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Analytical Annex JOB LOCATION:


PRINERGY 3

The UK Low Carbon


Transition Plan

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1

Contents
List of Charts 2 Chapter 4:
Aggregate costs of the package
List of Tables 3
of policies 53
List of Boxes 3
Chapter 5:
Executive Summary 5 Estimated impacts of the package of policies
Structure of the Annex 9 and proposals on energy prices and bills 61

Chapter 1: Chapter 6:
The Long Term 13 High level summary of impacts on
energy security 79
Chapter 2:
Getting there: transforming the UK economy Chapter 7:
and energy system to 2050 17 Macro-economic costs of climate change
mitigation measures 89
Chapter 3:
Reducing UK emissions of greenhouse Chapter 8:
gases from 2008-2022 29 Sustainability 99

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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
Chart 7 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 74
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
Chart 26 Innovation and the costs of mitigation (GDP impact in 2020) 94

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2Contents 3

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 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
Table 8 Estimated impact of energy and climate change policies on average
domestic energy bills 66
Table 9 Estimated impact of energy and climate change policies on average
domestic gas bills 66
Table 10 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
Table 14 Estimated impact of package on average non-domestic gas bill for
medium sized consumers 69
Table 15 Estimated impact of package on average non-domestic electricity bill
or medium sized consumers 70
Table 16 Estimated impact of energy and climate change policies on average
domestic energy bill 71
Table 17 Estimated impact of energy and climate change policies on average
non-domestic energy bill for medium sized consumers 71
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

List of Boxes
Box 1 HMRC Computable General Equilibrium (CGE) model 90

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5

Executive
Summary

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6 The UK Low Carbon Transition Plan
Analytical Annex

This annex provides the analysis and unmitigated climate change. These were
evidence underpinning the conclusions of the estimated at between 5 and 20% of GDP
main body of the UK Low Carbon Transition in the Stern Review2, estimates which Lord
Plan. It focuses in particular on the impacts Stern has recently commented are likely to
of the policies set out in the Transition Plan, substantially underestimate the damages.
including impacts on emissions over the
The package of climate change and energy
first three budget periods, on security of
measures set out in the Transition Plan will
supply and on the local environment. It also
have an impact on energy consumers across
assesses the overall costs of the policies and
the UK. Compared to the counterfactual
how they are borne among different parts
scenario in which none of these policies
of society.
are in place, on average, domestic energy
The package of policies saves about 700 bills will be 9% higher in 2020 and industrial
million tonnes of CO2e (MtCO2e) and puts energy bills 21% higher. The additional
the UK on track to meet the first three impact in 2020 of the policies in this
carbon budgets. Taking into account the Transition Plan relative to today is £76, which
impact of the Transition Plan policies, central is equivalent to approximately 6% of current
emissions projections show emissions below bills. Similarly, for an indicative non-domestic
each of the first three carbon budgets with a user, we estimate that these policies make
cumulative over-achievement of 147 MtCO2e up approximately £101,000, or 8%, of
by the end of the third budget. current non-domestic bills. The additional
impact in 2020 is estimated to be £212,000,
There is substantial uncertainty over
equivalent to approximately 15% of current
emissions projections and the 147 MtCO2e
bills. Government has sought to mitigate
of projected over-achievement provides a
these increases, through policies which help
‘contingency reserve’ to draw on in the event
households and businesses improve their
that emissions are higher than projected.
energy efficiency.
In combination with the flexibility to bank
over-achievement from one carbon budget There will be a variable impact on individual
period to another and other policy options houses owing to differential take up of
being considered within Government, the energy efficiency, renewable heat and
projected contingency provides confidence micro-generation measures – those who
that the UK will meet carbon budgets take up measures will find impacts on bills
domestically. This prepares the UK for tighter substantially reduced. Sustained higher
carbon budgets following a comprehensive prices for fossil fuels would reduce the cost
global deal. of some climate change policies, lowering
the cost passed through onto consumer
Overall the package comes at a cost of
bills. A sustained oil price of $150 per barrel
£25 to £29 billion.1 This is consistent with
means that policies set out in this Transition
other estimates of the costs of action to
Plan in 2020 would reduce bills slightly
the UK. These costs, though significant,
compared to the projected bill in 2020
are substantially lower than the damage
without these policies.
costs which would be associated with

1 This is a one-off figure covering the lifetime of the measures that the policies in the package implement.
2 “Stern Review on the Economics of Climate Change“ Available at:
http://www.hm-treasury.gov.uk/sternreview_index.htm

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2 Executive Summary 7
11

In addition, there are some already A package that delivers the UK’s fair
established climate change policies which share of global climate change mitigation,
continue to affect bills – by 2020, the impact supports continued economic growth and
of all climate change policies, both existing distributes the costs fairly, goes a great deal
and new, will be to add, on average, an of the way towards delivering a package that
additional 8% to today’s household bills and is consistent with sustainable development.
17% to today’s non-domestic bills. However wider environmental impacts
must also be considered. In general there
The policies in this Transition Plan will lead
are strong synergies between climate
to a significant reduction in the use of
change policies and the wider environment.
fossil fuels in our energy mix. By reducing
For instance, reducing greenhouse gas
our demand for fossil fuel, we reduce our
emissions can improve air quality. There
exposure to security of supply risks, including
will be a substantial improvement to
the risk associated with imported energy.
local air quality from meeting carbon
The package of policies is estimated to
budgets, estimated to be worth 20,000
reduce UK demand for fossil fuels by 19%
life years3 annually by the end of the third
in 2020 compared to the counterfactual
carbon budget period. The policies will
by increasing the supply of renewable
also reduce noise pollution, and reduce
energy and improving the UK’s
water eutrophication. However, there are
energy efficiency.
tensions in some cases, notably between
In 2020, a larger proportion of renewable the combustion of bio-mass and air quality.
generation, particularly wind generation, Where there are tensions, safeguards that
will create challenges from increased exist need to be maintained and monitored to
intermittency. Analysis suggests that these ensure they offer the appropriate protection
risks to electricity security of supply are for the local environment, while still ensuring
manageable before 2020, but that after 2020 we effectively achieve our energy and climate
they could potentially become a problem due change goals.
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 Improvements in air quality are associated with a range of health benefits most notable being the increase in life
expectancy and quality of life. These impacts have been estimated in accordance with best practice as set by the
Interdepartmental Group on Costs and Benefits air quality subject group. For further information please see:
http://www.defra.gov.uk/environment/airquality/panels/igcb/

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9
11

Structure of the
Annex

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10 The UK Low Carbon Transition Plan
Analytical Annex

This annex presents the analysis and hardest. However, it is important to ensure
evidence underpinning the conclusions of the that the burden of action does not fall
main body of the Transition Plan. It focuses disproportionately on some sections of the
in particular on the impacts of the Transition UK population or sectors of the economy.
Plan package of policies. It is divided into two This annex considers the distribution of the
main sections. costs within the UK.
The first section considers the long term, U Security of energy supply. The package,
focusing on our 2050 target of reducing UK particularly the policies relating to the
net emissions of greenhouse gases (GHG) to renewable energy target in 2020, will have
at least 80% below 1990 levels. This section an impact on security of energy supply.
sets out the size of the task, and assesses Continuity of energy supply is fundamental
the costs and benefits both for the UK and to the functioning of our economy and a
globally of meeting our 2050 goals. It also central element of the Government’s long
considers the different possible pathways term energy policy. Overall security of
to 2050 and beyond, including the variety of energy supply may be expressed in different
technologies that will need to be brought on. 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 Physical security: avoiding involuntary
for the period covering the first three carbon physical interruptions to consumption
budgets. This section considers the impacts of energy.
of the package on the UK’s GHG emissions,
Price security: avoiding unnecessary
the costs of the package and how these are
price spikes due to supply/demand
distributed, the impact of the package on
imbalances or poor market operations
security of energy supply, macro-economic
and maintaining competitive prices
costs and finally wider environmental impacts.
relative to other countries.
UÊ GHG emissions. In the third carbon
Geopolitical security: avoiding undue
budget period (2018 – 2022) the UK has
reliance on specific nations as sources
committed to reduce its net emissions of
of energy so as to maintain maximum
GHGs to at least 34% below 1990 levels,
degrees of freedom in foreign policy.
a level which puts the UK on track to meet
its 2050 emissions reduction target. UÊ ÊThe macroeconomic and transitional
The annex presents projections for UK GHG costs. Macroeconomic modelling of
emissions and shows that the policies set the costs of transforming the UK to a
out in this Transition Plan give us confidence low carbon economy is considered.
that our carbon budgets will be met. This modelling consistently suggests
that the costs in both the short and the
UÊ Costs and their distribution. Policies
long term, though significant, are likely
to reduce emissions or improve energy
to be manageable. The costs, as part
security will impose costs on sections
of co-ordinated global action, are much
of the UK population and UK economy.
lower than the damages associated with
Overall the costs of action will be lower
dangerous climate change.
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

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Structure of the Annex 11
11

UÊ Êˆ˜>Þ]Ê̅iÊwider environmental impacts it is also necessary to take account of


of the package are considered. The Climate wider environmental impacts such as air
Change Act 2008 states that proposals quality, biodiversity and the landscape. This
and policies for meeting carbon budgets annex values these wider environmental
must, when taken as a whole, ‘be such as impacts wherever possible and provides a
to contribute to sustainable development’. qualitative analysis in other cases.
Considering the impact of the package
on greenhouse gas emissions, energy
security, fairness and economic growth
goes a great way towards assessing the
sustainability of the package. However,

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13
11

Chapter 1:
The Long Term

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14 The UK Low Carbon Transition Plan
Analytical Annex

Long Term Impacts will vary between 1% of global GDP in 2050


(for stabilising atmospheric concentrations
The benefits of effective global action at 550ppm CO2e) to 3% (for a trajectory
on climate change will by far outweigh towards stabilisation at 450ppm CO2e).
the costs. The Stern Review4 suggested
Lord Stern has recently indicated that the
that global action to tackle climate change
Stern Review estimates are very likely to
will produce huge social and economic
substantially understate the true benefits of
benefits in the long term, avoiding global
action.5 Quantifying these impacts is very
costs equivalent to 5-20% of global GDP per
challenging, particularly in relation to the
annum and dwarfing the costs of coordinated
risks of uncertain but potentially catastrophic
international action (around 1% of GDP outcomes that, if they took place, would in
by 2050 for a 500 – 550 parts per million all likelihood be irreversible.6 The risk of these
emissions trajectory). These cost estimates outcomes is reflected in the precautionary
have been largely confirmed by Government approach adopted by the Committee on
modelling, which suggests that, if we Climate Change (CCC), which recommended
pursue least cost policies, costs of action an 80% reduction in UK emissions by 2050

Chart 1
Global emissions of greenhouse gases
Emissions of Greenhouse Gases
140

120

100
Emissions GtCO2e

80

60

40

20

0
1991 2011 2031 2051 2071 2091 2111 2131 2151 2171 2191

Source: UKCP09 (2009) Emissions from the three non-mitigations scenarios used in UKCP09 (green, blue,
navy) and a mitigation scenario from the CCC (dashed pink) aimed at limited global temperature change to
around 2˚C above pre-industrial levels
4 ‘The Stern Review of the Economics of Climate Change’, 2006. Available at:
http://www.hm-treasury.gov.uk/stern_review_report.htm
5 Comments made at the Copenhagen Climate Summit, March 2009.
6 These challenges are described in some detail in ‘Carbon Valuation in the UK Policy Appraisal: A Revised Approach’
DECC (July 2009), which sets out the Government’s new approach to valuing carbon in policy appraisal.
http://www.decc.gov.uk

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Chapter 1: 15
11
The Long Term

as an appropriate contribution to a global rainfall) up to the end of the 21st century in


stabilisation of GHGs that would allow a the absence of action.
very low probability – less than 1% – of a
o In the medium emissions scenario the
temperature increase of 4 C. Government o
temperature by 2050 would rise by 2.4 C
continues to improve its understanding of o
and by 2100 by 4 C. Such a level of
global climate impacts, through the AVOID7
warming would have severe impacts on
programme and through its support for the
society and the environment. Even under
development of a new version of the PAGE
the lowest emissions scenario without
model (which was used by the Stern Review
mitigation, temperatures would still rise by
to estimate climate damages). But the o
1.8 C in 2050, and by 2100 the increase
evidence in favour of global action is o
would reach 2.8 C and would continue to
already overwhelming.
rise beyond then. In the high emissions
Climate Projections for the UK (UKCP09) scenario the mean temperature would rise
o
were launched recently.8 These projections 2.6 C by 2050 and by 2100 the increase in
o
use emissions scenarios9 to estimate values temperature would be approaching 6 C.
of climate variables (e.g. temperature and By comparison, the predicted temperature

Chart 2
Global mean temperature rise
Global Mean Temperatures
6

IPCC Emission Scenarios


High
5 Medium
Low
Temperature Rise oC

World Stabilisation Scenario


4 Peak in emissions at 2016
followed by an annual
decrease of 4%
3

Temperature rise from pre-industrial baseline of 1750


0
1991 2011 2031 2051 2071 2091

Source: UKCP09 (2009) Temperature profiles for each of the emissions scenarios in chart 2.
All non-mitigation scenario temperatures are rising in 2100 while the mitigated CCC scenario stabilises at
around 2˚C.

7 Government programme to avoid dangerous climate change, for more information see www.avoid.uk.net
8 http://www.metoffice.gov.uk/climatechange/guide/ukcp/
9 Those shown are IPCC SRES scenarios A1F1 (high), A1B (medium) and B1 (low).

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16 UK Low Carbon Transition Plan
Analytical Annex

rise for a mitigation scenario (the CCC The CCC estimated that the costs to the
o
mitigated scenario) in 2050 would be 1.8 C UK of meeting an 80% target would be
o
but crucially it would only be about 2 C in the order of 1-2% of GDP in 2050.
in 2100.10 Government has published its own estimate
of the costs of meeting the 80% target
The key point is that while temperatures
in the Impact Assessment of the Climate
in 2050 may not be that different between
Change Act.11 This estimate drew upon a
the mitigated and the most optimistic
variety of modelling work including the work
unmitigated scenarios, by 2100 there will be
commissioned by the CCC and estimated
a huge difference – the difference between
costs to be of a similar order of magnitude.
catastrophic global warming and mere
warming, which while very challenging, Overall, the costs to the UK of meeting
is something to which human society can our 2050 target are affordable – given the
adapt. The main beneficiaries of urgent consequences of not acting – providing we
action now, because of the long life time of reduce emissions cost-effectively as part
greenhouse gases in the atmosphere, will be of co-ordinated global action. This means
our descendants. bringing on the right technologies and getting
the policy mix right. This is explored in the
next section.

10 These are global mean average temperatures which are averaged over land and sea. Land temperatures are generally
higher and temperatures in summer are higher than temperatures in winter. UKCP09 ‘downscales’ global models to
give projections for climate variables for the UK. For the UK, it is possible that the summer temperature for the CCC
mitigated scenario, where we are on track to reach an 80% reduction in GHG emissions by 2050, will be about 3oC
higher than pre-industrial levels, similar to the most optimistic ‘unmitigated’ scenario.
11 Available from http://www.decc.gov.uk/en/content/cms/legislation/cc_act_08/cc_act_08.aspx

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17
11

Chapter 2:
Getting There
Transforming the UK Economy and Energy System to 2050

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18 The UK Low Carbon Transition Plan
Analytical Annex

The long term goal level of growth to be accommodated within


the UK GHG emissions reduction target, the
As part of co-ordinated international action GHG emissions intensity of output in the
the UK has committed to reduce its net UK would have to reduce to less than one
emissions of greenhouse gases (GHGs) to at tenth of its 2009 level. This is a massive
least 80% below 1990 levels by 2050. undertaking, requiring a step change in the
This is intended to be a contribution to a way in which we generate and use energy.
global reduction in GHG emissions of 50% The global economy will be growing too,
below 1990 levels in 2050, to meet the aim with growth rates in the developing world
of restricting global temperature increases to expected to exceed those in the UK.
o
no more than 2 C. Higher global growth will increase global
This reduction in emissions needs to be demand for resources, with implications for
achieved against a backdrop of the UK and energy security and global emissions.
the global economy sustaining economic Meeting the 2050 emissions reduction target
growth. The Government’s long-term is achievable but will require a balance of
projections assume GDP growth for the UK effort between reducing energy system-
(after 2014) of 2.25 – 2.5%12 per year. This related carbon dioxide emissions, non-CO2
would imply the UK economy being up to GHG emissions and the use of international
2.8 times larger in 2050 than today. For this emissions trading.

Chart 3
Historic and illustrative future trajectory for UK GHG emissions intensity
of output (1990 – 2050)
250

200

150

100

50

0
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
2020
2023
2026
2029
2032
2035
2038
2041
2044
2047
2050

CO2e/GDP (2008 = 100)

Source: Department of Energy and Climate Change calculation (2009)

12 http://www.hm-treasury.gov.uk/bud_bud08_longterm.htm

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Chapter 2: 19
11
Getting There

Use of international additional abatement in the UK and selling


the excess internationally where the
carbon trading to meet international price is higher than the marginal
the 2050 target cost of abatement in the UK.
There is uncertainty over the extent to In assessing which of these scenarios is
which the long term target will be met by likely to hold, it is important to note that
reducing UK territorial emissions or through international carbon allowances are likely to
purchasing international carbon allowances. be scarce in 2050. The absolute quantity of
allowable global emissions in 2050 would
In 2050, the UK’s vision for international
be at least 50% below 1990 levels and
action to reduce emissions includes a global
the global economy would be expected
carbon market, where global emissions are
to be several times larger. As part of the
capped and the purchase of an international
Government’s review of carbon valuation,
carbon allowance will fund an additional
published in July 200914, Government
tonne of abatement elsewhere. Trading
analysts have estimated global carbon
enables the same environmental outcome
prices in 2050 using the GLOCAF15 model
to be achieved at lower cost, by allowing
and estimates available from other models
nations with relatively high cost abatement
and evidence. On the basis of this work,
options to fund emissions reductions in
Government economists have adopted,
countries with lower cost opportunities,
for 2050, a central estimate of £200/tCO2e,
while also contributing to decarbonisation
with a low sensitivity of £100/tCO2e and a
in developing countries. An effective global
high sensitivity of £300/tCO2e.16 The range
market would provide a mechanism to
reflects uncertainty in the global availability
ensure these low-cost opportunities are
and cost of abatement in 2050.
financed in the most efficient way. Estimates
suggest that through an effectively designed Even at the lower end of the spectrum, these
carbon market the global costs of the action carbon prices are a significant increase on
required by 2020 could be reduced by at current market prices for carbon. In 2050,
least one third and possibly up to two thirds it is likely to be cost-effective for the UK to
depending on market design.13 National undertake substantial domestic action and it
costs of abatement will differ, owing to is anticipated that much of the UK’s long-term
differing geographies and endowments of target would be achieved through domestic
natural resources, infrastructure stock and abatement. Analysis by the Committee on
specialisation in production. An efficient Climate Change (CCC) suggests that in most
delivery of the UK’s long term target 2050 scenarios, when access to allowances
would therefore involve the UK purchasing is unrestricted, international allowances do
international carbon units where they are not contribute more than 10% of total UK
cheaper than the cost of reducing emissions emissions reduction effort. This reflects the
in the UK or, alternatively, undertaking relatively cost-effective nature of domestic

13 ‘Road to Copenhagen’ DECC p43 http://www.actoncopenhagen.decc.gov.uk/en/ambition/road-to-copenhagen/


14 Carbon Valuation in the UK Policy Appraisal: A Revised Approach (July 2009) www.decc.gov.uk
15 The GLOCAF (Global Carbon Finance) model combines bottom up abatement cost curves from all regions of the world.
The model provides analysis of the global finance flows that result from global deals, with regional burden shares and
varying limitations on international carbon markets.
16 Real 2009 prices.

