carbon budgeting process, and thus clearly linked with accountability.
We deal with each of these in turn.
3. Unilateral Legal Target of CO2 reduction by 2050 and associated trajectory. The proposed unilateral legal target of 60% CO2 reduction by 2050 derives from the RCEP report published in 2000 and was adopted in the 2003 Energy White Paper on the basis that it was consistent with a global strategy of limiting the ultimate atmospheric concentration of CO2 to 550 ppm. As such it has been very helpful in promoting a national consensus on the scale of the actions required. On these grounds alone there is a strong case for embedding this 60% target in the proposed legislation.
However this position is not without difficulty, since
-the most recent scientific consensus indicates the need to aim for atmospheric concentrations of CO2 of less than 550 ppm [1]
-in the light of the lack of progress in reducing emissions over the last decade there are real doubts as to whether a 60% target would deliver cumulative emission reductions consistent with 550 ppm in 2050. [2]
Accordingly in an earlier paper [3]we expressed the view that “we should at least consider the implications of a more challenging 80% target, as well as the more conservative 60% UK reduction considered hitherto”.
The question is how should these concerns be dealt with within the proposed framework in the Bill? Clearly this has to be done in such a way as to minimise long term uncertainty on the government’s position. Otherwise many of the advantages of three rolling 5 year budgets could be prejudiced.
The essential issue is that a limit based on an 80% reduction would be a further major reduction in carbon emissions, implying only half the allowable emissions of CO2 in 2050 compared with a 60 % reduction. As such it almost certainly implies significantly higher adjustment costs, and is also likely to imply measures which would impinge on the nearer term targets. It would therefore be harder to justify an 80 % reduction as a UK unilateral measure at this juncture.
Thus, if risks of delay to the passage of the Bill are to be avoided, the most appropriate compromise or practical approach is to proceed for the time being with limits based on the 60% target as outlined in the Bill, but to recognise the probability that the UK will wish or indeed need to move to a tighter limit in the future, most probably as part of a coordinated international response. This does not appear to call for any obvious major adjustments to the Bill, other than to ensure that both Government departments, in their monitoring and policy development, and the Committee on Climate Change, in its advisory role, do take into account the implications of tighter international objectives as exemplified by an 80% path. The combination of explicit legal limits, with a recognition that the UK may need to adjust to even tighter targets in the future, should effect a substantial reduction in the uncertainty facing investment in CO2 emission reduction.
Because of the difficulty of these issues we would also propose that:
(i) at the earliest opportunity the Secretary of State should decide whether there had in fact been significant developments in scientific knowledge about climate change such as to raise doubts on the validity of the 60 % target [section 1.4]
(ii) the Secretary of State should seek the advice of the Committee on Climate Change [section 22.1] on:
a) the implications of adopting an 80% rather than a 60% target for 2050, in terms of the validity of the interim target for 2020, and the probable limits for the first three 5-year carbon budgets
b) clarification of the probable link between the 2050 target, whether on a 60% or 80% basis, and the cumulative UK emission reductions to 2050 (and therefore the implied carbon budgets to 2050)
(iii) the advice of the Committee should assume that targets/budgets would include aviation and shipping
4. Counting overseas credits towards the budgets and targets.
Any presumption that “effort purchased by the UK from other countries should be eligible in contribution towards UK emission reductions, within the limits set out by international law” needs to be clarified and qualified.
We recognise that emissions reduction is properly regarded as a global issue, and this requires in principle that there should be no restriction or disincentive to UK agents making genuine cost effective investments to reduce CO2 or GHG emissions in other countries, especially where these may be more cost effective than UK investments. However the use of overseas credits does raise a number of serious practical questions that need to be resolved.
First, the integrity, credibility and additionality of such schemes needs to be assured, as any revelations of schemes of dubious validity will serve to undermine both the domestic political consensus for action on CO2, and any exemplary value of UK action internationally.
Second, if the purchase of even soundly based international credits was on a scale that left only minimal “domestic” reductions, then the exemplary value of UK action would be severely damaged.
Third, analysis suggests that the availability of international credits will be very difficult to predict, as it will depend both on the implementation of projects in countries with sometimes difficult regulatory regimes, and also on the demand from other developed countries whose policies are still evolving. Unconstrained use of such credits could create significant uncertainty about the level of domestic emission reduction that is required and undermine the stability of the CO2 price, with a damaging impact on investment.