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20 The UK Low Carbon Transition Plan
Analytical Annex

abatement options, although the CCC analysis implies uncertainty about what the UK’s
suggests a changing use of credits over the 80% reduction target means for the level
timeline to 2050. of reduction in UK territorial emissions by
2050. This highlights the importance of
Government analysis suggests that
flexible market based instruments such as
international carbon trading might play a
international trading to ensure that climate
greater role in meeting the UK’s long term
change is tackled cost-effectively.
target. This analysis17 used GLOCAF for
all abatement costs meaning that both The underlying uncertainty about the level of
domestic abatement costs (within the domestic abatement in 2050 is captured in
EU) and international abatement costs the scenarios set out below, which consider
were modelled using the same underlying both a case where the domestic energy
methodology.18 However, interpreting system decarbonises by 90% relative to
the results for implications to the UK is 1990 levels in 2050, and one in which a 70%
complicated as GLOCAF carries only regional reduction is required.
abatement costs. Each region was given
a burden share of international action to Modelling of the UK energy
meet the goal of stabilising atmospheric
concentrations at 450ppm in the long term. system and associated
The European burden share was an 80% carbon dioxide emissions
reduction on 1990 emissions. to 2050
The modelling indicated that Europe would Government and the CCC have previously
meet its target most efficiently by importing commissioned research using the
20% of its reduction target in the form of MARKAL-MED19 model, which models the
international allowances, reducing emissions UK energy system and associated carbon
within the EU to 64% below 1990 levels. If dioxide emissions.
it is assumed that the UK is typical of the EU
as a whole, then the GLOCAF modelling can Different scenarios have been analysed,
provide an insight into the extent to which which consider various constraints on
the UK would achieve its target domestically the level of allowable emissions in 2020
under a global least cost approach to avoiding and 2050 and variations in the underlying
dangerous climate change. availability and cost of energy technologies.
Given these constraints on emissions and
In summary, uncertainty about the relative costs, the MARKAL model finds the lowest
national and international costs of abatement cost way to meet UK energy demand.

17 Previously published in the Climate Change Act Impact Assessment.


http://decc.gov.uk/Media/viewfile.ashx?FilePath=85_20090310164124_e_@@_climatechangeactia.pdf&filetype=4
18 The CCC analysis modelled domestic and international abatement using two different models with different underlying
cost data – MARKAL15 and GLOCAF. The UK Market Allocation (MARKAL) model is a least cost optimisation model
of energy use that investigates least cost solutions to meeting energy service demand while meeting emissions
constraints. Most notably, the model is rich in technological detail (e.g. costs, lifetime and efficiency) and its
assumptions have been extensively peer reviewed. The main limitation of this modelling approach is the unrealistic
assumption of perfect foresight out to 2050. Owing to this assumption, the modelling estimates produced by MARKAL
should be interpreted as the lower bound estimates of the long term costs of carbon abatement.
18 Previously published in the Climate Change Act IA.
19 The Markal MED model is an extension of MARKAL with more complex treatment of demand elasticities. Additional
information on the Markal MED can be found in ‘MARKAL-MED model runs of long term carbon reduction targets in the
UK’: http://www.theccc.org.uk/reports/supporting-research

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Chapter 2: 21
11
Getting There

Chart 4
One scenario for UK sectoral CO2 emissions to 2050 on an 80% CO2 emissions
reduction path
CO2 emissions by sector Transport
600 Services
Residential
500
Industry
Hydrogen
400
Electricity
MTCO2

300 Agriculture
Upstreamand
200 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 implemented and the least cost pathway
model, showing emissions from sectors of the UK should follow. Scenarios were
the economy over the period 2000 to 2050 commissioned for each of 70%, 80% and
under a scenario requiring a 33% reduction in 90% reductions in CO2 where the model
emissions in 2020 and an 80% reduction in has been constrained to meet the 2020
2050 compared to 1990 levels. renewable energy target.
The uncertainties over the extent to which In addition to uncertainties over emissions
it would be efficient for the UK to meet the constraints there are considerable
long term target through international carbon uncertainties in projecting future costs and
trading and over the feasibility of achieving availabilities of low carbon technologies.
an 80% reduction in non-CO2 GHG emissions The outputs from MARKAL scenarios –
lead to a range of possible emissions levels and those of any model – are sensitive to
from the energy system that are consistent assumptions about the future state of the
with achieving the 2050 target. Accordingly, world, including notably:
one of the scenarios considered sees UK
UÊ the future path of fossil fuel prices;
CO2 emissions from the energy sector
fall by 70% in 2050, and another by 90% UÊ the availability and cost of new abatement
(implying significant purchase of allowances technologies in the future; and
and / or greater effort in the non energy
UÊ improvements in energy efficiency that can
sectors). This has significant implications
be achieved.
for the technologies that will have to be

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22 The UK Low Carbon Transition Plan
Analytical Annex

Forecasting these variables out to 2050 which are all consistent with meeting the
is inherently uncertain and changes in 2050 target for an 80% reduction in net UK
assumptions can lead to significantly GHG emissions relative to 1990, but which
different modelling results. Depending on differ in their assumptions relating to the
the scenario, different sectors contribute price and availability of key technologies and
to a greater or lesser extent to the overall the extent of domestic abatement from the
reduction in UK emissions. The technologies UK energy system.
within a sector can also differ significantly.
It should be noted that these scenarios have
A further uncertainty is the possibility of been commissioned for a variety of purposes
one or more ‘technology shocks’. Over the over the last two years, and have not
period to 2050 there could be breakthroughs therefore been defined with a constraint that
in low carbon technology, unanticipated in they must be consistent with the package
the MARKAL model, which could radically of policies contained in this Transition
alter the lowest cost approach to reducing Plan. We have, however, commissioned
emissions. three scenarios – the 70%, 80% and 90%
renewables scenarios – that meet the
In combination, these factors mean that
constraint of meeting the UK’s renewable
it is not possible for a precise pathway for
energy target. The purpose of presenting
the UK’s transformation to a low carbon
these runs here is not to make a prediction
economy to be forecast. To demonstrate
about the future, but to illustrate the extent
this point, Table 1 below describes eight
of uncertainty and commonality in possible
scenarios produced by the MARKAL model,
future pathways to our 2050 goal.

Table 1
MARKAL scenarios

CO2 Emissions
Scenario reductions Other assumptions
(relative to 1990)
70% scenario 29% in 2020, Commissioned by the CCC. Max nuclear
70% in 2050 and CCS build rate 3GW p.a. in the 2020s,
5GW p.a. thereafter.
70% RES 29% in 2020, Commissioned by DECC for this Transition
70% in 2050 Plan. Model constrained to deliver
sufficient renewable generation in 2020 to
meet the Renewable energy target.
80% base case 33% reduction by Commissioned by the CCC. Max nuclear
2020. 80% reduction and CCS build rate 3GW p.a. in the 2020s,
by 2050 5GW p.a. thereafter.
80% high bio-energy 31% in 2020, Commissioned by Defra in 2007. High
80% in 2050 availability of domestic and imported
biomass, with high capacity for biomass
liquids to meet transport energy demand.

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Chapter 2: 23
11
Getting There

80% RES 29% in 2020, Commissioned by DECC for this Transition


80% in 2050 Plan. Model constrained to deliver
sufficient renewable generation in 2020 to
meet the Renewable energy target.
80% ‘resilient’ 26% in 2020, Commissioned by UKERC. Energy demand
(low electricity) 80% in 2050. 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 Commissioned by the CCC. Max nuclear
90% in 2050 and CCS build rate 3GW p.a. in the 2020s,
5GW p.a. thereafter.
90% RES 29% in 2020, Commissioned by DECC for this Transition
90% in 2050 Plan. Model constrained to deliver
sufficient renewable generation in 2020 to
meet the Renewable energy target.

Chart 5 shows that these scenarios result that is providing it. Overall electricity
in significantly different sectoral shares of consumption does not change much
overall CO2 emissions in 2050. between the scenarios where the model
was constrained to meet the renewable
Under all scenarios the use of electricity in
energy target and where it was not,
the UK increases (Chart 6). However,
however the composition of the generation
the scenarios show a significant variation
mix does change.
in the level of UK electricity consumption in
2050 and the mix of generation technology

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24 The UK Low Carbon Transition Plan
Analytical Annex

Chart 5
Sectoral CO2 emissions in 2050 under MARKAL scenarios, compared to
2005 emissions
MtCO2
600

500

400

300

200

100

0
2005 70% base 70% RES 80% base 80% high 80% 80% RES 90% base 90% RES
bio resilience

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

2000
Electricity output by fuel (PJ)

1500

1000

500

0
2005 70% 70% RES 80% base 80% high 80% 80% RES 90% 90% RES
bio resilience
Other Renewables Imports Gas Coal
Wind Gas CCS Coal CCS Nuclear

Source: Department of Energy and Climate Change chart based on MARKAL (2009)

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Chapter 2: 25
11
Getting There

All scenarios share some characteristics. the scenarios, but there is considerable
These include by 2050, electricity divergence in the rate at which the
accounting for an increased share decarbonisation is achieved. The MARKAL
of energy consumption, a radical modelling indicates that a relatively wide
de-carbonisation of electricity supply and range for the carbon intensity of grid
a dramatic improvement in electricity in particular years, such as 2030,
energy efficiency. would be consistent with reaching the long
term goal of an 80% decarbonisation.
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

Chart 7
Rate of decarbonisation of the electricity sector under MARKAL scenarios
Average emission from power generation

500

400
(gCO2per kWh)

300

200

100

0
2010 2015 2020 2025 2030 2035 2040 2045 2050

70% base 70% RES 80% base 80% high bio


80% resilience 80% RES 90% base 90% RES

Source: Department of Energy and Climate Change chart based on MARKAL (2009)

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26 The UK Low Carbon Transition Plan
Analytical Annex

Achieving the UK’s climate change Chart 8 compares the energy demand for
mitigation goals will require the use of many each of the scenarios in 2050 with the energy
technologies in the power sector – there demand in 2005. Significant energy demand
is no silver bullet. The MARKAL modelling reductions of between 26 and 43% are
provides evidence that there will be a achieved across the scenarios. Taking into
significant role for renewables, coal and gas account the higher level of GDP we would
with carbon capture and storage (CCS) and expect in 2050 this is equivalent to the energy
nuclear to achieve the required intensity of GDP falling to around a quarter
emissions reductions. of the 2009 level. MARKAL modelling shows
that this can be achieved primarily through
Analysis indicates that energy efficiency is
energy efficiency measures, but there will
essential to meeting our 2050 target and is
also be some energy demand reduction from
cost-effective too. Achieving a greater than
substitution to less energy intensive activities
tenfold reduction in the carbon intensity
and less waste of energy. These last two
of the UK economy in 2050 will not be
effects are encouraged by the higher energy
achievable solely through a de-carbonisation
prices that are the result of adopting low
of the UK energy supply but will also require
carbon technologies.
a much more efficient and less wasteful
use of energy. Cost-effectiveness analysis To achieve a tenfold reduction in carbon
indicates that energy efficiency should be the intensity of GDP by 2050 (see the first section
first choice of measure in moving to a low of this chapter), energy supply will also need
carbon economy. 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% 80% high 80% 80% RES 90% 90% RES
base bio resilience

Source: Department of Energy and Climate Change chart based on MARKAL (2009)
Note: This chart compares energy consumption in 2005 with energy consumption scenarios in 2050.

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Chapter 2: 27
11
Getting There

The policy regime for Overall, the policy package put forward in this
Transition Plan is designed to meet the long
the future term investment and innovation challenges
As the above discussion shows, there are created by the 2050 target. It comprises:
some commonalities in the outcomes of the UÊ A transparent regime for pricing carbon in
different scenarios assessed. Where there the long term, through international carbon
is a clear pathway policy should focus on trading systems (such as the EU Emissions
removing constraints and barriers that prevent Trading System).
or slow progress. Accordingly, the package
of policies in the Transition Plan seeks to UÊ Direct support for individual technologies,
address barriers that act to slow the uptake or groups of technologies, where there is a
of energy efficiency measures and to support compelling argument that they are needed as
key low carbon generation technologies. part of the global effort to reduce emissions
and yet are unlikely to be brought on through
Conversely, where there is significant the carbon price alone. Key technologies
uncertainty in predicting the least cost may not be brought on sufficiently quickly
pathway towards achieving our 2050 targets, without direct support until deeper
flexibility in policy design is important – there emissions reductions targets are agreed
is a danger that if policies are too prescriptive globally resulting in a stronger and more
about the ‘route map’ in the long run, then we credible carbon price signal, and without
may lock ourselves in to a high cost emissions intervention to address innovation market
reductions path if certain technologies turn failures. Government has chosen to support
out to be more or less costly than anticipated directly renewable and low carbon energy
or assumptions about the future turn out to technologies through the policies in the
be wrong. This is an argument for providing Renewable Energy Strategy and to support
a clear and stable investment framework Carbon Capture and Storage demonstration.
– underpinned by the 2050 target – but
allowing individual investors to decide which UÊ Broader support for a range of potentially
technologies to deploy to meet it. viable technologies where there is greater
uncertainty over which will be the lowest
The level of investment in low carbon cost solution.
technology research and development is
an important determinant of the future UÊ A stable, credible regulatory regime for
costs of abatement. Market and regulatory reducing emissions in the UK in the long
failures with respect to investment in term, based around the 2050 target and
innovation justify intervention to minimise interim five yearly carbon budgets,
the medium to long term costs of meeting to give companies sufficient confidence
carbon budgets. Intervention could increase to invest in low carbon technologies.
investment by addressing: The budget levels that have now been set
by Government for the period 2008 – 2022
UÊ positive externalities arising from put us on track to meet the 2050 target
investment in innovation; and and reflect the key importance of achieving
UÊ the short term weakness of the carbon a global deal on climate change.
price signal arising from immature carbon These principles are discussed in greater
markets and regulatory uncertainty over detail in relation to the Transition Plan
future global deals and caps on emissions. package of policies in Part Two.

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29
11

Chapter 3:
Reducing UK
Emissions of
Greenhouse Gases
from 2008-2022

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30 The UK Low Carbon Transition Plan
Analytical Annex

Carbon budget levels In the event of successful negotiation of


a global deal the EU would adopt a more
The CCC proposed two sets of carbon ambitious target of up to a 30% reduction
budgets for the UK, one to apply now in GHG emissions across the EU by 2020
before a global deal on climate change is over 1990 levels. The intra-EU effort share
reached (‘Interim’ budgets), and a more of this more stringent target has not been
challenging set to apply once a global negotiated; however, the UK would take on
deal on climate change has been agreed a tougher target than under the current EU
(‘Intended’ budgets). Based on this advice, Climate and Energy Package. In line with
the Government has set carbon budgets that CCC advice and the requirement of the
are based on the CCC’s Interim budgets, Climate Change Act, the Government will
consistent with the UK’s share of the EU’s tighten carbon budgets in response to these
target to reduce greenhouse gas emissions more stringent international obligations.
to 20% below 1990 levels by 2020.
As the final shape of the 30% EU package
The CCC recommended that, in the event has not been negotiated it is not possible
of a satisfactory global agreement through to be precise about the level of the more
the Copenhagen negotiations, the UK ambitious UK carbon budgets following a
should move to its Intended budgets. global deal. However, the CCC provided
The Government agrees that as part of a illustrative estimates of the level of tighter
successful global deal it should move to ‘Intended’ budgets. These showed a smaller
tighter carbon budgets. The appropriate UK share of a tighter EU ETS cap, with a
level of the tighter budgets will depend on consequent reduction in UK emissions in
the outcome of international negotiations on the traded sector. In the non-traded sector,
climate change. The CCC will therefore be the ‘intended’ budgets required the UK
asked to review its recommended Intended to achieve an additional 140MtCO2e of
budgets following a global deal and once abatement over budgets two and three.
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.

Table 2
Carbon budgets level

Budget 1 Budget 2 Budget 3


(2008-2012) (2013-2017) (2018-2022)

Budget level (MtCO2e) 3018 2782 2544


Percentage reduction
22% 28% 34%
below 1990 levels20

20 Comparing average annual emissions over the budget period to UK emissions in 1990 of 777.4 MtCO2e based on 2007
inventory methodology.

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Chapter 3: 31
11
Reducing UK Emissions of Greenhouse Gases from 2008-2022

The Climate Change Act does not specify a Mitigating global emissions will require
trajectory towards the 80% 2050 emissions co-ordinated global action. Dynamically
reduction target, other than requiring a adjusting domestic climate change policy in
minimum reduction of 34% in the net UK response to significant international actions
carbon account in 2020 relative to 1990.21 and commitments will help achieve the
The trajectory will be established through the overall required emissions reductions in a
level of the carbon budgets which will be set cost-effective manner.
with regard to criteria22 including technology
relevant to climate change and the implications Measuring emissions
for the feasibility and cost of achieving
emissions reductions in a given period. UK carbon budgets and the 2050 target
are measured in terms of the Kyoto basket
The trajectory implied by the current level of greenhouse gases24 and specified in
of carbon budgets from 2008 – 2022 is terms of the net UK carbon account.
less stringent than that required to meet To calculate the net UK carbon account,
an 80% 2050 emission reduction target on UK greenhouse gas emissions from the
a straight line basis. But the CCC believes UK national emissions inventory report
this is sufficient to put us on track if met are adjusted to account for the amount of
through domestic emissions reductions. carbon units which have been bought in
However, were a successful global deal to from overseas and retired by Government
be negotiated, the level of budgets would be and others (including participants in the EU
amended, setting the UK on a much more Emissions Trading System) to offset UK
stringent trajectory.23 emissions (‘credits’), and UK carbon units
In practice, this means that if a comprehensive which have been disposed of to a third party
global deal can be achieved at Copenhagen (‘debits’). Meeting the budgets and the long
this year, the UK and other EU member term target will require a balance of effort
states will take on greater action, earlier. from CO2 mitigation, non-CO2 mitigation and
While evidence (e.g. from the IPCC 4th the purchase of carbon units representing
Assessment Report) suggests that delaying emissions reductions abroad.
action to reduce emissions risks increasing The emissions coverage of UK carbon
costs by locking in investments in carbon- budgets is not identical to the scope of the
intensive infrastructure, the argument for this UK’s commitments under the Kyoto protocol.
approach is clear – making highly ambitious While carbon budgets cover UK emissions
action by the EU contingent on action by other only, the UK’s commitments under the Kyoto
countries is intended to maximise the chances protocol include emissions from the crown
of achieving a global deal. dependencies and certain overseas territories.

21 See the following section for a description of the net UK carbon account.
22 Section 10 of the Climate Change Act lists the matters to be taken into account in connection with carbon budgets.
http://www.opsi.gov.uk/acts/acts2008/pdf/ukpga_20080027_en.pdf
23 Meeting the current non-traded portion of carbon budgets domestically prepares the UK to meet the tighter budgets.
Purchase of international credits might be expected to form an important part of the additional effort required to meet
more challenging carbon budgets. The CCC advice stated that use of credits from outside the EU, under the tighter
carbon budgets to be set following a global deal, would be acceptable given the feasibility and cost-effectiveness of
going further domestically.
24 Climate change is caused by various greenhouse gases. The Kyoto Protocol applies to emissions of a basket of
six greenhouse gases: Carbon Dioxide (CO2), Methane (CH4), Nitrous Oxide (N2O), Hydrofluorocarbons (HFCs),
Perfluorocarbons (PFCs) and Sulphur Hexafluoride (SF6). Non-CO2 greenhouse gas emissions arise from a number of
sources including agriculture and land use change (largely methane from livestock), the waste sector (e.g. from landfill)
and industrial process emissions, for example in the cement and paper industries.

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32 The UK Low Carbon Transition Plan
Analytical Annex

Under carbon budgets, emissions associated The UK’s share of the EU Emissions Trading
with land use, land use change and forestry are System cap in 2007 was 12.5% of the total
treated in line with current UNFCCC reporting cap. Within the UK, emissions of CO2 in the
requirements, in a more comprehensive way EU ETS (‘traded sector’) were 256.3 MtCO2
than under the Kyoto protocol which only in 2007. To comply with the EU Emissions
considers a subset of these emissions. As is Trading System, UK installations were net
the case under the Kyoto protocol, emissions importers of EU allowances, importing 25.7
from international aviation and international MtCO2e of allowances. Within the UK, in
shipping are not included in carbon budgets, sectors of the economy not covered by the
as there is currently no internationally agreed ETS (‘the non-traded sector’), CO2 emissions
methodology for attributing these emissions to were 286.3 MtCO2.
individual countries. However, section 10 of the
Non-CO2 GHG emissions were 93.7MtCO2e
Climate Change Act requires we take account
in 2007, which is 48% lower than in 1990.
of these emissions in setting carbon budgets.
This reflects the already substantial progress
that has been made to reduce non-CO2
Where we are now: GHG emissions in a number of sectors. For
current emissions example, methane emissions from waste
landfill have fallen by 59% between 1990
The most recent year for which full inventory and 2007, and are projected to fall by 63%
data on UK GHG emissions are available is by 2020 (relative to 1990 levels). Likewise,
2007. In 2007, approximately 85% of UK overall GHG emissions from agriculture
GHG emissions were CO2 emissions, the vast (predominantly nitrous oxide and methane)
majority of which are energy system related. have fallen by 21% since 1990. Overall,
The other 15% are non-CO2 GHG emissions non-CO2 GHG emissions were 48% lower
such as methane emissions from livestock in 2007.
and waste.
In total, the net UK carbon account was 610.6
Around 40% of the UK’s emissions are MtCO2e in 2007, in 1990, the corresponding
covered by the EU Emissions Trading figure was 777.4 MtCO2e. There has therefore
System. This is a cap-and-trade scheme been a 21% reduction between 1990 and 2007.
which sets a limit (cap) on emissions in the
EU’s power and heavy industry sectors.25

25 See ‘Reducing emissions in sectors covered by the EU ETS’ section later in this chapter for further detail.

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Chapter 3: 33
11
Reducing UK Emissions of Greenhouse Gases from 2008-2022

Principles for developing barriers to innovation which will further


dampen investment, such as regulatory
policies to reduce uncertainty and information asymmetries.
emissions Individual policy interventions are justified on
Achieving the 2050 GHG emissions their ability to address specific market failures
reductions target will require Government or barriers which prevent the exploitation
intervention. This section sets out the of cost-effective carbon abatement
economic principles underlying that opportunities. The Impact Assessments of
intervention and informing the policies set the individual policies comprising our overall
out in this Transition Plan. These are set out plan all set out the rationale for intervention
in more detail in a Government publication on this basis.
“Making the right choices for our future”,
The greenhouse gas emissions externality
published in March 2009.26
can be addressed through ensuring that those
There are extensive market failures and who release emissions face a price for doing
barriers to action, the combined impact of so, that reflects not just their private costs
which lead to a higher level of emissions of releasing emissions but the wider social
than is socially optimal. Without intervention, costs too. Increasing the cost of producing
the market will under-allocate resources emissions aligns the incentive for individuals
to reducing GHG emissions. Where policy or firms to reduce their emissions with the
instruments address one or more of these social benefit from lowering emissions. It
market failures, and do so effectively, overall increases the incentive for individuals or firms
welfare will be increased. to invest in installing low carbon technologies.
A price can be placed on greenhouse gas
UÊ The emission of greenhouse gases is a
emissions through the introduction of carbon
negative externality. Those who emit
taxes, cap and trade schemes or implicitly
them do not suffer the damages that they
through regulations requiring investments in
cause. This results in more greenhouse
more costly low carbon technologies.
gas emissions than is optimal for society
as a whole. There are a diverse set of behavioural barriers
to the exploitation of carbon abatement
UÊ There are behavioural barriers to exploiting
options. These range from informational
low and negative cost abatement options.
barriers and split-incentives to psychological
For instance imperfect information about the
and sociological factors creating inertia.
options and availability of energy efficiency
Policy interventions to address these
technology, or the costs of the energy
barriers can include regulations, information
being used, may lead to under-investment
campaigns and technologies to raise the
in reducing energy consumption.
visibility and therefore the awareness of
UÊ Those investing in innovation create energy use and the associated emissions.
positive externalities in the shape of
Tackling the greenhouse gas emissions
new knowledge and skills which spread
externality and behavioural barriers above, is
beyond the investor. Owing to this
fundamental in laying the foundation for low
positive externality, without intervention,
carbon innovation to take place, as it largely
investment in low carbon research and
determines the likely level of demand for
development would be lower than the
future goods and services.
socially optimal level. There are further
26 http://www.defra.gov.uk/environment/climatechange/research/economics/framework.htm

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34 The UK Low Carbon Transition Plan
Analytical Annex

Government also needs to give support at prior to the Climate Change Programme the
the appropriate time and in the appropriate extended ambition has been included in the
way if it is to bolster low carbon industries’ package. A detailed list of policies included
innovation. This will depend on the sector, is shown below. This list includes policies
its market structure and the profile of announced in the 2007 Energy White Paper,
organisations operating within it. the Renewable Energy Strategy policies and
additional policies set out in this Transition
Overall, the ideal policy framework is
Plan. This decision has been taken as it goes
one that is flexible enough to adapt to
far enough back to capture the most active
changing circumstances while still providing
policies contributing to meet the first three
businesses and individuals with policy
carbon budgets, and aligns the policy baseline
certainty to make long-term investment
with that used by the Committee on Climate
decisions. Fundamental to this effort is
Change in their December 2008 report.
securing a global agreement to reduce
greenhouse gas emissions. Designing The policies set out in the Transition Plan
domestic climate change policy around which are included in the package of policies
international interventions, and adjusting and proposals are:
it dynamically alongside significant actions
UÊ The December 2008 EU Climate and
to tackle the problem at the global level,
Energy Package agreement to a tightening
will help achieve the required emissions
of the EU Emissions Trading System cap in
reductions in a cost effective manner.
Phase 3 (2013 – 2020) (baseline assumes a
In estimating the impacts of this plan on continuation of the Phase 2 EU ETS cap);
emissions and its overall costs, it is necessary
UÊ The Renewable Energy Strategy
to define which policies are included in the
(Renewable Electricity and Renewable
package and to compare the world with their
Heat). This includes the extension of the
impact to a baseline case, the counterfactual,
Renewables Obligation, Feed-in-Tariffs,
without them. The following section sets out
the Renewable Heat Incentive and the
the approach taken to defining the baseline.
extension of bio-fuels to 10% by energy;

Baseline used in this UÊ Vehicle efficiency standards, EU new car


average fuel efficiency standards of 130g/
analysis km by 2015, the additional impact of
The Transition Plan sets out a package further new car efficiency improvements
of policies to meet the first three carbon to 95g/km by 2020 and new van average
budgets. To assess the impacts of this efficiency standards of 160g/km.
package it is necessary to define firstly the UÊ Complementary measures for cars (gear
scope of the package – which policies are shift indicators/low rolling resistance tyres/
included – and secondly what the baseline for more efficient air conditioning/tyre pressure
comparison is – the world without the policies. monitoring/ low viscosity lubricants);
Defining the scope of the package requires UÊ Low rolling resistance tyres for HGVs;
a decision on the inclusion or exclusion of
particular policies. The decision has been UÊ SAFED bus driver training;
taken to include those policies which have UÊ Illustrative rail electrification of 750km of
been announced more recently than the 2006 single track rail line;
Climate Change Programme. Where there has
been an extension to policies which existed UÊ Carbon Reduction Commitment;

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Chapter 3: 35
11
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 UÊ Agriculture proposals; and,
energy efficiency;
UÊ Waste proposals (Food to anaerobic
UÊ Community Energy Savings Programme; digestion, diverting wood waste and raising
landfill tax in budget 2009).
UÊ Zero Carbon Homes;
UÊ Smart-metering (households and business); Meeting carbon budgets:
UÊ Energy Performance of Buildings Directive – Emissions projections from
Includes Energy Performance Certificates,
Display Energy Certificates for public buildings,
2008 to 2022
inspections for air conditioning systems, The policies set out in this Transition Plan
and advice and guidance for boiler users. will allow us to meet our carbon budgets
on central expectations. Chart 9 shows
UÊ Product policy – minimum standards and
central projections for the net UK carbon
labelling, in line with ambition announced in
account up to 202227 with and without the
the Energy White Paper 2007;

Chart 9
Central Projections for the net UK carbon account with and without the
Transition Plan Package of Policy Measures
650

600
Greenhouse gas emissions MtCO2e

550

500

450

400

0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Power & heavy industry Transport Homes


Workplaces Farms & countryside
Source: Department of Energy and Climate Change (2009)
27 CO2 projections from the DECC energy model, non-CO2 projections are produced under contract by AEA technology Ltd.

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36 The UK Low Carbon Transition Plan
Analytical Annex

policies presented here. Central projections reducing emissions. Further, there is wider
show the net UK carbon account to be lower uncertainty about the way society and the
than each of the first three carbon budgets. UK energy system will evolve in the future.
The combined impact of the Transition Plan An estimated range for the uncertainty
policies is to reduce projected emissions surrounding UK net carbon emissions
by 459 MtCO2e over budget three and 715 projections for each of the three carbon
MtCO2e over the three budgets as a whole. budget periods from 2008 – 22 is shown
in Chart 10.28
There is, however, considerable uncertainty
over emissions projections. There are The uncertainty means that we cannot rely
several factors which are key drivers of the on central estimates alone to demonstrate
level of emissions. These include changes that we are on track to meet carbon budgets.
in fossil fuel prices, external temperatures, In the rest of this section, we set out how
energy use, GDP and population growth. Government has dealt with this uncertainty
There is also uncertainty about the extent in developing its package of policies to meet
to which policies will be effective in carbon budgets. We cover first those sectors

Chart 10
Uncertainty around emission projections
MtCO2e
3500

3000

Gap: -44
2500 Upper: 62 Gap: -64
Lower: -145 Upper: 65 Gap: -39
2000 Lower: -184 Upper: 126
Lower: -170
1500

1000

500

0
Budget 1 Budget 2 Budget 3
Central projections – without Transition Plan policies Budgets Projections – with Transition Plan policies

Source: Department of Energy and Climate Change (2009) Negative implies that emissions are below the budget

28 There is relatively greater uncertainty over projected emissions from the agricultural sector. The projections for
greenhouse gas emissions from agriculture are based on a scenario for the sector, developed by ADAS in 2005,
which contains considerable uncertainty about the likely future structure of the agriculture sector. The methodology
used to estimate greenhouse gas emissions from agriculture is fairly simple, using absolute numbers of livestock,
area of land under arable crops and amount of fertiliser used. There is therefore a significant margin of error associated
with estimates of emissions from the agriculture sector for any given year, although the trend over time is likely to
be much more reliable. Defra is considering currently how to develop a more refined inventory for emissions from
agriculture. Significant changes to how emissions are estimated could have implications for carbon budgets, in which
case the Government might seek the advice of the Committee on Climate Change on how to take this into account.

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for which uncertainty over emissions has The net UK carbon account and the
effectively been eliminated – the power and traded sector
industrial sectors capped by the EU Emissions The traded sector (the sectors of the UK
Trading System – and then the remaining covered by the EU ETS) makes a contribution
sectors of the UK economy, emissions from to the net UK carbon account that is equal to
which show significant uncertainty. the UK’s share of the EU ETS cap. If EU ETS
installations in the UK emit more than the
Reducing emissions in UK share of the cap then there will be a net
sectors covered by the import of allowances to the UK. Importing
allowances will fund equal and opposite
EU ETS emissions reductions in the wider EU, or in
The EU Emissions Trading System (ETS) developing countries.
covers 42% of EU GHG emissions and 41% Chart 10 above, showing we are on track to
of UK GHG emissions. There is certainty meet our carbon budgets, shows the net UK
in the overall level of emissions within the carbon account. The projected level of the
capped sectors across the EU as a whole. net carbon account includes a credit equal
The agreement reached in December 2008 to the level of net imports of EU allowances
achieves an EU wide reduction of 22% in from the EU Emissions Trading System or a
traded sector emissions in 2020 relative debit where the UK is a net exporter. In some
to 2005 verified emissions. The EU has years over the period to 2022, the UK is
committed to a larger reduction in EU projected to be a net importer of allowances,
greenhouse gas emissions following an in other years the UK is projected to be a
international deal – the proportion of the net exporter. Over the period as a whole the
additional effort which would come from the UK is projected to export a small number of
ETS sectors is yet to be negotiated, but once allowances (13MtCO2e). This means that UK
agreed there would again be certainty over territorial emissions over the three carbon
ETS sector emissions across the whole budgets will be lower than the projected level
of the EU. of the net UK carbon account by 13MtCO2e.
The creation of an EU wide cap has the Chart 11 shows traded sector emissions in
strengths of providing certainty over the the UK and the UK share of the EU ETS Cap.
quantity of emissions, while the flexibility
created through the trading mechanism
allows these reductions to be achieved
efficiently, at least cost.

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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 UK carbon account will always be equal to
in UK territorial emissions (represented the UK’s share of the
by the navy line in the chart above) in the EU ETS cap – the quantity of auctioning
capped sectors will not change the level rights allocated to the UK government plus
of emissions across the EU as a whole. the free allocation of allowances to UK
The availability of allowances is unchanged. installations as represented by the pale line
The additional reduction in capped sector in the chart above.
emissions in the UK would alter the
distribution but not the level of emissions There is still a rationale for the
across the EU as a whole. Similarly, the Government to seek abatement in
net UK carbon account – which is used for the traded sector
determining compliance with carbon budgets This does not mean that the UK Government
– would be unchanged by any reduction can be complacent about decarbonising the
in UK territorial emissions within the EU sectors covered by the EU ETS. There are
ETS sectors. Under the carbon accounting still strong reasons for the UK to seek out
regulations for UK carbon budgets,29 the emissions reductions in the traded sectors.
contribution of the traded sector to the net

29 The Carbon Budgets regulations can be found at: www.opsi.gov.uk/si/si2009/uksi_20091257_en_1 Further information
can be found on DECC Carbon Budgets web page: www.decc.gov.uk/en/content/cms/what_we_do/lc_uk/carbon_
budgets/carbon_budgets.aspx

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Reducing territorial UK emissions in the Residual uncertainty over the UK


traded sector reduces the number of share of the EU ETS cap
allowances that are imported, or increases The EU ETS cap creates certainty over EU
the number of allowances that are exported wide emissions in the ETS sectors. However,
by the UK. This carries an economic benefit there is still some residual uncertainty over
approximately equal to the value of EU the UK’s exact share of the ETS cap for
allowances.30 Where the UK can reduce Phase 3 of the EU ETS, running from 2013
emissions in the traded sector at a lower to 2020. Although the share of auctioning
cost than the EU allowance prices there will rights allocated to the UK Government has
be a net benefit to the UK with the overall been agreed, there remains uncertainty
cost of complying with the EU ETS reduced. over the exact level of free allocation of
Policies that address barriers or market allowances to UK installations owing to
failures in the traded sector, allowing low a variety of factors including uncertainty
or negative cost abatement to be exploited, surrounding the patterns of openings and
will also reduce the price of EU allowances closures of plants receiving free allocations.
and so minimise impacts on energy bills for Further, the detailed implementation of
businesses and consumers across the EU. the revised EU ETS Directive is still being
Further, successfully exploiting low cost negotiated, covering issues such as detailed
abatement potential and supporting low rules for allocating free allowances to
carbon innovation in the traded sector could different industries reflecting technologies
facilitate the negotiation of future, ambitious used and the competitive pressures they
caps which are consistent with a trajectory face from outside the EU. Should the actual
towards the UK’s 2050 target. level of allocations to UK installations differ
Reducing territorial UK emissions in the significantly from the estimated level used
traded sector may carry other ancillary to set carbon budgets, the traded sector
benefits, such as improvements to air component of the budget may need to be
quality and energy security. Energy and amended, taking into account the advice of
process efficiency savings, where these the Committee on Climate Change.
can be achieved cost-effectively, place UK
companies in an advantageous position for Reducing emissions from
handling the tighter EU ETS and global caps
in the future.
sectors not covered by the
EU ETS
A wide range of policies are in place to
achieve reductions in emissions in the Government’s approach to
traded sector – for example policies targeting developing policies in sectors not in
improvements in energy efficiency (such as the EU ETS
product regulations) or policies seeking to
There is a much greater challenge for
support innovation in the traded sector and
Government in tackling emissions from
bring down the future costs of abatement
sectors outside the EU ETS, (the ‘non-traded’
(such as Carbon Capture and Storage
sector) since these are not capped. The
(CCS) demonstration).
general principles for developing policies
to overcome market failures still apply,

30 This is only an approximation owing to second order effects. Lower demand changes the market price of allowances
which in turn changes the distribution of EU ETS emissions, and the cost to the UK of its remaining imports of
allowances (or reduce the revenue from exports of allowances).

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40 The UK Low Carbon Transition Plan
Analytical Annex

but in addition a number of more specific The CCC’s analysis of the cost-effectiveness
challenges, relating to the uncertainty of abatement options can be presented in
surrounding uncapped emissions, need the form of a marginal abatement cost curve
to be overcome. This section sets out (MACC). An example MACC is shown in
Government’s specific approach to Chart 12. The MACC presents in order of
developing policies to reduce emissions from cost-effectiveness the options for reducing
these sectors, based on: a clear assessment emissions in the non-traded sector in 2020.
of feasible technical potential for reducing Each rectangle represents a technical option
emissions; a focus on the potential of for reducing emissions, with the height of
individual measures to overlap and interact the box determined by the measure’s cost-
with each other through the analysis of effectiveness and the width by the volume of
packages of measures; and a variety of abatement that it is feasible for this measure
approaches to dealing with the inherent to achieve in the year 2020.
uncertainty in emissions from these sectors.
The MACC below shows the ‘high feasible’
abatement potential identified by the CCC.
Assessment of emissions
This includes abatement measures from
reduction potential
industry, domestic and non-domestic
In its December 2008 report31 the CCC buildings, transport, agriculture and waste
provides an analytical view of the cost- sectors. Approximately 33% of abatement
effectiveness of technical options to deliver potential is from transport measures and
reductions in non-traded sector emissions. 35% of total abatement potential is negative
This analysis has been supplemented cost, i.e. money saved by implementing
by Government analysis to inform the the measure would outweigh any costs.
development of the package of policies. Of this negative cost abatement potential,
The CCC’s analysis considered feasible about 20% is from non-CO2 measures
technical abatement potential relative to a (predominantly agriculture), and 28% is from
baseline level of emissions. The baseline was energy efficiency measures in the domestic
generated for the CCC using 2008 fossil fuel sector, for example, insulating your home.
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

31 “Building a Low Carbon Economy – the UK’s contribution to tackling climate change” (December 2008). Available at
http://www.theccc.org.uk/pdf/TSO-ClimateChange.pdf
32 http://www.defra.gov.uk/environment/climatechange/uk/ukccp/pdf/ukccp06-all.pdf. The CCC baseline level of emissions
differs slightly from the no policy projection that is used in this annex. Both the CCC baseline and the no policy and
proposal projection were generated by the DECC energy model, however the CCC baseline was generated in 2008
using older fossil fuel price and growth assumptions. There has also been some minor re-evaluation of policy delivery
from the UKCCP 2006. Though this complicates the interpretation of the CCC MACC, the differences are not sufficiently
material to invalidate the CCC cost-effectiveness analysis, or their assessment of the volume of abatement that
particular technical measures could deliver.

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Chart 12
A Marginal Abatement Cost Curve in the Non Traded Sector
£/tCO2e
13,950
4,600
Domestic
Non-domestic
Transport
Industry
Agriculture
900 Waste

300
250
200
150
100
50
0
-50 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70
-100 MtCO2e
-150
-200
-250

-3,450

Source: Committee on Climate Change (2008)

Further analysis undertaken by Government UÊ Research commissioned by the


and other bodies indicates that potential Department of Energy and Climate Change
in some areas may be lower than the CCC into ‘hidden costs’34 has indicated that
analysis suggested or come at a higher cost. there are real and substantial time and
For example: financial costs associated with domestic
energy efficiency and carbon saving
UÊ The CCC MACC analysis assumed that
measures that existing cost-effectiveness
the capital costs of solid wall insulation
analysis neglects. These hidden costs
were £4000 for an average 3 bed property.
mean that the CCC analysis overstates
However, there remains considerable
the cost-effectiveness of many household
uncertainty over the future costs of solid
measures (including, again, solid wall
wall insulation. A solid wall supply chain
insulation). This in part explains why
review carried out by the Energy Saving
apparently profitable energy efficiency
Trust in April 2009 suggested that the costs
measures are not being taken up by
of installing solid wall insulation for a single
households and reduces the cost-effective
property would on average be more than
potential from the domestic sector.
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
33 It should be noted that there is considerable uncertainty over learning rates for solid wall insulation which could reduce
both the cost of installation, and the hidden costs associated with the measure (for instance by reducing the thickness
of insulation required or by installing alongside other measures).
34 “The hidden costs and benefits of domestic energy efficiency and carbon saving measures” ECOFYS, May 2009

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42 The UK Low Carbon Transition Plan
Analytical Annex

UÊ In agriculture, some mitigation measures 95gCO2/km by 2020. The CCC therefore


identified by the CCC were excluded from modelled the technology bundles that could
elements of Government’s analysis of deliver a 95g average for new cars sold in
feasible technical potential on the basis the UK. However, the regulation does not
that there was insufficient evidence to be prescribe the efficiency of cars that are
certain of their effectiveness in the UK bought in any one member state, as the
(e.g. nitrification inhibitors), or that they target is for sales across the EU as a whole.
were currently not permitted for use in the New car fuel efficiency in the UK has
EU (ionophores and bST hormones). Even historically tracked above the EU average
those mitigation measures which have been by around 6gCO2/km, and our central
identified as offering realistic potential are forecast is for the UK to continue to track
subject to significant scientific uncertainty. above the EU average. Measures could be
However, the evidence base and legislative implemented to encourage the take-up of
situation for some mitigation measures the lowest emitting cars in the UK, but as
may change over time and demand or other the target is set as an average across the
factors may change the cost-effectiveness EU, this would not affect the level of global
of other measures. The Government’s emissions, but would displace emissions
policy strategy in agriculture will not be reductions elsewhere in the EU.
based exclusively on one piece of analysis
UÊ These views are reflected in the package
and will consider ways that other promising
of policies that has been developed.
mitigation measures can be developed
through Government intervention. The CCC MACC shows potential abatement
by technical measure (that is, it represents
UÊ In waste, the measures outlined in this
assessments of the abatement that could be
Transition Plan concentrate on reducing
brought about by the actions and behaviour
landfill methane emissions. The CCC
of individuals and firms, such as installing
also included abatement potential arising
insulation in a home). There are complications
from renewable energy, which overlaps
when moving from these technical measures
with other policies in the Transition Plan,
to a package of policies.
and hence would be double-counted if
apportioned to waste. In addition, the CCC UÊ Government intervention rarely targets
assigned lifetime methane savings to the individual technologies;
year that the waste is diverted from landfill
UÊ Overlaps between policies create
(the emissions savings actually occur over
difficulties in accounting for their overall
100+ years), whereas for the purposes of
impact; and
carbon budgets it is necessary to assign
methane savings to the years in which UÊ The UK GHG inventory must be
they are actually emitted. sophisticated enough to pick up the impact
of the methods that policies incentivise.
UÊ In transport, the potential emissions
savings in the UK may be dependent
Flexible policies
on international agreements on the
policies that would deliver the technical MAC curves provide a guide to the potential
abatement potential identified by the CCC. and future costs of technical measures.
For example, the EU new car efficiency However, since these are subject to
regulation agreed in December 2008 set a considerable uncertainty, policies should not
target for new cars sold across the EU of be overly prescriptive as to the measures
that should be taken up.