Under present practice and within the framework of the EU ETS, UK reliance on such credits is limited to some 8% of total emissions. The “partial regulatory impact assessment” attached to the Bill examines the issue of greater flexibility and states (5.1.38) that the use of such additional flexibility would:
- restrict the pace of decarbonisation of the UK economy, by encouraging Government and firms to use overseas credits as a cheaper short-term option, expose the UK to the risk of “lock-in” to high carbon technologies, and potentially reduce the ability of the UK to demonstrate leadership
We would give considerable weight to these observations at this juncture. They are of greatest relevance for the next 5-10 years, since it will be during this period that
- the exemplary value of UK action would have the greatest leverage in progress towards a “post Kyoto” settlement
- potential reforms to the EU ETS will have to be implemented and tested
- long term foundations for the UK low carbon economy need to be laid, requiring strong incentives
On this issue we propose that the use of overseas credits (particularly CDM and JI) should remain very limited for the first budget period to 2012, and be subject to review thereafter in the light of progress with EU ETS reform and international negotiations on a “post Kyoto” settlement.
This would also involve specific guidance from the Secretary of State to the Committee on Climate Change to limit its discretion on this point. (Section 20.i.b)
5. Incorporating the corpus of policies and measures into the carbon budgeting system, including accountability and monitoring.
We are concerned that the carbon budgeting system, and its associated accountability and monitoring arrangements, should facilitate public scrutiny of the whole corpus of policies and measures concerned with the low carbon issue. Effective accountability will need to consider not only recent performance of emissions against budget but also those steps being taken to create the conditions for necessary long term technological and system changes.
We believe that the carbon budgeting system should have space for detailed descriptions or “time critical pathways”, endorsed by Government, on how the emission targets (both short and long term) are to be achieved, subject to necessary flexibility and with due regard to “urgency”. We emphasise that here we are concerned not only with direct action by Government but also with action by other agents for change operating within policy or market frameworks set or influenced by Government.
Our ideas on “time critical pathways” have been set out in earlier documents[4], and are summarised again in Annex 1 to this note. We believe they could play an important role in making the proposed carbon budgeting system fully effective. There are two specific points of entry.
(i) Section 6 requires the Government, whenever a carbon budget is set, to produce a report setting out its proposals and policies for meeting the carbon budgets for current and future budgetary periods. Note 34 to the Bill states that “this clause aims to enshrine transparency in the system so that Parliament is clear about how the Government intends to achieve its new obligations”.
(ii) Section 21 requires that the Committee on Climate Change report annually to Parliament its views on progress being made towards meeting not only the carbon budgets already set, but also the long term target for 2050.
It is difficult to see how these duties could be discharged satisfactorily without reference to something like Government-endorsed “time critical pathways” for the main sectors of electricity, transport and buildings.
23.05.2007/mjp/jr
Annex 1. Summary Of Proposals On Time Critical Pathways
In the detailed evolution of Climate Change Policy, and within the framework of carbon budgets proposed in the draft Climate Change Bill, there is also a need for an approach which will address “urgency” directly. Given the long lead-times involved in removing sources of inertia, introducing low carbon technologies and making the associated changes to infrastructure and institutions, the successful implementation of any 60- 80% path is on a very tight schedule. To provide clarity and credibility there is therefore a need to draw up “time critical pathways” for the three most significant sectors —electricity, transport, and buildings. These would be drawn up by the relevant Government departments, and endorsed by Government. They would identify, for each sector:
i) the extent and duration of the CO2 savings likely to be available from short term behavioural changes to reduce demand, increased efficiency of existing assets and systems, and fuel switching between existing assets and systems.
ii) the likely portfolio of options for key technologies/ system changes, over and above those in (i) above, which could contribute to the sector’s transition to a very low carbon future by 2050 and an assessment of the speed at which they might be introduced, taking account of:
- stage of technical development (in light of R&D both in the UK and internationally)
lead-times to widespread adoption
- age and turnover of existing capital stock (including associated infrastructure)
nature of factors creating inertia and barriers to progress, and the potential speed of their removal
iii) description of “time critical pathways” based on analysis of the above factors, which clearly set out the order and timing of key decisions and commitments involved, if the ultimate goals are to be achieved, in terms of:
· who will be the main agents for change; and therefore who is to be incentivised to do what, and when?
· what incentives will be most appropriate for urgent progress?
· what issues of coordination (e.g. on infrastructure) will arise and when?
· how sufficient flexibility can be retained to cope with uncertainty.
Such descriptions of “time critical pathways” could be an important means of establishing a coherent link between the whole corpus of climate change policy measures and the carbon budgeting system and its associated accountability framework.
[1] The recent IPCC report for example suggests that lower concentrations, of between 445ppm and 490ppm, would keep the temperature rise in a range of 2.0-2.4C. This compares with EU policy of seeking to avoid rises of more than 2C.
[2] Tyndall Briefing Note 17, March 2007
[3] Bringing Urgency Into UK Climate Change Policy. Paper by the BIEE Climate Change Policy Group, para 3
[4] Bringing Urgency Into UK Climate Change Policy. Paper by the BIEE Climate Change Policy Group, December 2006, and also Time Critical Pathways For UK CO2 Reduction, Supplementary Note, February 2007
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