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Flexible market based policies can reveal policy with the additional policy attributed
the lowest cost measures by harnessing the change in emissions since the previous
individual investment decisions. Price run of the model. This ensures that the
instruments improve the economics of low total savings attributed to individual policies
carbon technologies relative to more polluting sum to the total modelled savings from the
substitutes. Those investing will respond package of all the policies acting together.
to the carbon price signal, investing in the
In the non-transport sector there are three
technologies that are most cost-effective at
overarching policies which provide a degree of
the time they are making the decision.
aggregate certainty over the level of emissions
An example of a price-based instrument is reductions that will occur within their scope.
the Carbon Reduction Commitment which These policies are the Carbon Reduction
will place a cap on the emissions of Commitment (CRC), the Climate Change
non-energy intensive businesses and the Agreements and obligations on domestic
public sector. It does not specify which energy suppliers. Each of these policies and
abatement technologies must be used the policies they interact with are treated as
to meet the cap which should result in packages – the ‘non-energy intensive business
abatement being achieved at least cost. and public sector package’, the ‘energy
intensive business package’ and the ‘domestic
Dealing with overlapping policies energy efficiency package’ respectively.
Because climate change policies rarely target Some non-transport abatement options
specific abatement measures, several climate occur outside of the three packages – notably
change policies may be encouraging the take non-CO2 GHG abatement, abatement from
up of the same underlying technical carbon non-energy intensive organisations too small
abatement options. For example, a retail firm to be included in the CRC and lifestyle changes
which installs more energy efficient fridges in the domestic sector. For policies targeting
may do so in response to none, some or all of these reductions, particular vigilance is
the following policies: the EU ETS increasing required to account for policy interactions
electricity prices, participation in the Carbon when assessing savings.
Reduction Commitment, the Climate Change
Levy, product regulations, Carbon Trust The costs and benefits of renewable
advice, an interest free loan or feedback from measures are attributed to the Renewable
their smart-meter, etc. If in performing policy Energy Strategy policies owing to the
appraisal all of these policies are attributed substantial incentives that these policies
the savings associated with the more efficient offer. For instance, owing to their eligibility for
fridges, then the sum of savings from all the renewable incentives, the costs and benefits
policies will be overstated. of on-site micro-generation installed as part
of zero carbon homes building regulations are
To minimise the risk of over-stating the not accounted for in the net present value of
savings from policies a package approach Zero Carbon Homes but in the net present
has been adopted when accounting for the value of the renewables policies.
impact of policies on emissions.
Each policy appraisal has been peer reviewed
In the transport sector, policies are modelled through the Inter-Departmental Analyst
sequentially through the National Transport Group35 to ensure consistency of the policy
Model. Transport emissions are modelled appraisal and to ensure that the policy
after the introduction of each additional overlaps have been fully considered.
35 See www.decc.gov.uk

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44 The UK Low Carbon Transition Plan
Analytical Annex

Sensitivity of the inventory be accounted for in a verifiable way. This will


The UK GHG inventory used to record need substantial investment and a proposal
emissions from agriculture is based on a very has been drawn up to take this forward.
simple methodology, using absolute numbers
of livestock, area of land under arable crops Overall Impact of Policies
and amount of fertiliser used. This means on Emissions From 2008
that, in its current form, it would be unable to
account for many of the emissions reductions to 2020
which would occur as a result of the measures Bringing the analysis of policies together
currently envisaged for the agriculture sector forms a central estimate of emission
within this Transition Plan. In addition, many savings from the EU ETS and sectors not
of these measures are in any case subject to covered by the EU ETS. Table 4 lists the
significant scientific uncertainty in terms of policies with their carbon savings. The overall
their abatement potential. carbon savings differ from the sum of the
Measuring the impact and effectiveness individually appraised policy savings owing
of these measures would require moving to macro-economic interactions that arise
from the current ‘Tier 1/2’ system within the in the Department of Energy and Climate
inventory to a Tier 2 or 3 system, facilitating Change energy model. With the policies
a considerably higher temporal and spatial set out in this Transition Plan, we are on
resolution and a focus on land management track to meet all three carbon budgets on
activities at a much more detailed level. This the central projections and save in total
would allow individual mitigation measures to around 700 million tonnes of CO2e.

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Table 3
Impacts on emissions in policies in this Transition Plan (MtCO2e)
Budget 1 Budget 2 Budget 3
MtCO2e
(2008-12) (2013-17) (2018-22)
Budget level 3018 2782 2544
Central projections
2987 2961 2964
Without Transition Plan policies
Savings from policies
Package of policies appraised and entered into 12 232 455
the model
Macro-economic interaction
Within the Department of Energy and Climate 1 11 3
Change model36
Total Savings 13 243 459
Central projections with Transition Plan policies 2974 2718 2505
Carbon budget ‘Gap’37 -44 -64 -39
Range for carbon budget ‘Gap’ -145 to 62 -184 to 65 -170 to 126

36 The savings from the package of policies, when modelled in the DECC energy model, do not exactly equal the
appraised savings from the policies owing to interactions within the model. The interaction effect is small relative to the
volume of appraised savings.
37 Negative value implies emissions are lower than the budget. Figures may not sum due to rounding.

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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 Budget 2 Budget 3
MtCO2e
(2008-12) (2013-17) (2018-22)
Policies (firm and funded) EU ETS
Reduction in UK share of EU ETS cap38 0 155 248
Transport
New Car CO2 standards to 2015 0 5.1 20.1
Additional Renewable Transport fuels, 10% by
0 9.1 30.1
energy by 2020
Low Carbon Buses 0 0.2 0.9
SAFED training for bus drivers 0.4 1.0 1.0
Households
Domestic energy efficiency package39 9.3 30.4 45.8
Product Policy (additional to the domestic
-0.8 -2.4 -4.5
energy efficiency package)40
Zero Carbon Homes 0.1 0.6 2.2
Smart-metering and better billing
0.9 2.1 1.8
(lifestyle changes)
Community Energy Saving Programme 0.2 0.1 0.1
Business and Public Sector
Non-energy intensive business and public
0.3 2.4 4.6
sector package41
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
38 Reductions due to policies introduced prior to the Energy White Paper 2007 are not shown, and the EU ETS cap for
2008-2012 was set before then which means that savings for that period are not shown here. Savings in budget 2 and 3 are
relative to the UK share of the cap in 2008-12.
39 Includes: the full impact of CERT (a minority of this ambition was announced prior to the 2007 Energy White Paper, where
it was extended. It was subsequently further extended in September 2008); Future supplier obligation; Energy performance
Certificates; better billing and smart-metering; product policy, and Heat & Energy Saving Strategy Supporting Measures.
In a separate exercise estimated savings from residential smart meters have been revised and, whilst overall CO2 savings
are broadly similar, they are more weighted to the non-traded sector and to later years than is suggested here.
See: http://www.decc.gov.uk/en/content/cms/consultations/smart_metering/smart_metering.aspx
40 Product Policy savings are negative because of the Heat Replacement Effect: more energy efficient products create less
ambient heat which needs replacing via alternative fuel sources. Overall, products policy provides a significant net benefit,
due to savings in emissions in the traded sector and their associated benefits. Non-traded sector emissions increases
presented above for products policy are not the most up-to-date, and should be treated as higher-bound/cautious
estimates, which we plan to improve on in the future as further evidence becomes available.
41 Includes the Carbon Reduction Commitment, Energy Performance of Buildings Directive, Business Smart-metering,
Product Policy, Public sector targets and loans, Carbon Trust advice and loans.

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Reducing UK Emissions of Greenhouse Gases from 2008-2022

EPBD for SMEs 0 0.3 0.7


Renewables
Renewable heat (RHI plus supporting measures) 0.7 11.1 42.6
Waste
Increased Landfill Tax (Budget 2009) 0 0.8 1.7
SUBTOTAL (firm and funded policies)

Excluding EU Emissions Trading System 10.5 60.7 147.6


Including EU Emissions Trading System 10.5 215.4 395.8

Further intended abatement


Transport
EU New Car CO2 regulation: 95g/km by 2020 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
0 0 0.8
single track rail line
Business and Public Sector
Energy intensive business package42 0 8.0 8.0
Waste
Diverting food waste away from landfill
0 0 3.3
Diverting wood away from landfill
Agriculture
Crop management and fertiliser use
Enteric fermentation and methane 0 0 15.0
Manure management
SUBTOTAL (further intended abatement)
1.3 17.0 59.6
TOTAL43

Total savings (appraised and entered into the model) 11.7 232.4 455.4

42 Includes the extension to Climate Change Agreements, Energy Performance of Buildings Directive, Business Smart-
metering, Products Policy, Carbon Trust advice and loans
43 Figures may not sum to this total due to rounding.

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48 The UK Low Carbon Transition Plan
Analytical Annex

We are therefore on track to meet our particularly. Further work will be carried
carbon budgets on central expectations. out on policy proposals to target some of
However, the uncertainty in projecting future the untapped cost-effective potential to
emissions is such that there is a significant provide a greater contingency and to further
chance that domestic emissions will be prepare the UK for tighter international
higher than central projections. There are targets. Further work is being carried out on
a number of elements to Government’s policy proposals for SMEs, and further non-
strategy for dealing with this uncertainty: CO2 GHG abatement from agriculture.
UÊ The package approach set out above UÊ There may be further abatement
should ensure we can have greater available from broader behavioural
confidence in the emissions savings change. Government will seek to unlock
attributed to policies than has been the this through a variety of means. Reductions
case previously. This will help deal with in emissions can be achieved if people and
policy uncertainty. business switch to less energy intensive
activities or reduce their waste of energy.
UÊ For the first two budget periods in
However the evidence base is too thin to
particular, the net UK carbon account
quantify the savings that will be delivered.
is projected to be lower than required
Government will work to develop this
to achieve our carbon budgets by
evidence base – for example through the
147MtCO2e. Any contingency reserve
pilot schemes in the transport sector and
built up helps to deal with unexpected
the assessment of Real Time Displays.
events, such as significantly lower fossil
fuel prices than assumed in our central UÊ Taxes and other economic instruments
price scenario.44 (If fossil fuel prices were can play a significant role in delivering
lower than expected under our central carbon budgets. The Government will
projections – $60 as opposed to $80 per continue to examine options for further
barrel in 2020 – this would only increase carbon savings from such measures,
total emissions by 64MtCO2e over the but must take into account primary
three budget periods. This is less than our considerations such as broader fiscal,
contingency reserve so we would still be economic and social objectives. The
on track to meet the carbon budgets.) Government has committed to aiming
to reform the tax system to increase
UÊ Over-achievement can be banked.
incentives to reduce environmental
The Climate Change Act permits unlimited
damage, shifting the burden of tax
banking of over-achievement from one
from “goods” to “bads”. Of course,
budget period to another. This maintains
environmental taxation must be well-
an incentive for the UK to make emissions
designed and must continue to meet
reductions as and when it is cost-effective
the tests of good taxation – including
to do so, even when on track to meet the
economic efficiency, acceptable
current budget. Banked allowances would
distributional impacts, and implications
increase the contingency to cope with
for international competitiveness.45
unanticipated increases in emissions.
UÊ Credits. Government has made it clear
UÊ We are exploring further policies
that it intends to achieve the current
in a variety of areas; non-CO2 GHG
carbon budgets without purchasing credits,
emissions, forestry and SME emissions
44 http://www.berr.gov.uk/files/file51365.pdf
45 http://www.hm-treasury.gov.uk/prebud_pbr02_adtaxenvir.htm

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Chapter 3: 49
11
Reducing UK Emissions of Greenhouse Gases from 2008-2022

outside of the EU Emissions Trading Pull and push support


System – consistent with CCC advice Interventions to increase low carbon
and to prepare for the more stringent innovation can be broadly categorised as
budgets that would follow a substantive either increasing the demand side ‘pull’ for low
international deal. The option remains carbon technologies or providing a technology
of using credits in the non-traded sector ‘push’ by increasing early stage research into
in the event that expected domestic low carbon technologies. A balance is required,
emissions reductions are not fully realised, with the optimal mix for particular technologies
consistent with the advice of the CCC depending on where a potential technology
that it would be prudent to reserve such lies on the innovation curve.
an ‘insurance option’. In the case of the
first budget period, this would require an The Department of Energy and Climate
amendment to the zero limit on credit use Change commissioned a report from Frontier
outside the EU ETS set in legislation. Economics46 on low carbon innovation.
This report shows that given the currently
UÊ The Climate Change Act allows a limited available innovation support, an additional
level of borrowing from future budget pound of support would, depending on how
periods (1% of the next budget) to reconcile it is targeted, deliver very different levels of
an overshoot of a budget. Borrowing would additional innovation effort. The balance of
entail greater action in the next budget support required will depend on the maturity
period, both to get back on track and to of the technology among other factors.
meet the now more stringent budget.
While the level of R&D spending is generally
relatively low compared with demonstration
Policies to support and deployment, the risks are far greater
Innovation and bring down that the technology will not come to market.
long term costs Therefore, although the gains are potentially
higher, these should be balanced against
This Transition Plan sets out the policies higher risks. Once adequate financial
Government has put in place to meet the incentives are in place, deployment will take
first three carbon budgets. But it is also key place mainly through the private sector.
that we develop policies to ensure we are on The position is different for R&D, however
track to meet our 2050 target cost-effectively, – there are more barriers for private R&D
which means creating an appropriate investment (and more potential gains to the
framework for investment and innovation, economy as a whole rather than to individual
addressing market failures where they exist, R&D investors) so the case for Government
such as positive externalities, information support is potentially stronger.
failures and barriers to entry. Government
needs to give support at the appropriate time This does not imply there is no role for
and in the appropriate way if it is to bolster demand side deployment incentives – it
low carbon industries’ innovation. This will highlights the importance of sufficient
depend on the sector, its market structure demand being a pre-requisite for most
and the profile of organisations operating innovation – but suggests that, where there
within it. Policies in this Transition Plan is already a broad range of incentives in place
support innovation in a variety of sectors. for many low carbon technologies, additional
R&D support can have a bigger impact on
46 Alternative Policies for promoting Low Carbon Innovation, Frontier Economics, July 2009, commissioned by DECC and
published alongside this report.

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50 The UK Low Carbon Transition Plan
Analytical Annex

encouraging more innovation and reducing where Government can be most effective, in
the costs of a technology, compared to line with the new industrial activism.49 Such an
additional later stage incentives. approach can accelerate the development of
technologies which show the largest potential
The Frontier report also highlights the
for carbon abatement and net economic
importance of adopting a variety of innovation
benefit to the UK. The Government has broadly
incentives. The way an innovation incentive
welcomed the findings of the report and will
policy is implemented will have its own risk and
continue to support a portfolio of key emerging
reward profile for a potential innovator. Without
technologies, but where market failures and
a mix of policies, (for instance, obligations,
barriers differ across sectors it will strengthen
grants, match funding, and technology
future emerging low carbon technology policy
prizes) some organisations are more likely to
by tailoring support for technologies.
take advantage of the innovation incentives
compared to others, with the innovative
Support for renewables
potential of some organisations left untapped.
The Government has set out a
Successful innovation will bring down commitment to deliver 15% of final
the costs of meeting the carbon budgets. energy consumption from renewables
Macroeconomic modelling by HMRC, by 2020.50 In the lead scenario meeting
detailed later in this annex, has found that this entails over 30% of electricity being
a higher rate of cost reduction in wind generated by renewables in 2020. Such a
generation could increase GDP in 2020 commitment constrains the pathways to the
by around 0.05%, or around £1bn. The 2050 target that the UK can take. However,
importance of innovation in low-carbon success at bringing forward innovation in
technologies has been underlined by a renewable technologies reduces the costs
recent report from the UK Energy Research of abatement targets in the UK and globally
Centre.47 Accelerated development of in the future. Chart 13 demonstrates the
low-carbon technologies could reduce the impact of the Transition Plan on bringing on
cost of meeting the 2050 target by £36bn renewables.
over 2010-2050. The potential savings are
slightly lower, however, since neither of The financial incentives included in the
these estimates include increased research, Renewable Energy Strategy (RES) to
development and demonstration (RD&D) incentivise take up of renewable energy
costs, which would be necessary to achieve technologies will stimulate innovation
accelerated technology development. benefits through both faster technology
deployment and through streamlining supply
Further analysis of the UK’s support for low chains. Other policies to address non-market
carbon innovation can be found in a recently barriers – for example in the biomass supply
published report from the Carbon Trust.48 market – will also encourage private sector
This suggested a need to focus on a range of investment through addressing market
‘technology families’ and prioritising to ensure failures and barriers to market development.
public resources are placed where they can Innovation and deployment of renewable
offer the greatest additionality. This is not technologies is inherently risky and the
picking individual technologies, but intervening benefits from innovation are unpredictable.
47 UKERC, 2009, Decarbonising the UK Energy System: Accelerated Development of Low-Carbon Energy Supply Technologies
48 Carbon Trust (2009): ‘Focus for success: A new approach to commercialising low carbon technologies’
49 BERR (2009): New Industry, New Jobs, Crown copyright http://www.berr.gov.uk/files/file51023.pdf
50 Renewable Energy Directive: http://eur-lex.europa.eu/JOHtml.do?uri=OJ:L:2009:140:SOM:EN:HTML

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Chapter 3: 51
11
Reducing UK Emissions of Greenhouse Gases from 2009-2022

Chart 13
Increase in renewables brought on in 2020 by this package, compared to
current policies and 2005 levels
300

250

200
TWh

150

100

50

0
2008 2020 2020
(current policies) (new policies)
Electricity Transport Heat

Source: Department of Energy and Climate Change (2009)

The measures included in RES aim to reduce a very low deployment base in the UK
these risks by encouraging a portfolio of but where technologies are relatively well
technologies. The RES market instruments established world-wide, cost reductions could
will provide learning by doing benefits across be in the order of 10-23% (see Chapter 7 for
a range of sectors and technologies – the more detail) – the upper range reflecting heat
RO for large scale renewable electricity, RHI pumps rates where significant economies
across renewable heat and FITs for small of scale could be expected with the rapid
scale electricity technologies. expansion of this market. These results show
there are significant gains through continuous
Learning curve benefits are expected to
improvement of existing products through
accrue as increased technology deployment
design and performance enhancements.
is linked with cost reductions, suggesting
Associated benefits on supply chains and
that further deployment will reduce the
householder and community engagement
costs of these technologies. Technologies
will also help to overcome non-financial
starting from different points tend to achieve
barriers, bringing down deployment costs
different learning rates. For example,
in the longer term and help to meet
modelling undertaken for the RES in the large
carbon targets.
scale electricity sector suggest that capex
costs of wind technologies could be 10-15% Support for early stage innovation in
lower in 2020 than in 2010, whilst wave and renewables can also deliver significant
tidal technologies could achieve 30-40% cost benefits. This is why the Government
reductions. On the smaller scale, photovoltaic is today announcing a package of up to
(PV) technology and micro-wind might achieve £120m that has been earmarked to support
cost reductions in the order of 50-60% in 10 offshore wind, along with up to £30m of
years, whilst more established technologies support for wave and tidal and up to £10m
such as small scale hydro and waste, are for electric vehicles. The measures in these
expected to be closer to parity. packages will provide testing infrastructure,
grant support for RD&D, work at removing
In the heat sector, which is starting from

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52 The UK Low Carbon Transition Plan
Analytical Annex

barriers to deployment and, in the case of commercial deployment in the 2020s.


electric vehicle deployment, of charging
Support for demonstration will enable
infrastructure. Together, these measures
learning and technological development,
form complementary packages that will make
reduce costs and risks and help to establish
significant contributions towards innovation
CCS as a commercially proven low carbon
in these sectors, hence bringing down the
technology. The Government launched a first
costs of the 2020 renewables target and
CCS demonstration competition in 2007,
meeting the carbon budgets.
and in 2009 announced plans to provide
Taking the offshore wind package as an financial support for a total of up to four
example, this will facilitate and fund RD&D, commercial-scale demonstrations in the UK,
helping to increase learning rates and hence on a range of technologies.52 This funding sits
achieve potentially very large cost savings. To as part of a packing of financial and regulatory
achieve a higher learning rate and hence make measures that are intended to bring forward
a big difference to the costs of meeting the CCS as an operational technology earlier
renewables target, the Carbon Trust (2008)51 than the market would otherwise. As the
estimate that £1.2 to 1.8bn needs to be spent financial mechanism will be funded via a levy
on offshore wind RD&D in the UK to 2020. on electricity suppliers, support for these
They also estimate deploying 29GW could cost demonstration projects could increase prices
a total of £75bn over the next two decades, but for electricity consumers by around 2% in
that increased innovation (increasing learning 2020. However, investment today will reduce
rates from 9% to 15%for instance could the long term costs of the transition to a
reduce the cost of deployment by £14bn. low carbon energy mix, support security of
supply by enabling coal to be part of a diverse
Support for carbon capture low carbon mix, and offer industrial benefits
and storage through first mover advantage.
The timely and effective development
of CCS technologies requires a strategic Support for innovation in the grid
approach across the whole innovation chain, For regulated monopoly energy infrastructure,
from research and development through to the incentives in the regulatory framework
commercial-scale demonstration. CCS has may need to be adjusted to provide greater
the potential to capture 90% of emissions incentives on companies to innovate and trial
from large combustion power stations new technologies. Regulatory incentives
thereby contributing to Greenhouse Gas have been put in place for Distribution
reductions globally. However, CCS has not Operators to trial new ‘smarter’
yet been fully demonstrated as an end to end technologies on their networks. Ofgem are
process on a power station at commercial proposing to increase the amount of funding
scale. At this stage of development, available to around £500 million to 2015.
investment in CCS is very costly and risky. Direct funding for innovation is also provided
Current private investor activity in CCS in the through the Energy Technologies Institute
UK and elsewhere is focussed on R&D and which aims to invest up to £1bn over the next
pilot plants at around one tenth scale, which 10 years in low carbon energy technologies,
clearly help to advance CCS, but not at the including networks.
pace needed to prove the technology for
51 Carbon Trust, 2008, Offshore wind: big challenge, big opportunity. 29GW is the Carbon Trust estimate of offshore wind
capacity in 2020, which is on the high side of estimates and may be realised after 2020.
52 A framework for the development of clean coal: consultation document. DECC. June 2009. Available at
http://www.decc.gov.uk/en/content/cms/consultations/clean_coal/clean_coal.aspx

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53
11

Chapter 4:
Aggregate costs
of the package
of policies

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54 The UK Low Carbon Transition Plan
Analytical Annex

The package of policies set out in this The present values are calculated over
Transition Plan will impose costs on the the lifetime of the measures that the
UK but also deliver benefits, beyond the policies implement.
delivery of our climate change goals. The
The package is projected to achieve sufficient
costs include investments in low carbon
reductions to meet the first three carbon
technologies which are more expensive
budgets, on central estimates, and the
relative to the more polluting alternatives,
measures implemented by the policies
and the administration and compliance costs
will deliver reductions on into later budget
of the policies. The benefits include reduced
periods. The first three budgets cover
energy consumption, ancillary benefits (such
15 years of the 43 year period of 2008
as improved air quality) and, where the
to 2050. The total cost of the package is
policy reduces UK emissions in the traded
estimated at £25 to £29 billion. Different
sector, a reduced requirement to import EU
policies will incentivise measures with
allowances to the UK.
different lifetimes, and so the aggregate
costs of the package cannot be simply
Present value of the costs of the
converted into a percentage of GDP for a
package of policies
particular period (as is done with macro-
Table 5 lists the present value of the costs economic modelling). However, the costs can
of the policies excluding a valuation of be judged to be consistent with the overall
the avoided damages from reducing GHG costs of delivering the long term target that
emissions.53 In the traded sector the resource were estimated in the Climate Change Act
costs to the UK of complying with the EU Impact Assessment of £324 to £404 billion.
ETS cap are valued, but the avoided damages
associated with reduced EU wide emissions The effort from the UK provides substantial
in the traded sector are not. The overall costs net benefits once the avoided damage costs
of the package presented here therefore from GHG emissions are considered.
represent the UK’s share of the global burden The over-arching Impact Assessment
of stabilising emissions within acceptable published alongside the setting of the first
levels, but do not include the benefits of three carbon budgets in April 2009 provided
achieving that global stabilisation level. a best estimate of the net benefit of the UK
The resource costs of low carbon action on climate change over the first three
technologies are relative to the costs of carbon budgets of £221.5 billion.54
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’).

53 The costs and benefits of technologies implemented as a result of the Transition Plan package of climate change
policies are relative to the counterfactual baseline.
54 The overarching IA can be found at the following web site:
http://decc.gov.uk/en/content/cms/what_we_do/lc_uk/carbon_budgets/carbon_budgets.aspx

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Chapter 4: 55
11
Aggregate costs of the package of policies

Table 5
Overall costs of the package
Net Present Cost of Policy (excluding
Policy 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 5300 to 9200
Carbon Capture Readiness -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 -450
of 130g/km
New van average efficiency standards of 180
160g/km
Additional impact of further new car efficiency 3600
improvements to 95g/km
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 –56
track rail line

55 Values have been rounded to the nearest £10million


56 An assessment of the NPV will be worked up as the policy is developed further.

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56 The UK Low Carbon Transition Plan
Analytical Annex

UK Trading schemes and Energy Efficiency Policy


Carbon Reduction Commitment -2150
Energy Intensive business package -ve
CERT -12700
New Supplier Obligation (successor to CERT) -19200
Community Energy Savings Programme -100
Zero Carbon Homes57 450058
Smart Metering (households) -2180 to -3250
Smart Metering (SMEs) -1330
Energy Performance of Buildings Directive 730
Product policy -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 60
from landfill
Total £25bn to £29bn

The present value of costs for policies, Net present value of the
shown in Table 6, does not allow the
relative merit of policies to be judged. package of policies
The policies may achieve differing levels The full net present value of the policies
of GHG abatement. Judgement of the to deliver emissions reductions in the
relative merits of the policies requires their non-traded sector, shown in Table 6, includes
contribution to meeting emissions reduction a valuation of the GHG reductions that the
targets to be taken into account. policies deliver. GHG reductions in the
57 The figures quoted for zero carbon homes cover all homes built to 2025, including homes built to forthcoming changes
to Building Regulations in 2010 and 2013, as well as the zero carbon homes built from 2016. Due to the potential
for duplication of costs between the zero carbon homes policy and the costs of feed-in tariffs and renewable heat
incentives, the costs and benefits of all onsite and offsite renewable energy generated by zero carbon homes have been
removed. Since the definition of zero carbon homes is still being finalised post-consultation, the figures presented in
this document refer to the 70% carbon compliance onsite option as this is an illustrative ‘middling’ option. Note that the
44%, 70% and 100% options should have broadly similar onsite energy efficiency elements anyway owing to the same
indicative Advanced Practice Energy Efficiency requirements they all face.
58 Only related to energy efficiency aspects of ZCH and building regulations for building built up to 2025 – i.e. excluding
renewables costs
59 Resource costs are estimated to be negative, but there is uncertainty over the level of policy costs to deliver abatement.
60 Waste Net Present Cost figures in Table 5 are based on resource costs alone and are based on an illustrative 5-year
period for the policy therefore they are not comparable with policy Net Present Costs from other sectors. They are
included here for illustrative purposes.

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Chapter 4: 57
11
Aggregate costs of the package of policies

non-traded sector have been valued using price of carbon will result in a positive net
the non-traded price of carbon. This is part of present value. Those policies with a positive
the Government’s revised carbon valuation NPV will reduce emissions in the non traded
methodology published in July 2009.61 The sector with a lower cost per tonne of carbon
non-traded price of carbon is an estimate dioxide than the non-traded price of carbon.62
of the marginal cost of delivering emissions The schedule of the non-traded price of
reductions in the non-traded sector. If a policy carbon over the carbon budget period is
is part of a least cost delivery of the target, shown in the chart below.
valuing the carbon impact at the non-traded

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 technology innovation and the innovation
positive net present value. This is particularly benefits have not been valued in the
the case for the renewable heat, bio-fuel appraisals for the policies. The importance of
and zero carbon homes policies. In part this innovation in lowering the costs of mitigation
is because they are justified partly on their targets has been highlighted above.
contribution to supporting global low carbon

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 cost-
effectiveness benchmark that accounts for the profile of the carbon savings that the policy delivers and the non-traded
price of carbon in the respective years.

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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
Cost-effectiveness
Policy (£million 2009)
(£/tCO2 Non-Traded)
(+ve = benefit)63
Power Sector and Renewable Heat
Renewable Heat -6900 90
Transport
Extension of Bio-fuels to 10% (by energy) -1700 80
EU new car average fuel efficiency
2400 -9
standards of 130g/km
New van average efficiency standards of
490 11
160g/km
Additional impact of further new car
-1100 55
efficiency improvements to 95g/km
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
–64 -40
single track rail line
UK Trading schemes and Energy Efficiency Policy
Carbon Reduction Commitment 3400 -38
Energy Intensive Business Package Not available Not available65
CERT 16300 -155
New Supplier Obligation (successor to
30000 -89
CERT)
Community Energy Savings Programme 150 -80

63 NPVs have been rounded to the nearest £10million.


64 An assessment of the NPV will be worked up as the policy is developed further.
65 Extensions to the CCAs will be negotiated in Spring 2010

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Chapter 4: 59
11
Aggregate costs of the package of policies

Zero Carbon Homes66 -1300 128


Smart Metering (households) 3050 to 4160 -109
Smart Metering (SMEs) 2150 -74
Energy Performance of Buildings
-340 75
Directive
One-off interest free loans to SMEs 4 38
One-off interest free public sector loans 50 -392
Non-CO2 GHG and Land Use Change
Crop management/fertiliser use67 – -153 to +46
Livestock68 – -3603 to -21
Manure management – -6 to +25
Food to AD 40 19
69
Waste Proposals Diverting wood
-20 94
away from landfill

66 New homes to be zero carbon from 2016. Figures presented here also include Building Regulations changes in 2010
and 2013 tightening energy efficiency requirements and only reflect onsite energy efficiency measures, i.e. any costs
and benefits of renewables have been removed to avoid duplication with FITs and RHI.
67 These figures, taken from a report for Defra by ADAS in May 2009, represent one estimate of the likely range of
average private on farm resource cost (savings), and are still subject to considerable uncertainty and debate. However,
the measures and costs are assessed on a stand-alone basis; potential positive or negative interactions of measures
implemented together are not reflected.
68 The lower bound cost (saving) in the livestock category relates to improved genetic resources in beef animals, the full
realisation of which would most likely lie beyond the end of the third period; and which is not directly under the control
of individual farmers, depending crucially on the wider agricultural breeding and research support sectors.
69 Waste NPV figures in table 6 are based on resource costs alone and are based on an illustrative 5 year period for
the policy therefore they are not comparable with policy NPVs from other sectors. They are included here for
illustrative purposes.

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60 UK Low Carbon Transition Plan
Analytical Annex

Policy Marginal Abatement carbon. A further 17 MtCO2e of abatement is


being achieved through renewable heat and
Cost Curve bio-fuel policy at a lifetime cost-effectiveness
Chart 15 shows a policy MAC curve for of £80-£90/tCO2e. Though this is higher
the non-traded sector in 2020. Each box than the cost-effectiveness benchmark for
relates to a particular policy or proposal in policy, these policies carry un-quantified
the Transition Plan package that achieves innovation benefits.
reductions in non-traded sector emissions The cost-effectiveness figure for each of the
in 2020. policies represents the cost-effectiveness of
This MAC curve shows that policies are the whole policy per tonne of abatement in
delivering approximately 23MtCO2e of the non-traded sector. Where the policy has
abatement in the non-traded sector in the an impact in the traded sector, the costs and
year 2020 at below the non-traded price of benefits of this impact are included in the

Chart 15
Policy MAC curve for policies that deliver savings in the non-traded sector
£/tCO2e Public sector loans CESP CRC Zero carbon homes
CERT SO EPBD Smart metering (households)
240
220 SME (loan scheme) Transport RHI Smart metering (SME’s)

200
180
160
140
120
100
80
Central non-traded price of carbon
60
40
20
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41
-20
-40 MtCO2e
-60
-80
-100
-120
-140

-400

Source: Department of Energy and Climate Change (2009)

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61
11

Chapter 5:
Estimated impacts
of the package
of policies and
proposals on energy
prices and bills

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62 The UK Low Carbon Transition Plan
Analytical Annex

The package of climate change measures energy consumers (through increased energy
is likely to have a significant impact on bills). The cost of the measures and limitations
consumers across the UK. The impact from on their implementation mean that not
the policies to households and businesses everyone will receive a measure and benefit
will be through higher prices for goods from reduced energy bills. The package will
and services and changing patterns of therefore lead to transfers of benefits to those
consumption. However, the most significant who take up measures and from those who
impact on consumers will be an increase in do not, but pay for the subsidies.
energy bills.
The impact of these policies will not be
This section presents analysis carried out to uniform across the UK economy. Domestic
estimate the overall impacts of the policies and non-domestic energy consumers will not
set out in this plan on consumers. be subject to exactly the same policies and
The results of two models are included, so will face differing costs and benefits.
one which estimates the average impact on
This analysis is not a complete view of
energy prices and bills for domestic and
the impacts of the package on consumers,
non-domestic energy consumers and a
only a partial one. The analysis only considers
second which estimates the distributional
the impact on average energy prices and bills
impacts on energy bills for the UK domestic
and energy bills across different groups of
sector. The two models are methodologically
households – it doesn’t incorporate any other
different and therefore their results are not
transfers, benefits or costs resulting from a
directly comparable.
policy, which accrue over and beyond energy
Many of the climate change policies analysed bills (for example a direct subsidy paid as
involve transfers from one part of the cash by energy companies to households to
economy to another. For instance, under the take up a measure).
EU Emissions Trading Scheme (ETS), money
Only those policies already in place or
is transferred from consumers who pay
planned to a sufficient degree of detail
higher energy prices to the energy suppliers
(i.e. with quantified estimates of costs
(if there is no auctioning of rights) or to the
and benefits) have been included in the
exchequer (if allowances are auctioned). It
modelling. Table 7 below presents the
must be noted that auction revenue to the
policies analysed in the two models.
exchequer helps support public spending,
including investment in public transport and The baseline is consistent with that used
energy efficiency. throughout the Transition Plan (for more
detail see Chapter 3).
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

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Estimated impacts of the package of policies and proposals on energy prices and bills

Table 7
Policies assessed in the Department of Energy and Climate Change models on
Climate Change Impacts
Policies included in distributional analysis Additional policies included when
and average price and bill analysis 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 business. Results for energy prices faced by


non-domestic consumers are based on the
average retail energy prices consumption of a medium fuel user in industry
and bills (as defined by Eurostat), whereas, for the
non-domestic energy bills, results are shown for
The average energy retail prices and bills
small, medium and large energy consumers.
model produces estimates of the impact
of climate change policies on domestic The estimated baseline price is calculated by
and non-domestic energy consumers.72 summing future estimates of the wholesale
Average, in this case, means that any price price, transmission, distribution and metering
or consumption impact is spread evenly, costs, pre-EWP 2007 policies, such as the
on a per MWh basis, across all consumers original Renewables Obligation and the
affected by the policy, either domestic, Climate Change Levy, and the supplier’s
non-domestic or both. costs and margin for each year. The estimate
of the baseline bill is calculated using the
The results for domestic and non-domestic
baseline price, including VAT and multiplying
consumers are based on average consumption,
by baseline consumption.
as opposed to an ‘average’ household or
70 For the EU ETS the base case is a flatline cap over the three carbon budget periods. Owing to anticipated surplus of
allowances in future phases it is assumed in the baseline the effective price of EUAs is zero and there is therefore
no pass through cost of allowances onto energy bills. To assess the with package impacts the EU allowance price
projections are taken from the Government’s revised carbon valuation methodology, published July 2009.
71 Only the impacts of products policy on energy bills have been modelled. However the cost of any increases in the
prices of the products, resulting from the policy, is not presented here. The improved energy efficiency delivered
through the EU’s minimum standards for the energy efficiency of products saves households and businesses significant
amounts of money over the lifetime of these measures. There are upfront costs to the end user to deliver this overall
lifetime saving, which are estimated to be around £2 billion for manufacturers needing to comply with higher standards
72 Non-domestic energy consumers include industry, transport, public administration, commercial and agriculture.

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64 The UK Low Carbon Transition Plan
Analytical Annex

Energy suppliers are likely to pass through of the policies and changes in energy
a larger proportion of the costs of policies consumption due to the impacts of policies
to the domestic sector and a smaller on consumption and consumers’ responses
proportion to the non-domestic sector, as the to changing prices.
domestic sector is likely to be more inelastic
to price changes than the non-domestic Estimated impact on average
sector. However, in the absence of any firm electricity and gas prices
evidence of differential pass through to Charts 1674 and 1775 illustrate the estimated
domestic and non-domestic sectors, this increase in energy retail prices for domestic
model assumes that these costs are spread and non-domestic consumers due to climate
evenly across total energy consumption change policies, to 2020. These price
in the UK.73 This assumption implies that increases are primarily due to the EU ETS
the non-domestic bill impacts may be and the policies in the RES. The increase in
overestimated and the domestic bill impacts gas and electricity prices accelerates closer
may be underestimated. to 2020, as the ambition of the policies that
The overall impact on household and are rolled out increases. However, a number
business energy bills is a combination of of the policies are already reflected in existing
changes in prices as a result of the costs retail prices so domestic consumers will not
face all these increases over the time frame.

Chart 16
Estimated impact of the package of climate change policies on domestic and
non-domestic retail gas prices
Retail gas price (£/MWh)

60
50
40
30
20
10
0
Domestic Non-domestic Domestic Non-domestic Domestic Non-domestic

Current 2015 2020

Domestic retail gas price without package Non-domestic retail gas price without package
Price impact of CERT Price impact of CESP
Price impact of SO Price impact of Better Billing
Price impact of Smart Metering Price impact of RHI

Source: Department of Energy and Climate Change (2009)

73 We assume that 100% of the costs of the climate change policy borne by the energy suppliers are passed on
to consumers.
74 Due to the timing of the analysis data presented here on the price impacts of the Renewable Energy policies (both
electricity and heat) may not be fully consistent with data on costs presented in earlier sections of this Annex. This is
due to revisions in the carbon price projections that have not been incorporated in analysis underlying the electricity
and gas price impacts.
75 The impact on electricity prices for the Grid Extension for RES is included in the price impacts for the extended RO.

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Estimated impacts of the package of policies and proposals on energy prices and bills

The increase in baseline prices up to 2020 is 35% higher in the non-domestic sector as a
owing to increases in the wholesale price and result of the plan. Retail electricity prices in
transmission, distribution and metering costs. 2020 are estimated to be 34% higher in the
domestic sector and 30% higher in the
Retail gas prices in 2020 are estimated to
non-domestic sector.
be 31% higher in the domestic sector and

Chart 17
Estimated impact of the package of climate change policies on domestic and
non-domestic retail electricity prices
180
Retail energy price (£/MWh)

160
140
120
100
80
60
40
20
0
Domestic Non-domestic Domestic Non-domestic Domestic Non-domestic
Now 2015 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 percentage increase comes from the rise in


domestic electricity and gas bills domestic gas bills.
The total increase in average bills for each We are already feeling the impact of some of
year is proportionally smaller than the price these policies. This impact is largely made up
increases, owing to the impact of energy of the impact of three policies – CERT, products
efficiency policies which reduce energy policy and the EU ETS. Though the impact of
consumption. these policies currently is likely to differ from
The table below shows the impact of the that which has been modelled, the 2010 impact
package on domestic energy bills. In total can be used as a proxy for the current impact
they are expected to increase bills by £125 of the package. The validity of this proxy is
(or 9%) compared to the baseline in 2020. supported by Ofgem’s most recent estimate of
The breakdown of bills into gas and electricity the environmental costs included in consumer
components shows that the biggest bills for CERT and the EU ETS.76 Ofgem
estimate the costs in 2008 were £68.77
76 Ofgem, Factsheet 78, March 2009 “Wholesale and retail energy prices explained”.
77 Ofgem estimate that environmental costs are approximately equal to £60 for electricity bills (including EU ETS,
CERT and RO) and £19 for gas bills (CERT). Removing the RO from the impact on bills gives us a total environmental
component impact of £68. A detailed breakdown of these estimates can be found in Ofgem Factsheet 66, January 2008,
“Updated household energy bills explained”.

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66 The UK Low Carbon Transition Plan
Analytical Annex

The additional impact in 2020 of the policies which is approximately 6% of current energy
in this Transition Plan, relative to today is £76, bills.

Table 8
Estimated impact of the package on average domestic energy bills78

£ (real 2009 prices) Current79 2015 2020

Estimated average bill without any


1,135 1,244 1,348
policies set out in this plan
Estimated average bill with policies 1,184 1,258 1,473
Impact of policies 49 14 125
( % impact) (4%) (1%) (9%)

Table 9
Estimated impact of package on average domestic gas bills80

£(real 2009 prices) Current 2015 2020

Estimated average bill without policies


657 717 771
set out in this plan
Bill impact of CERT 8 -18 -22
Bill impact of CESP 1 0 0
Bill impact of further Supplier Obligations
0 -1 -24
to 2020
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%

78 The average energy bill is only an indication estimated by adding together gas and electricity bills. In reality bills will
vary depending on consumers’ usage, and also depend on consumers tariffs. For example consumers on dual fuel bills
may pay less than consumers with separate gas and electricity bills. Estimates of total bills may not be fully consistent
with adding gas and electricity bills together due to rounding.
79 Throughout this chapter, figures for “current” use a modelling bill in 2010, which is a reasonable approximation to the
current breakdown of a bill as estimated by Ofgem. This is discussed further in the text preceding Table 8.
80 NB Numbers in this and following tables may not add up as a result of rounding.

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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


477 527 577
set out in this plan
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
0 2 -21
to 2020
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 in percentage terms for non-domestic


non-domestic electricity and consumers. Also, as described previously,
gas bills domestic and non-domestic consumers
The percentage increase in bills in the are not subject to exactly the same climate
non-domestic sector is higher than the change policies.
increase in the domestic sector. There are a number of energy efficiency policies
This difference arises in part because the for non-domestic consumers which will have
baseline gas and electricity prices for non- an impact on energy consumption and thus
domestic users are on average lower than reduce energy bills. The results below include
for domestic users. There are some policies, the impacts of products policy, the CRC and
such as EU ETS, which affect both domestic the energy intensive business package. The
and non-domestic consumers and, owing costs associated with these policies are not
to our assumption that costs are spread reflected in energy bills. They will only affect
evenly, this makes the additional cost larger certain eligible non-domestic users, however

81 The impact on electricity bills for the Grid Extension for RES is included in the bill impacts for the extended RO – large scale.

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68 The UK Low Carbon Transition Plan
Analytical Annex

the impact has been modelled as an average consider cost effective policy options to
cost across all non-domestic users. This will unlock further SME energy efficiency.
therefore underestimate the bill savings for
The impact on industrial bills is more complex
eligible non-domestic users and overestimate
to model than domestic bills. This is because
the bill savings for ineligible non-domestic
of the diversity of energy usage and energy
users.
prices faced by consumers in this sector. The
There will be further reductions in energy classifications of non-domestic consumers
consumption owing to smart-metering for are illustrative and are based on the Eurostat
SMEs. It has not been possible to model definitions presented in table 11. The
these so the impacts are not included in midpoints of the ranges were used in the
the presented results. However, estimates model.
suggest that SMEs will save approximately
Overall, the policies are expected to increase
£250million per year by 2020 as a result
bills by almost 21% compared to the baseline
of Smart Meters. There are also plans to
in 2020.

Table 11
Industrial Gas Eurostat size band Annual consumption (MWh)

Lower bound Upper bound

Small 12 278 2,777


Medium 13 2,778 27,777
Large 14 27,778 277,777

Table 12
Industrial Electricity Eurostat size band Annual consumption (MWh)

Lower bound Upper bound

Small IB 20 499
Medium ID 2,000 19,999
Large IE 20,000 69,999
Very Large IF 70,000 150,000

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Estimated impacts of the package of policies and proposals on energy prices and bills

Consumers are already paying for some by 2020 will add a further £200,000 to their
of the climate change polices set out in energy bill; an increase of 15% relative to the
this plan. For an illustrative medium sized bill they would be paying now.
industrial user, implementing our full package

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
60 1,281 7,502 64 1,396 8,124 68 1,499 8,672
policies set
out in this
plan
Estimated
energy
62 1,383 7,909 67 1,506 8,621 83 1,813 10,560
bill with
policies
Estimated
impact of 2 101 406 3 110 497 15 314 1,888
package (%)

% 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

Estimated average gas bill without policies set out


383 408 430
in this plan
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
Estimated gas bill with policies 381 416 532
Estimated impact of policies -1 8 102
% impact (on baseline) 0% 2% 24%

82 The average energy bill is only indicative, estimated by adding together average gas and electricity bills. In reality bills
will vary depending on consumers’ usage and also depending on consumers’ tariffs. Estimates of total bills may not be
fully consistent with adding gas and electricity bills together due to rounding.

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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


899 998 1,069
set out in this plan
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
Estimated electricity bill with policies 1,002 1,090 1,281
Estimated impact of policies 103 102 212
% increase on base 11% 10% 20%

While there is limited evidence on how Overall energy bill impacts


suppliers’ costs would be split between
domestic and non-domestic consumers, – including all climate
it is not expected that very large industrial change policies
consumers of energy would pay energy bills
The package of measures assessed in the
as outlined in the above table. It is believed
Transition Plan do not present a complete
that, owing to their bargaining power,
picture of all the climate change policies
very large industrial consumers will pay close
feeding into energy bills. For example, the
to the wholesale price. This means that their
existing Renewables Obligation (introduced
bills will only be affected by those climate
in 2002) currently features in both domestic
change policies which affect the wholesale
and non-domestic bills and the Climate
price of energy. In 2020, it is estimated that
Change Levy (introduced in 2001) features in
the energy bill for very large industrial energy
current industrial bills.
consumers will be approximately 12% higher
(mainly affecting electricity) compared to the
counterfactual of no policies set out in this
Transition Plan.

83 The impact on electricity bills for the Grid Extension for RES is included in the bill impacts for the extended RO.

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Estimated impacts of the package of policies and proposals on energy prices and bills

By 2020, the impact of all climate change with climate change policies. The increase
policies, both existing and those in the compared to a counterfactual of no climate
Transition Plan, will add, on average, an change policies is 12% for the domestic
additional 8% to today’s household bills and sector and 34% for the non-domestic sector.
17% to today’s non-domestic bills which Further details are provided in the tables
already include some costs associated below.

Table 16
Estimated impact of energy and climate change policies on average domestic
energy bill
% change
% change in bill
Current Difference
2009 prices Bill in 2020 from relative to
bill in impacts
current bill baseline in
2020
Pre TP baseline £1,135 £1,348 % change % change
With package £1,184 £1,473 £76/£1184 £125/£1348

Impact of Package £49 £125 £76 6% 9%


Without all climate
£1,117 £1,314
change policies % change % change
With all climate change £92/£1184 £159/£1314
£1,184 £1,473
policies
Impact of all climate
£67 £159 £92 8% 12%
change policies

Table 17
Estimated impact of energy and climate change policies on average non-
domestic energy bill for medium sized consumers
% change
Difference % change in bill
Current Bill in 2020
2009 prices in impacts from relative to
bill (£000) (£000)
(£000) current bill baseline in
2020
Without package
£1,282 £1,499 % change % change
baseline
£213/£1383 £314/£1499
With package £1,383 £1,813
Impact of Package £101 £314 £213 15% 21%
Without all climate
£1,165 £1,356
change policies % change % change
With all climate change £239/£1383 £457/£1356
£1,383 £1,813
policies
Impact of all climate
£218 £457 £239 17% 34%
change policies

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72 The UK Low Carbon Transition Plan
Analytical Annex

Sensitivity analysis of the assumed owing to high fossil fuel demand


coupled with significant supply constraints.
price and bill impacts In the second, a sustained oil price of $60
The above analysis is uncertain as it is based per barrel is assumed due to low global
on many assumptions, including fossil fuel energy demand.84
prices (gas, coal and oil), which are the With higher fossil fuel prices policies, the
primary drivers of energy prices and bills, cost of the package is reduced. Higher fossil
currently making up over 50% of domestic fuel prices mean that the cost of some
energy prices. Fossil fuel prices affect the climate change policies, such as the RES,
wholesale price and the cost of EU ETS is cheaper, so less is passed through to
allowances, and alter the cost of the climate consumers. With higher fossil fuel prices,
change policies. So far the analysis has the subsidy required to incentivise
assumed a scenario of a sustained oil price of investment in technologies is less.
$80/bbl in 2020. This, combined with the impact of energy
The fossil fuel price profile that the above efficiency measures is estimated to lead to
analysis is based on is estimated assuming a a slight reduction in domestic energy bills
scenario where there is timely investment in in 2020 with a sustained oil price of $150
energy related infrastructure and moderate per barrel. Conversely, with lower fossil fuel
demand for fossil fuels. Two alternative prices, the impact of climate change policies
scenarios are considered. In the first, a is both proportionately and absolutely larger
sustained oil price of $150 per barrel is owing to changes in the costs of policies.

Chart 18
Estimated impact of the package of climate change policies on domestic
energy bills at varying sustained fossil fuel prices
2000
Average estimated domestic

1800
1600
1400
energy bill (£)

1200
1000
800
600
400
200
0
Sustained oil price of Sustained oil price of Sustained oil price of
$150/bbl $80/bbl $60/bbl

Counterfactual Effect of package of climate change policies

Source: Department of Energy and Climate Change (2009)

84 This is based on Department of Energy and Climate Change fossil fuel price assumptions, available at:
http://www.berr.gov.uk/energy/environment/projections/recent/page26391.html

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Estimated impacts of the package of policies and proposals on energy prices and bills

Distributional impacts of To assess the distributional impacts of


climate change polices, a model was
the package developed by Government analysts,
The average impact of these policies on supported by the Centre for Sustainable
prices and bills does not present the full Energy,86 which simulates how the impacts
picture. Many households will not take on household energy bills are likely to be
up measures unless they are subsidised. allocated across the population.
Some low income households will be All energy bill impacts are calculated against
able to access fully subsidised measures a counterfactual energy bill in 2020 that
whilst other households will be able to excludes the package of policies in this
buy measures at subsidised prices. These Transition Plan.
subsidies will be funded by all energy
consumers (through increased energy bills). Distributional impacts of policies
Households who take up insulation and across income deciles
renewable energy measures will generally When assessing distributional impacts, it is
have lower energy bills as a result.85 important to look at the increase in energy
The benefits from lower energy bills bill as a percentage of income, as well as the
will typically be larger than the costs to absolute and percentage increase in the bill.
households which benefit from these policies This gives a better idea of the affordability
while the costs will be spread across all of the impact for households with different
households. incomes. To estimate income in 2020 we
used income growth forecasts87 – the same
It should be noted that this analysis is partial,
income growth rate has been assumed for
in that it only focuses on the impact of
all households.
climate change policies on energy bills.
Climate change policies are likely to have As outlined above, the costs of energy
other costs and benefits that will impact policies are passed on by energy suppliers
energy consumers outside their energy as an increase in price. Households with
bills. For example, the costs of household higher levels of energy consumption will face
appliances will increase to meet higher a larger bill increase from the same increase
energy efficiency standards owing to in price. People on higher incomes generally
products policies implemented by the consume more energy; they typically live in
Government. In addition, this analysis larger houses which require more heating
includes neither costs to households of and have more electrical appliances.
buying new technology, nor the beneficial High-income households are therefore
effect of incentive payments on income. likely to face a larger absolute increase
in their energy bill than low-income
households.

85 It must be noted that only a small proportion of the population will be able to avail of both renewable heat and
insulation measures.
86 Centre for Sustainable Energy, Distributional Impacts Model for Policy Scenario Analysis (DIMPSA), 2009 for DECC
and HMT.
87 Consistent with assumptions for household income growth used in the long-term public finance report
(http://www.hm-treasury.gov.uk/bud_bud08_longterm.htm).

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74 The UK Low Carbon Transition Plan
Analytical Annex

Chart 19
Increase in energy bills in 2020 for different income deciles
16%

14%

12%
Percent of income

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 Comparative impacts across
complete picture of the impact on different households – based on uptake
types of household. Although higher income of measures
households may face a higher absolute The analysis of the distributional impacts of
increase in their bill, this increase is likely the package demonstrates that there is a
to be a much smaller proportion of their differential impact across different sections
income than for lower income households, of the population, depending on income,
as demonstrated in Chart 19. type of household and whether or not they
According to the analysis, the most take up measures, amongst other factors.
significant difference in the impact on energy Even among households which take up at
bills is between those households that take least one measure there is considerable
up insulation and renewable heat measures variation in the impact on energy bills.
and those that do not. Therefore, not only do Households that switch to biomass boilers
households that receive measures face much will face no increase in their heating bill
lower increases in their bills but also the because the costs of climate change policies
difference in the impact between higher and will be passed to electricity, gas and other
lower income households is much smaller. fossil fuels. Also, if biomass is cheaper than
Chart 20 shows the difference in impact as their original fuel, household switching may
a percentage of income for households that save money. Households which take up both
take up measures and those that do not. renewable heat and insulation measures may
even see their energy bills fall.

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Chart 20
Impact of climate change policies for household that take up insulation and
renewable energy measures
3.0%
Increase in energy bill as a percent of

2.5%

2.0%
income

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 Distributional Impacts in the


estimates of how the increase in bill could Business Sector
vary depending on what measures a Energy-intensive industries facing a
household takes up. Based on initial analysis, clear carbon price, for example through
households that take up an insulation the EU Emissions Trading Scheme, are
measure only could face an increase in their potentially at risk from “carbon leakage”,
energy bills of approximately 10%, compared where industries move or relocate
to 18% for those that do not. Households investment to an area without carbon
that take up both renewable heat and constraints. The risk of carbon leakage
insulation measures could see their energy depends on the ability of the sector
bills fall by roughly 18%, compared to a concerned to pass on costs without losing
counterfactual of no climate change policies market share and its degree of exposure to
(see Chart 21). The actual impact on bills international competition. Sectors identified
will depend on the costs of the renewable as being at particular risk of carbon leakage
heat scheme that will be passed through to include steel, aluminium, cement and paper.
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.

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76 The UK Low Carbon Transition Plan
Analytical Annex

Government recognises that those sectors North East and 1.5% in Yorkshire and the
where international competitiveness is Humber region. In contrast these sectors
potentially at risk from higher energy costs account for only 0.2% of employment in
may be concentrated in particular regions. London and 0.6% of employment in the
Analysis at 3-digit sectoral level indicates South East. To the extent that any carbon
that in 2006 there were 16 sectors for which leakage occurs in these sectors, it is likely
expenditure on electricity and gas account for to worsen regional imbalances in the UK
more than 10% of gross value added. economy. However, these regions may also
In total these sectors, which in addition benefit from some of the new business
to those mentioned above include glass, opportunities in emerging sectors such as
chemicals and man-made fibres, account for renewable energy. The transition to a low
around 0.9% of UK employment. The sectors carbon economy must be managed so that
are, however, disproportionately located all parts of the UK are able to strengthen
in certain regions and countries of the UK. their performance, and without reinforcing
Around 1.9% of employment in Wales is existing disparities.
accounted for by these sectors, 1.7% in the

Chart 21
Percentage change in energy bills for household that take up renewable heat
and insulation measures88
20%
Percentage change in energy bill

15%

10%

5%

0%

-5%

-10%

-15%

-20%
No Yes No Yes No Yes

Takes up insulation Takes up renewable heat Takes up renewable heat


measure measure and insulation measure

Source: Department of Energy and Climate Change (2009)

88 To note, the blue and the pink bars in each case represent different sections of the population. For example in the
scenario where we assess the average energy bills of people who take up insulation measures and those who don’t, we
are comparing the average energy bills of the section of the population which has not taken up any insulation measures
compared to the average energy bills of the population which have taken up some form of energy efficiency measure.
It must be noted that either population group in this case can include households which have also taken up a renewable
heat measure.

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Estimated impacts of the package of policies and proposals on energy prices and bills

In the longer term, securing a strong more economically advanced developing


international climate change agreement countries, with the aim of increasing the
incorporating binding emissions reductions scope and coverage of the carbon market in
targets for developed economies and a way that reduces competitive distortions
significant reductions in developing and reduces the global cost of mitigation.
economies will be key to tackling the risk The Government notes that a few industrial
of carbon leakage. The UK supports the sectors are making some progress in
development of a global carbon market as negotiating their own global sectoral
an important way to encourage emissions agreements. Such agreements, if sufficiently
reductions in a cost-effective way. robust and leading to real emission
The Government’s objectives for a global deal reductions, could help to reduce the risk of
include agreeing new sectoral carbon trading carbon leakage.
systems in energy-intensive sectors in the

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11

Chapter 6
High level
summary of
impacts on energy
security

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80 The UK Low Carbon Transition Plan
Analytical Annex

This section looks at the key impacts of the Chapter 3) will lead to increased use of
policies in this Transition Plan on the UK wind, wave and solar power, as well as of
security of supply position. biomass (both for heating and for electricity
generation) and bio-fuels. Together these
Demand for fossil fuels will lead to a significant reduction in the use
of fossil fuels in our energy mix. The chart
The security of our fuel supplies is an below shows the production and demand
important aspect of our overall security of coal, oil and gas before and after the
of supply. The policies set out in this plan package of policies.
(defined against the baseline set out in

Chart 22
Actual and Projected UK Fossil Fuel Demand and Production

150
140
130
120
110
100
90
mtoe

80
70
60
50
40
30
20
10
0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025

Oil Demand (incl. bunkers) (pre-TP baseline) Oil Demand (incl. bunkers) (post-TP)
Net Gas Demand (pre-TP baseline) Net Gas Demand (post-TP)
Coal Demand (pre-TP baseline) Coal Demand (post-TP)
Oil Production Net Gas Production
Coal Production

Source: Department of Energy and Climate Change analysis (2009)

By reducing our demand for gas, oil and coal, the impact on the percentage of UK gas, oil
we reduce our exposure to security of supply and coal consumption that would be imported
risks, including the risks associated with before and after the policies in this Transition
imported energy given competition for energy Plan. These figures are based on central
resources and politicisation of supply. Table 18 projections of demand and production both of
summarises our assessment of the aggregate which are inherently uncertain and subject to
impact of the package of policies on gas, oil and wide margins of error.
coal consumption and Table 19 summarises

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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 Reductions in oil consumption are largely
demand for gas (for example, through the driven by transport policies which make
so-called ‘heat replacement effect’).91 vehicles more efficient and the increase
However, these increases are dwarfed by in the use of bio-fuels as a result of the
savings due to other policies such as those Renewable Transport Fuels Obligation.
improving the energy efficiency of buildings
The reduction in coal consumption is driven
(for example, the Community Energy Savings
by the reduction in electricity demand.
Programme or replacing demand for gas for
However, the numbers in Table 18 do not
renewable sources.
include possible future increases in electricity
(or fall in oil) demand due to electric vehicles

89 The impact includes all the policies set out in this plan (see Chapter 3 for more detail).
90 Calculations assume a one-for-one reduction in imports with a reduction in consumption.
91 The ‘Heat Replacement Effect’ is when a more efficient energy product (such as an energy efficient light bulb) gives out
less heat which leads (under some circumstances) to an increased demand for space heating.

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82 The UK Low Carbon Transition Plan
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or rail electrification. It is still not clear what Analysis for the RES indicates that nearly
the impact of these could be on the total a quarter of the UK renewable energy
demand for electricity given the uncertainties target could come from bioenergy in the
around how, for example, the deployment of heat and electricity sectors (not including
electric vehicles will evolve. the contribution from biofuels). Delivering
the RES is therefore expected to increase
Security of Renewable the demand for biomass feedstocks in
these sectors. Our analysis suggests that
Energy Supply there could be sufficient biomass resource
Whilst reducing demand for fossil fuels will potential in the UK to meet this demand in
have a positive impact on security of supply, 2020 and the import market for biomass will
increasing demand for bio-energy i.e. biofuels grow as biomass increasingly becomes a
and biomass could create new security of traded commodity. Whether the domestic
supply challenges. potential is fully developed will depend on
how the market responds to the financial
Biofuels incentives being introduced in the RES, and
The Renewable Transport Fuel Obligation to supporting measures aimed at developing
will increase the demand for biofuels used the UK biomass supply chain and overcoming
for transport. Our analysis to date suggests supply side constraints.
that while there are also risks associated with Our analysis indicates that several biomass
the import of biofuels (such as crop failures, sources, such as wood pellet and wood
supply disruption in countries that produce chip and food processing residues such
biofuels, and reduced incentives to invest in as seed husks and olive cake are already
fossil fuel infrastructure), overall biofuels are traded internationally, and as supply and
likely, at the margin, to have a positive impact demand for bioenergy increases worldwide,
on the UK’s security of supply. This would it is likely that a global market will develop,
be through: and biomass will increasingly become an
UÊ Reducing the imported oil needed from internationally traded commodity.
regions associated with geopolitical risks, As a result, demand and supply of some
as biofuel imports are expected to come biomass sources (particularly homogeneous
from countries with less geopolitical risk. products such as woody resources) should
be considered globally, rather than locally.
UÊ Reducing the impact of crude oil supply Others, particularly those difficult to
disruptions, with biofuels most likely transport, or where there are high standards
reducing the proportion of total transport for sustainability, will still operate largely
fuel supply disrupted by any given global within local markets. Our analysis showed
supply disruption. that global woody biomass sources could
UÊ Alleviating the petrol and diesel retail price potentially be very large – sufficient to meet
impact of spikes in crude or petroleum UK demand for RES even with increasing
product prices. pressure for biomass from the rest of Europe.

Biomass
Policies such as the Renewable Heat
Incentive will increase biomass consumption
(for example, by leading to biomass fuelled
stoves and boilers).

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Overall, these factors are likely to have Renewable generation is likely to change the
positive security of supply implications for shape of electricity prices. An independent
the UK, through: multi-client study on intermittency
undertaken by Pöyry consultants92 suggests
UÊ Reducing reliance on imported oil and
that the volatility of spot prices is likely to
gas, towards locally produced or imported
increase dramatically as a result of wind
biomass feedstocks. This will tend to
generation. In Pöyry’s central scenario with
reduce the geopolitical risk associated with
33 GW of wind in 2020 rising to 43 GW
the former.
in 2030 (compared to 26.4 GW in 2020
UÊ Developing sustainable global biomass in the Renewable Strategy lead scenario)
supply chains could help biomass to wholesale prices may fluctuate from negative
become a fundamental part of the prices (due to wind generation bidding at its
UK energy mix and one which can be opportunity cost of -1 ROC) to above £1,000/
employed in a flexible manner. Greater MWh and peak around £1,300/MWh for a
diversity and flexibility of electricity and few hours in 2020, and that by 2030 peak
heat fuels can help to make the system prices could reach around £7,700/MWh and
more resilient and able to respond to last for an hour during the tightest supply
shocks or price spikes. periods. In comparison, prices reached a high
of around £500/MWh last year (see Chart
Security of Electricity 24 below). Analysis undertaken by Redpoint
for the Renewable Strategy Consultation93
Supply and Intermittency suggests similar variations in prices for lower
The decarbonisation of our electricity supply levels of renewable generation. Both studies
necessary to meet our climate change goals show that the probability of lower and
will lead to significant changes in how we negative prices is likely to increase as well as
generate electricity. The majority of the the probability of higher peak prices.
increase in renewable generation is likely While price volatility is likely to increase and
to come from wind. The nature of wind prices are likely to become more peaky,
generation means that supply will be average wholesale electricity prices would
intermittent and to a large extent unpredictable. not necessarily increase (compared to a
The variability of wind generation means that scenario of lower renewable deployment)
it cannot replace conventional plants on a since the average short run generation
like for like basis and results in an increasing cost is likely to be lower as the amount of
requirement for the system to carry flexible renewable generation increases.
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.

92 Impact of Intermittency: How wind variability could change the shape of the British and Irish electricity market.
Pöyry (July 2009).
93 Implementation of EU 2020 Renewable Target in the UK Electricity Sector: Renewable Support Schemes.
Redpoint et al (2008).

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84 The UK Low Carbon Transition Plan
Analytical Annex

Chart 23
Price Duration Curves for 2020 and 2030 for Great Britain

2020 2030
3,000 3,000

2,500 2,500
£/MWh (real 2008 money)

£/MWh (real 2008 money)


2,000 2,000

1,500 1,500
150
150
1,000 1,000

500 500

110
110 0 0
0.0% 0.5% 1.0% 0.0% 0.5% 1.0%
£/MWh (real 2008 money)
£/MWh (real 2008 money)

70
70

30
30

-10 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
-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 may affect the confidence of investors in
those generators that are only able to run conventional generation that peak prices will
for a few hours during the year. Since our reach sufficiently high levels on a sufficient
electricity system has never experienced this number of occasions to allow them to recover
level of plant intermittency and price volatility their costs. They also need to have confidence
before, there is a lot of uncertainty as to how in their ability to capture those prices.
prices will behave in reality. This uncertainty

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Analysis undertaken by Redpoint for the margins (i.e. the percentage by which
Renewable Strategy Consultation94 and the generation exceeds expected peak demand
Renewable Strategy95 suggests that if the taking into account the probability that plants
market provides adequate price signals, of different types will be unavailable) for the
market participants will invest in sufficient lead scenario of the Renewable Strategy
conventional generation, including back-up i.e. 29% large scale renewable generation
generation, under the assumptions made. scenario by 2020 (26.4 GW of wind in 2020).96
The chart below shows the de-rated capacity

Chart 24
Capacity Margins (%) under 29% large scale renewable electricity generation

25.0%

20.0%
Capacity Margin (%)

15.0%

10.0%

5.0%

0.0%
2011

2019
2013

2015

2017

2021

2023

2025

2027

2029
2009

Source: Redpoint (2009)

Chart 25 below shows the expected energy shows that EEU remains low until 2016 and
unserved (EEU) (i.e. this combines possible reached a peak in 2025 of around 7 GWh.
levels of shortfall between supply and This peak is driven by old coal and gas plants
demand with their probabilities to give a closures due to the Industrial Emission
probability weighted amount of unserved Directive (IED).
energy) for the same scenario. The figure

94 Implementation of EU 2020 Renewable Target in the UK Electricity Sector: Renewable Support Schemes. Redpoint et al
(2008)
95 Implementation of the EU 2020 Renewables Target in the UK Electricity Sector: RO Reform. A Department of Energy
and Climate Change, June 2009.
96 The analysis assumed that the Industrial Emission Directive (IED) was implemented in 2016 and there would be a NERP
option. However, the IED is still under negotiation and a more flexible agreement of the IED would likely increase the
capacity margins.

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86 The UK Low Carbon Transition Plan
Analytical Annex

Chart 25
Expected Energy Unserved (GWh) under 29% large scale renewable
electricity generation

6
EEU (GWh)

0
11

19
13

15

17

21

23

25

27

29
09

20

20
20

20

20

20

20

20

20

20
20

Source: Redpoint (2009)

While capacity margins are likely to be potentially become a problem after 2020 due
lower than today and consequently EEU to the closure of old gas and coal plants and
higher, the equivalent expected volume of additional renewable deployment.
unmet demand is relatively small compared We will do further work to determine
to demand lost annually through network the scale and nature of the challenges of
failures each year (around 10 GWh per year). intermittent generation and consider ways
This result is critically dependent on several of reducing the impact such as encouraging
factors such as the exact distribution of wind more demand-side response. We will call
generation, the amount of reserve contracted for stakeholders’ views on our assessment
by National Grid, and the level of demand side of intermittency in a call for evidence on
response. In addition, the analysis assumes electricity later this year. In the light of
that investors in flexible plants expect to earn responses, and as levels of renewable
a return on their investment by operating generation increase, we will work closely
flexibly, generating more at times when the with the National Grid, Ofgem, industry and
system is tight and so benefiting from the academics to consider what further steps
high prices at those times. might be necessary to address issues arising
from intermittency.
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

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Other Security of Supply UÊ The Planning Act (2008) introduces a


“single consent” regime which will
Impacts streamline the application process,
There are other policies in this Transition alongside improved public consultation,
Plan that are likely to have an impact on the before any planning application is made.
security of our energy supply: Changes in the planning regime will
facilitate market players bringing forward
UÊ Coal-fired power plants (as well as gas timely investment in infrastructure.
plants) not only provide reliable electricity
production, but are also potentially a UÊ Smart Meters could play a part in
“swing producer” of electricity (production developing dynamic electricity markets, by
can increase or fall as required) and could facilitating demand responsiveness which
be therefore be a useful complement to would reduce peak demand.
increasing levels of renewables, such as
wind, which have variable supply.
Carbon Capture and Storage
Demonstration will help to deliver reliable
clean coal technology helping to keep
coal part of the future generation mix and
maintaining diversity and flexibility.

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Chapter 7
Macro-economic
cost of climate
change mitigation
measures

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90 The UK Low Carbon Transition Plan
Analytical Annex

Adapting the UK economy to meet our estimate the impact of short and long term
climate change and energy goals will targets (see box below for a description
incur significant costs. Several modelling of the HMRC CGE model). The main
approaches have been used to assess the scenario includes an EU ETS cap consistent
macroeconomic costs for the UK of the with an EU GHG reduction of 20% in
short and long term climate change targets. 2020, the renewable energy target and
Overall, results have suggested that the international credit limits equal to those in the
impact of mitigation policies is likely to be Commission proposal. In addition, from 2030
manageable in both the short and long term. all sectors are assumed to be part of a global
trading system and the long term target of
The HMRC Computable General
80% reduction in GHG by 2050 is forced onto
Equilibrium (CGE) model was used to
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 Models are sensitive to the data inputs and
results show a manageable impact on assumptions they use. Extensive sensitivity
GDP and welfare. The results show a testing of the model (not shown) has been
GDP reduction of about 0.35% (relative to undertaken, in particular around the areas
baseline) in 2020 and about 0.85% of carbon caps, fossil fuel/carbon prices and
(below baseline) in 2050. Note the model economic growth, however, these factors are
does not capture the benefits of reducing less important in determining the economic
GHG emissions. outcome. Instead it was noted that the results
are particularly sensitive to the degree to which

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agents desire a smooth consumption path emissions by 33% in 2020 and by 80% in
over time (i.e. the elasticity of inter-temporal 2050 for the UK could cost between 1-2%
substitution), the productivity of energy GDP in 2050.97 The CCC examined a range
technology and supply constraints. In sum, of sensitivities. The results were found to be
GDP costs will be higher if agents react to the particularly sensitive to assumptions on the
reduction in purchasing power by saving large existence of international credits, technology
amounts to maintain fairly constant levels of cost, emissions pathway and fossil fuel prices.
consumption (i.e. low elasticity of inter-temporal
The CCC analysis also highlighted the
substitution). The effect on GDP will also be
sensitivity of costs in the long term to
higher in the presence of supply constraints
the level of innovation and availability of
in implementing abatement technology e.g.
low carbon technologies. More precisely,
shortages of skilled labour in the construction
in a scenario with no developments in
sector. However, it was found that the potential
technological innovation beyond 2010,
adverse economic effects of implementing
the impact of the 80% reduction in 2050
carbon caps and renewable technology can
was more than double the impact under the
be significantly reduced with relatively low
scenario with unrestricted innovation.
increases in the productivity of technology.
Costs of meeting the targets increase
Recent analyses based on the HMRC model
substantially if at least two of renewables,
are broadly consistent with previous
nuclear and CCS are not used to decarbonise
modelling results.
power generation. MARKAL modelling
Analyses undertaken for the Energy White conducted by the CCC suggested that if CCS
Paper (2007) using the UK MARKAL – were unavailable at a reasonable cost then a
Macro model found that the long run costs large expansion of nuclear power would be
of reducing carbon dioxide emissions by 80% the least cost option. If in addition to CCS
by 2050 were about 1.6% of GDP (assuming nuclear is also unavailable, then MARKAL
central fossil fuel price scenarios). indicates the 80% reduction target would still
be possible but at significantly higher costs
Using the bottom up MARKAL MED model,
(approximately 60% of electricity generation in
the Committee on Climate Change (CCC)
2050 should come from renewable sources)
estimated that a reduction of net GHG
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.
Present Value of Costs
Scenario
2008-2050
Nuclear, Renewables and CCS all available £379 billion
Nuclear and Renewables available (No CCS) £433 billion
Renewables only (No CCS or nuclear) £663 billion

97 Committee on Climate Change Building a low carbon economy – the UK’s contribution to tackling climate change’
December 2008. Please see link: http://www.theccc.org.uk/reports.

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92 The UK Low Carbon Transition Plan
Analytical Annex

In practice it would be very challenging to solar photovoltaic electricity, costs have fallen
achieve the 80% target without either CCS by nearly 20% by doubling capacity. Whether
or nuclear. The CCC commissioned MARKAL past learning rates are a good indication of
modelling matches overall demand for the future, and more particularly how to
electricity with generation, but does increase learning rates for a given technology,
not fully account for the intermittency are key issues in affecting the cost of the
associated with renewable energy, UK’s path towards a low carbon future.
particularly wind generation.
MARKAL results are dependent on assumed
Frontier Economics98 note the importance learning rates for low carbon technologies.
of learning rates to the likely cost reduction Although future rates cannot be known,
from deploying various technologies. historical learning rates by technology99 are
The learning rate shows the likely cost shown in Table 21, below. The table also
reduction from a given technology if the level shows the level of global deployment (as
of its deployment doubles. For a relatively a multiple of current deployment levels)100
mature technology such as hydroelectricity, necessary to deliver the cost reductions
costs have fallen by around 2% from a assumed in the CCC’s MARKAL analysis if
doubling of installed capacity over recent historical learning rates persist.
years. For younger technologies, such as

Table 21
Technologies, learning rates and cost-reductions in the MARKAL model
Implied
Cost Change
Deployment
Learning Between Now and
Technology Multiple over
Rate 2050 assumed in
Current Installed
MARKAL model
Capacity
Solar PV 18% -70% 71

Onshore Wind below 7% -26% 18

Offshore Wind 9% -14% 3


Coal-Fired with Carbon 3% -22% 284
Capture and Storage

Table 21 shows the important role learning smaller deployment multiple. Given historical
rates play. A low learning rate, such as for learning rates for offshore wind, the assumed
Coal CCS, requires a much larger deployment cost reductions by 2050 of 14% appear
multiple and delivers a smaller cost reduction, conservative. Global deployment of offshore
compared to solar PV’s high learning rate wind would be expected to increase more
that delivers deep cost reductions at a than threefold before 2050.
98 Frontier Economics, July 2009 “Alternative Policies for Promotive Low Carbon Innovation”, published alongside the
Transition Plan.
99 Source: “Energy Technology Perspectives: Scenarios and Strategies to 2050”, International Energy Agency, 2008
100 For those technologies that are not yet deployed, such as Carbon Capture and Storage, the deployment multiples and
learning rates relate to the number of plants currently being developed using the latest technologies.

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The impact of a learning rate shock on the The learning rate effect cuts the GDP fall
costs of mitigation for the UK was further from of 0.05% percentage points by 2020,
investigated using the HMRC CGE model, from -0.35% to -0.30%. Productivity would
where a change in learning rates is expected also increase in the sector but, because it
to lead to an increase in productivity that is a small sector compared electricity as a
will offset some of the costs of carbon whole, there is little change in the net
mitigation. GDP impact.
Results highlighted the potential for UÊ A 10% improvement in the productivity
innovation to reduce medium and long term of energy storage.101 This increases
costs of moving to a low carbon economy the efficiency of current electricity
when technologies improve faster than production and expands the amount of
expected in the base scenario (see Chart 26). usable energy generated by intermittent
technologies such as wind power. This
The following scenarios were modelled:
leads to a marginally smaller decline in
UÊ An increase in the learning rate of 1 GDP of -0.34% compared to -0.35% by
percentage point for all carbon abatement 2020. There are two significant effects
technologies. This leads to a 3.7% underpinning this result: first, the reduced
reduction in costs of energy generation cost of energy supply boosts GDP by
equipment by 2020 compared to the more than the 0.2% shown above; the
baseline forecast, and a subsequent fall second is the impact of this efficiency
in the cost of electricity. This reduces gain redeploys a significant amount of the
the cost of the UK achieving its carbon sector’s resources, creating a transitional
budgets, which leads to a smaller GDP drag on GDP while those resources are
penalty of -0.18% by 2020, compared to being redeployed.
-0.35% without the learning rate shock.
UÊ A 1 percentage point improvement in the
The learning rate improvement also feeds
learning rate for electric cars. This reduces
through to a consequent improvement
the cost of electric cars by 3.8% below the
in the sector’s productivity, which further
baseline estimate by 2020, which enables
reduces the GDP penalty to -0.17%
electric cars to become closer substitutes,
by 2020, as resources are redeployed
in terms of cost, to existing liquid fuelled
throughout the economy.
vehicles, although the take-up of electric
UÊ A 1 percentage point increase in the cars is still relatively small. It is the small
learning rate of onshore and offshore wind size of the sector that means there is
powered electricity generation. This is a little discernable impact on GDP from this
subset of the first scenario and leads to improved learning rate. There is still an
a cost reduction of 4.1% below the level improvement in productivity, however,
projected in the baseline. Again, this leads which leads to a marginally smaller
to a smaller decline in GDP as the carbon GDP penalty of -0.34% by 2020, as car
abatement can be achieved more cheaply. manufacturers’ profitability on electric
cars improves.

101 The CGE model did not model a learning rate for energy storage technologies because it affects the efficiency of
existing energy generation capacity, rather than new installations to which learning rates apply. so an independent
productivity shock is applied, where cheaper energy storage will increase the amount of usable energy for the
energy sector.

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94 The UK Low Carbon Transition Plan
Analytical Annex

on early stage R&D and the rest spent on


Chart 26
demonstration and deployment. The survey
Innovation and the costs of also revealed that around 40% of innovating
mitigation (GDP impact in 2020) companies do not utilise any form of
Government-sponsored support. Of those
% GDP Wind Cars Electricity Storage that do, around a fifth receive grant or R&D
0
tax credit support.
The survey also asked companies about the
-0.1
main focus of their low carbon innovation
activity. The biggest focus was on reducing
-0.2 energy consumption, with over 60% citing
this, followed by around a third innovating in
renewable energy. Around a fifth innovated in
-0.3
reducing the cost of low carbon technologies
and in low carbon enabling technologies.
-0.4
Recent analyses undertaken by the OECD
Baseline (ETS and RES) have highlighted the important incentive
Learning Rate Shock (1% point) power of carbon pricing on R&D and
Productivity Shock (10%) technology deployment. More precisely,
using the World Induced Technological
Source: HMRC analysis Change Hybrid (WITCH) model,102 it was
found that a world carbon price consistent
The Department of Energy and Climate with a 450ppm long run stabilisation target
Change commissioned the ONS to would approximately quadruple (relative
undertake a survey into the level of low to baseline) energy R&D expenditure and
carbon innovation in the UK during 2008, investments in deployment of renewable
although, as it is the first survey of its type, power generation. Moreover, this effect
the results should be treated with caution. was forecast to increase over time following
The survey covered 4,000 organisations stringent targets that are likely to translate
who undertake Research, Development, into higher carbon prices.
Demonstration and Deployment spending
in the public and private sectors, and had a The MARKAL model relies on the very strong
response rate of over 50%. This was then assumption of perfect foresight about the
grossed up to derive a UK spending figure. future availability of technologies. Analyses
It estimates that the UK spent around £340 conducted by Oxford Economics (OE) to
million on low carbon innovation (£240m of inform the Energy White Paper (2007)
R&D and £100m in later stage demonstration suggested that short and medium term
and deployment), nearly 1.5% of total UK adjustment effects of the targets might
R&D innovation spending, as estimated be significant. Assuming an illustrative
by the ONS’s annual Business Enterprise homogeneous price across the whole
Research and Development (BERD) survey economy sufficient to achieve a carbon
during 2007. Around 70% of this was spent emission reduction of 30% by 2020 (relative

102 OECD (2008), “The Economics of Climate Change Mitigation: Policies and Post-2012 Options”, OECD Working Party on
Global and Structural Policies, ENV/EPOC/GSP(2008)16

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Marco-economic costs of climate change mitigation measures

to 1990), OE found transition costs between energy production and distribution sectors
1.3% and 2% of GDP in 2020. Similarly, would be hardest hit (Chart 27). For instance,
turning off capital adjustment costs (a proxy oil extraction, electricity production and
for adjustment costs)103 in the HMRC CGE distribution, and gas extraction contract
model would lead to a reduction in GDP (relative to baseline) in 2020 (2050) of 8.4%
costs from 0.96% to 0.5% of GDP in 2050 (13.7%), 2.6% (14.2%) and 8.1% (9.7%)
suggesting that adjustment costs have a respectively.There are two main reasons
relatively limited macroeconomic impact. behind the relative higher adverse impact
on these sectors than others. Firstly, these
Sectoral impacts sectors are relatively small so a given change
is proportionately bigger. Secondly, they
Despite aggregate costs on the UK being shrink since most of the fuel savings in the
manageable, impacts vary widely across MACC are from electricity (58% in 2050),
sectors. More precisely, results obtained gas (14% in 2050) and oil (21% in 2050).
with the HMRC CGE model suggested that

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

0% Non nuclear renewables


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
Land transport
-30%
Air transport
Public sector
-40% Health and education
Other services
Source: HMRC CGE model (2009)

103 The Climate Change Act 2008 Impact Assessment can be found at http://www.defra.gov.uk/environment/
climatechange/uk/legislation/pdf/ccbill-ia-final.pdf

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96 The UK Low Carbon Transition Plan
Analytical Annex

The unilateral carbon price in the EU created international competition, where there are
by the EU ETS creates the potential for high transport costs, or other barriers to
emissions intensive sectors to shift to imports, or where imports are not perfect
production to areas with no or lower carbon substitutes for domestic products. Analysis,
costs. Through imposing an additional cost for example by Climate Strategies (2007)
of EU production, the EU ETS may reduce has found that the risk of carbon leakage is
the profitability of production in the EU, determined by a sector’s carbon intensity and
and increase the level of imports from the trade intensity. Chart 28 presents the change
rest of the world. EU companies will face in cost (as a proportion of the sector gross
greater competition from non-EU producers, value added) for sectors as a result of a `20
and reduced profits from operating in the carbon price in the EU ETS. It suggests that
EU. Shifting emissions outside the EU, also the risk of leakage, while significant for some
known as ‘carbon leakage’, would undermine sectors, is confined to a few energy-intensive
the effectiveness of the EU ETS. sectors, such as iron and steel, aluminium and
cement, which account for a small proportion
The risk of carbon leakage will depend on
of overall UK GDP. However, given the sectors
the specific characteristics of the sector.
most at risk, the potential loss of GDP as
The risk of leakage will be lower in sectors
a result of leakage is significant but small.
which do not face a high degree of

Chart 28
CO2 cost screen: sectors potentially exposed under unilateral CO2 pricing

Electricity dependent (indirect) CO2 costs / GVA


65 Lime

60 Allocation dependent (direct) CO2 costs / GVA


Potential Maximum Value at Stake (MVAS) and

55

50 Finishing of
Net Value at Stake (NVAS), %

textiles
45
Household Copper
40 Other inorganic
basic chemicals paper
Cement
35 Flat
Non - glass
30 wovens
Basic iron & Aluminium
steel Veneer sheets
25 Industrial
Fertilisers & gases Rubber tyres
20 nitrogen & tubes Casting
Coke oven of iron
15 Hollow
Malt glass
10
Refined petroleum Pulp &
5 paper

0
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 1.1

UK GDP, %

Price increase assumption: CO2 = €20/tCO2, Electricity = €10/MWh

Source: Climate Strategies (2008)

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Marco-economic costs of climate change mitigation measures

The regional distributional implications are In the short term, the global recession has
considered in the distribution section above. created the need for a package of fiscal
stimulus measures. Budget 2009 provided
The most effective solution to the problem
over £1.4bn of additional targeted support for
of carbon leakage is to reach an appropriate
the low carbon economy. This, together with
international deal which ensures a consistent
announcements made since Autumn 2008,
carbon price signal between regions. While
will enable an additional £10.4bn of low carbon
this remains the ultimate objective of the UK
and energy investment over the next three
and the EU, the revised Directive for the EU
years. This will employ around 20,000 people
ETS provides for continuing free allocations to
in construction and installation in the short
sectors at risk of leakage. By December 2009
term and provide the foundations for strong
the Commission will determine which sectors
growth of the green sector in the future.
will receive free allocation based on energy
and trade intensity. Overall the macro-economic impact is
manageable with the right policy mix, and
preferable to the costs of inaction.

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Chapter 8
Sustainability

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100 The UK Low Carbon Transition Plan
Analytical Annex

Section 13(3) of the Climate Change Act 2008 effects on the wider economy. This chapter
states that proposals and policies for meeting considers a number of further impacts
carbon budgets must, when taken as a whole, which all form part of the framework of
‘be such as to contribute to sustainable sustainable development, focussing on
development’. some of the potential wider environmental
impacts of policies, including landscape,
The Government Economics Service (GES) is
biodiversity, water, noise and air quality; and
currently undertaking a review of Sustainable
on congestion impacts.
Development in policy appraisal, which will
provide supplemental Green Book guidance.
The group undertaking this work is chaired Wider Environmental
by the Chief Economist of the Department Impacts
for Environment, Food and Rural Affairs,
with experts on environmental, social and Climate change poses one of the most
economic appraisal drawn from across significant risks to the environment, but
Government. Whilst this group has not in taking measures to reduce greenhouse
formally reported its findings, their research gas emissions we need to ensure that this
into current appraisal practices starts to does not compromise other environmental
consider how to take a more structured priorities and legal obligations that
approach to the consideration of Sustainable Government has. Existing legislation such
Development. as the EU Habitats Directive, the Water
Framework Directive and the legislation
Consideration of Sustainable Development that underpins the Air Quality Strategy set
should demonstrate whether a policy, as environmental standards and targets for
a whole, makes the UK and its economy the UK, with consequences for both the
more or less sustainable, and by how environment and health. These need to
much. This is no small task, but it is most be maintained as we move towards a low
likely appropriate to use Social Cost-Benefit carbon economy.
Analysis (SCBA) as a tool if the impacts of a
policy are purely marginal and affect only the The sections below provide an assessment
current generation. However, where impacts of the synergies and tensions with the wider
are non-marginal or affect more than one environment of the measures set out in the
generation,104 supplementary tools may be Transition Plan to reduce greenhouse gas
necessary to complete a policy appraisal. emissions. There are difficulties in monetising
these impacts as they often do not have
In practice, though, and as noted previously, market prices, although methods to value
the incorporation of values for these non market impacts do exist and can provide
impacts is often not possible, and hence robust evidence. Further difficulty arises
consideration of sustainable development where we are unsure of the exact decisions
requires us to be explicit about the that will be taken, as policies are designed to
trade-offs and long-term impacts of a policy offer incentives that allow commercial players
decision on the environment, society and to meet targets and obligations in the most
the economy. Previous chapters have looked cost effective way to them.
at some of these potential impacts and
trade-offs, such as distributional issues and

104 For a positive NPV to represent a Pareto improvement, it must be possible for the winners of a policy to compensate
the losers. It is clearly not sensible to assume that future generations can compensate us for lower utility today, so
CBA is not necessarily appropriate for showing whether a policy represents a net improvement in wealth.

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Sustainability

Landscape habitat. Unabated climate change will lead


There are potentially a number of impacts to significant biodiversity loss. Therefore,
on the landscape as a result of proposed successfully combating climate change (and
measures to tackle climate change. planning to adapt to that change that is already
Particular areas of focus are where policy locked in) is key to the long term future of
change involves any material change to the biodiversity domestically and globally.
appearance of the landscape either from Climate change mitigation activity can
changes in land use or visually intrusive have both positive and negative impacts
construction, and where impacts affect for biodiversity. Adverse impacts can be
National Parks or Areas of Outstanding minimised through avoidance, mitigation,
Natural Beauty. and, where the former are not possible,
The need for more renewable energy through offsetting.
infrastructure and biomass and bio-fuels Eutrophication occurs in natural freshwater
has the potential to significantly affect the lakes, other freshwater bodies, estuaries,
landscape. Increased size and number of coastal waters and marine waters, and
wind farms in the UK will alter the landscape can affect a range of priority species and
as will land use changes brought about by habitats identified under the UK Biodiversity
increasing production of bio-energy. Action Plan. Reduced eutrophication,
The Government is strongly of the view that through reduced nitrogen fertiliser use in
all bio-fuels and biomass used in the UK agriculture,105 or reductions in combustion-
should come from sustainable sources and based power generation due to an increased
we are active in the EU and internationally use of renewable energy and energy
in seeking agreed definitions. Energy crops efficiency, can help to reduce any negative
which benefit from the Energy Crops impacts.
Scheme are also subject to environmental
assessment. Policies aimed at improving the Renewable energy generation may
efficiency of products, buildings, vehicles have negative impacts on biodiversity
and production processes will reduce overall if construction of infrastructure leads to
demand for energy, and therefore the need disturbance of habitat or significant land
for new energy sources and infrastructure. use changes. Any introduction of tidal
power generation and the associated
There could be impacts on the urban infrastructure requirements would have
landscape through policies aimed at the potential to significantly impact the
increasing the uptake of renewable energy natural environment, including habitats and
technologies, where these are applied species. The extent of these impacts would
domestically and at the neighbourhood level depend upon the location and scale (as with
to generate renewable energy through solar other renewable energy infrastructure) of
panels and wind turbines. the project. The Government will also be
assessing the potential implications of the
Biodiversity projected increase in biomass demand with
Impacts on biodiversity arise where a view to introducing additional safeguards
policy change leads to changes in habitat, as necessary. The extent to which this is
fragmentation or disturbance, and loss in needed will depend upon the success of

105 Analysis on the environmental impacts of reducing nitrate loss from agriculture can be found in the Impact Assessment
of proposals to revise the Nitrates Action Programme and extend the Nitrate Vulnerable Zones (NVZ), August 2008.
Available at:http://www.ialibrary.berr.gov.uk/ImpactAssessment/?IAID=2936af84c8834d538c0b11f5cd6a4cbf

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102 The UK Low Carbon Transition Plan
Analytical Annex

policies which reduce energy demand, as the Noise


renewables target relates to the proportion of Impacts on noise arise from changes in policy
final energy use. Avoiding indirect biodiversity that produce unwanted sound. Consideration
impacts therefore strengthens the case for should be taken of the characteristics of the
energy efficiency policies. sound, such as volume and duration, and of
the people who are likely to be affected.
Water, including quality, quantity
and flood risk Community renewable generation could
A wide range of human activity can impact on result in impacts on noise if, for example,
water quality. Policy change may impact on through the Community Emissions Reduction
the degree of water pollution (surface water, Target community wind turbines are used in
ground water and coastal and marine), levels urban settings. Consideration will need to be
of abstraction of water or the risk of flood or given to appropriate locations.
coastal erosion. Policies set out in the Transport Strategy
Moving to a low-carbon economy offers may lead to improvements in noise levels
opportunities for other Government by encouraging cycling and walking, where
objectives under the Water Framework this reduces the number of vehicles on the
Directive. Combustion-based power road. Any increase to the cost of driving due
generation leads to acidification and to the increased use of biofuels could lead
eutrophication of water. Therefore, reducing to similar benefits. These benefits may be
our reliance on this form of energy, through offset due to car efficiency standards that will
energy efficiency policies and renewable likely lead to a reduction in the cost of driving.
energy generation, will reduce damage More detail on the impacts of the transport
to water bodies, along with the need for strategy are set out in the subsequent
additional measures to meet the Directive. congestion section.

Mitigation measures in the AFLM sector will Air Quality


look to focus on fertiliser use, efficiency and There are three key drivers to air quality
timing, and manure management. Synergies management; health effects, short and
may exist with improving water quality where medium term environmental damages
reductions in overall nitrogen use lead to a (such as acidification and eutrophication of
reduction in diffuse nutrient pollution in areas ecosystems), and long term environmental
where eutrophication occurs. consequences – primarily climate change.
Water stress in the UK may benefit if policies It is important that when evaluating options
aimed at promoting domestic energy efficiency to mitigate climate change, consideration is
(such as the Supplier Obligation and Carbon also given to the short and medium term air
Emissions Reduction Target where energy quality impacts of the abatement options.
companies can achieve their obligations In most cases there are notable synergies
by promoting energy saving measures to between actions to reduce carbon emissions
consumers) raise awareness of resource usage and short and medium term air quality.
and promote behaviour change. For example, However, in some circumstances there
if individuals act to save water by taking may be tensions – for example the location
showers instead of baths. of a source of air pollutants is a major
determinant of the health effects yet it has
no impact on the climate change potential of
the emissions. The tensions and synergies

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Sustainability

are discussed in detail in the 2007 Air Quality The modelling results shown here reflect
Expert Group (AQEG) report “Air quality and the air quality impacts of one scenario for
climate change: a UK perspective”.106 achieving our carbon budgets. The core
approach was to firstly develop marginal
To help maximise the synergies and avoid
air quality impacts for all the activities
such tensions from the package of policies,
and technologies under consideration.
research was commissioned using the
The marginal air quality impact estimates
MARKAL model to consider and value
followed the standard impact-pathway
the potential impacts of climate change
approach calculating emissions and then
measures on air quality under a cost-
valuing the resultant impacts on human
minimisation scenario to reach our climate
health and the natural and man-made
change targets.
environment. To estimate the emissions
Given the range of climate change measures associated with activities, data was
included within the model, it was necessary sourced from the National Atmospheric
to focus on the three key sectors that were Emissions Inventory (NAEI)107 while the
likely to have notable overlaps between value of the emissions were valued using
air quality and climate change. Therefore the Interdepartmental Group on Costs and
marginal air quality costs were developed Benefits (IGCB) damage costs.108
across electricity generation, road transport
Overall the results from this analysis
and domestic and non domestic buildings.
demonstrated a clear and substantial synergy
It was also decided to focus on particulate
between air quality and climate change
matter (PM), oxides of nitrogen (NOX),
policies. Chart 29 provides the key high level
sulphur dioxide (SO2) and ammonia (NH3) as
results by sector for the three time periods
pollutants of primary concerns.
of carbon budgets 2012, 2017 and 2022.
The modelling results presented below The following diagram and text excludes the
should be seen as the result of a cost- impacts of increased uptake of residential
minimising model run using the MARKAL biomass, the reasons for this are discussed
model, based on particular assumptions at the end of this section.
about the costs and availabilities of
Chart 29 clearly shows the net air quality
technologies. They are therefore not
benefit associated with the climate change
projections of changes in air quality to 2022
measures increasing over time. The total net
as a result of the measures in the Transition
benefit is estimated at around £150 million
Plan. In the transport sector, for example, the
in 2012 increasing to £425 million in 2017
Carbon Reduction Strategy for Transport sets
and £775 million in 2022. The 2022 figure is
out the policies that will deliver transport’s
estimated to be equivalent to saving 20,000
contribution to the carbon budgets. The
life years 109 annually by 2022. Over the
Impact Assessment for the Strategy sets out
period the share of the benefit from each
the expected air quality impacts of the actual
sector remains relatively constant at between
measures in the Strategy to 2022.

106 Available from www.defra.gov.uk/environment/airquality/publications/airqual-climatechange/index.htm


107 More information on the NAEI is available from www.naei.org.uk.
108 Information on the methodology underpinning the IGCB damage costs is available from www.defra.gov.uk/evidence/
economics/igcb/index.htm
109 Improvements in air quality are associated with a range of health benefits most notable being the increase in life
expectancy and quality of life. These impacts have been estimated in accordance with best practice as set by the
Interdepartmental Group on Costs and Benefits air quality subject group. For further information please see:
http://www.defra.gov.uk/environment/airquality/panels/igcb/

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104 The UK Low Carbon Transition Plan
Analytical Annex

Chart 29 For the domestic sector the air quality


impacts were spread over a much
The net air quality benefit associated
wider range of technologies. The largest
with Climate Change measures
contributors are increases in solar
water heating and reducing household
£900
temperatures by 1 degree which accounted
£800
in total for around 55% of the benefit, at
£700 30% and 25% respectively. The remaining
£600 benefits were distributed across a range of
technologies but particular recognition should
£500
be given to the contribution of wall insulation
£400
and heat pumps. The key tension between
£300 air quality and climate change was in relation
£200 to residential biomass discussed below.
£100 Finally road transport contributed a
£0 relatively small amount of the net impact.
2012 2017 2022 The benefits that were identified were split
Road Domestic Power
relatively evenly between power train and
non-power train technologies. The relatively
Source: the Department for Environment, Food and low impacts can be seen to be largely due
Rural Affairs Analysis (2009) to the increasingly robust vehicle emission
controls over this period with the introduction
55% – 60% from the power sector,
of latter European emission standards.
35% – 40% from the domestic sector and
5% from road transport. The final key result from this analysis,
omitted from the results up to this point,
Underlying these high level impacts it is
identified the potential consequences of
then possible to identify the key findings for
an unmanaged major uptake of residential
the different activities within the sectors.
biomass. The initial analysis indicated that
These are briefly summarised below:
this change alone would outweigh the air
The benefits from the power sector are quality benefits from all the other changes
dominated by the modelled reductions in the identified across all the sectors. Taken
use of coal plants which account for around together the package was estimated to
80% of the total benefit. The second largest impose a net air quality cost of £112 million
contributor is biomass burning around 15% in 2012 rising to £2.6 billion in 2022.
followed by reduced gas combustion which
However, it must be noted that changes to
accounted for around 3% of the benefit.
the modelled uptake of residential biomass,
The key trade-off identified in this sector
primarily constraining location and technology
related to the increase in co-firing with
type, reduces the negative air quality impact
biomass which was seen to increase notably.
by around 95%. These constraints thereby
However as the additional biomass burning
mean the package of measures is expected
is expected to replace coal it is expected to
to significantly improve air quality by almost
provide a net air quality benefit.
£600 million per annum in 2022.110

110 More information on the approach to manage the air quality impacts of residential biomass is provided in the
Renewable Energy Strategy, July 2009.

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Congestion or tele-working) and reduce the number of


Where policy measures reduce the costs car trips will also have a beneficial impact on
of driving per kilometre, this is expected congestion. Similarly, freight modal shift
to result in an increase in the amount of grants that shift freight from the roads to
mileage driven, thereby adding to congestion. other modes of transport will tend to reduce
Congestion results in a cost to the economy congestion on the roads.
as a result of increasing journey times and
reducing the reliability of journeys. Slow Overall assessment
moving traffic and stop/start conditions also Measures to reduce carbon emissions and
have a negative impact on emissions. hence avoid dangerous climate change
offer some strong synergies with other
The measures within the Carbon Reduction
Government objectives to protect the wider
Strategy for Transport111 that are expected to
environment. As the above assessment
reduce the cost of driving per kilometre are
details, decarbonising power generation
the EU new car regulation and the expected
generates significant improvements in air
EU regulation for new vans. The modelling
quality, and can bring about benefits to water
undertaken for the EU new car regulation
quality through reduced eutrophication,
suggests that increases in congestion would
indirectly leading to further potential
be relatively small, but would increase over
improvements for biodiversity.
time as more fuel efficient cars make up a
greater proportion of the total fleet relative to Reducing energy demand through the
the baseline. various policies aimed at promoting energy
efficiency of products, buildings, vehicles
Other measures within the Strategy will
and production processes will lead to further
tend to reduce congestion. For example, an
gains in these areas, along with additional
increase in the amount of transport fuel from
benefits of avoiding the need for new
biofuels would be expected to lead to an
technologies and mitigating any tensions
increase in the cost of driving, compared to
these might pose.
the baseline, as the pre-tax cost of biofuels is
generally higher than the cost of fossil fuels. Where tensions do exist, such as through
This increase in cost is expected to decrease the need to rapidly expand renewable
the amount of mileage travelled, offsetting energy generation and the potential adverse
some of the reduction in the cost of driving consequences for biodiversity and the
as a result of the EU new car regulation. landscape, safeguards that exist need to
be maintained and monitored to ensure
Other measures that will tend to decrease
they offer the appropriate protection for
congestion include those aimed at increasing
the local environment, while still ensuring
the amount of walking and cycling, as well as
we effectively reduce greenhouse gas
investment in public transport and schemes
emissions. As such, Government will be
to encourage car sharing, which reduce
assessing the potential implications of the
the number of journeys undertaken by car.
projected increase in biomass demand with a
Improvements in technology which reduce
view to introducing additional safeguards
the need to undertake business and
as necessary.
commuting journeys (such as teleconferencing

111 Available at: www.dft.gov.uk/carbonreduction

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