Skip Navigation LinksUK > Energy & environment > Latest Press Release

Cambridge Econometrics
Press Release


Embargoed until 00.01 Monday 24 May 2010

 

Latest projections confirm that:

  • the knock-on effects of the 2008-09 recession, and the modest economic upturn forecast over the short term, point to a further decline in the UK's carbon emissions in 2010
  • the UK is expected to come close to meeting its carbon budgets for the first two budget periods (2008-12 and 2013-2017), but not the third (2018-22), unless the incoming coalition Government introduces firm policies to promote renewable energy and energy efficiency in the key sectors of the economy not covered by the trading arrangements of the EU Emissions Trading System (EU ETS)


Despite our forecast of a modest economic recovery, carbon emissions in the UK are set to fall further in 2010 after a sharp 10% decline in 2009 due to the recession and fuel switching from coal to nuclear in power generation

The Cambridge Econometrics forecast, produced before the outcome of the May General Election was known, suggests that CO2 emissions based on domestic abatement effort (and excluding the UK’s net purchases of allowances under the EU Emissions Trading System), will fall by around 1½% in 2010 driven by falls in emissions from power generation, the energy-intensive industries, road transport, and households as the economic recovery from recession is expected to be weak (only 1% growth in 2010). However the decline in emissions is forecast to be less pronounced than in 2009. This is because of the partial offset provided by the modest rise of around 1-1½% in emissions in 2010 from other non-energy-intensive industry and commerce (comprising largely private and public services) as energy consumption rises in response to a revival in activity in these sectors. Power generation, industry and road transport, taken together, are expected to account for around four-fifths of the reduction in carbon emissions forecast between 2008 and 2010.

Official estimates based on energy use data show that emissions in 2009 fell sharply by around 10% as the recession led to a sharp decline in economic activity which, in turn led to a sharp fall in final energy demand (our estimate made before the provisional energy use data for 2009 were published was broadly similar, indicating a decline of around 10%). An additional factor that contributed to lower emissions was fuel switching from coal to nuclear for electricity generation, as supply interruptions that had severely affected a number of the UK's nuclear power stations in 2008 were overcome in 2009. The sharp decline in 2009 followed the reductions in emissions recorded in 2007 and 2008 of 1½% and 2% respectively.
The recession, by reducing the demand for electricity at peak times, has also had the effect of reducing the carbon content of each unit of electricity produced in 2009 and in our forecast for 2010. This tendency towards a lower carbon intensity of electricity generation is supported by the continued penetration of renewable sources of energy for power generation. Meanwhile, the fairly high coal prices relative to gas faced at the margin by power generators, boosted by the recovery in the EU ETS allowance prices from their low point in 2009, mean that the share of coal as a fuel used in power generation is expected to decline in 2010, while that of gas, the less carbon-intensive fuel, remains broadly stable, thereby exerting downward pressure on the sector’s emissions.

We forecast that, if current policies are continued by the incoming government, the UK will fall well short of its official renewable electricity targets for 2010 and 2020…

We forecast that renewables will account for around 7% of UK electricity sales to final users in 2010, 3 pp short of meeting the 10% target. However, if final electricity demand grows at ¾%-1% pa over 2010-20 in line with our latest projections and if fossil fuel prices remain relatively high, the share of renewables in UK electricity sales is expected to increase to around 11% by 2015, still short of the 15% target set by the Renewables Obligation (RO), and around 16½% by 2020, well below the Government's aspiration by means of the RO for a much higher share. The forecast failure to meet the renewables target is largely due to the expectation that fossil fuel generation will remain important in meeting the UK's electricity needs over the next decade and that new gas-fired power stations rather than renewables will help to fill the gap left by the decommissioning of most of the UK's nuclear and older non-FGD coal-fired power stations.

… and also not meet the EU-set target of a 15% share for renewable energy in the UK's total final energy consumption by 2020

Our forecast highlights the extent of the challenge facing the incoming Government as it seeks to meet the UK's legally-binding renewable-energy target of 15%, set for 2020, as part of the 20% target for the EU as a whole.

On the basis of our modelling of current policy, we predict that the share of renewables in UK final energy demand will increase to 6% by 2020, compared with around 2¼% in 2008. The contribution towards the 15% UK target is intended to come from three different policy areas: the use of renewable sources to produce electricity, the use of biofuels in transport and the use of renewable fuels in heating, both in industry and by households. We also expect renewables to account for around 15% of electricity generation by 2020, compared with the previous Government's aspiration of a 30% share. However, the expected revisions to the RO policy, coupled with feed-in-tariffs for distributed generation are likely to further increase the production of electricity from renewable sources and reduce demand met by the electricity grid.

For transport, consistent with the revised Renewable Transport Fuel Obligation (RTFO), we have only modelled the increase in penetration of biofuels up to 2014 (it is held more-or-less constant thereafter), largely because there continue to be concerns among policymakers about sustainable sources and the potential threat to food production. The EU has, as a result, not yet fully formulated its renewable transport fuels policy beyond 2015. However, there is a broad ambition to extend the target for biofuels penetration beyond 2015 if it proved to be sustainable and this, if successful, would have a positive impact on the 2020 share of approximately 2 pp.

Lastly, the penetration of renewable fuels in heat supply has not been modelled over the forecast period, as the policies associated with the Renewable Heat Incentive have not yet been specified in sufficient detail. Once again, this is expected to increase the share of renewables in UK final energy demand. Overall, however, the 15% target remains a daunting challenge for the incoming Government.

Carbon emissions in the UK are expected to decline more slowly, by ¼-½% pa, over 2010-20, as the economy starts to grow more robustly

Total carbon emissions are forecast to decline more slowly by ¼-½% pa over 2010-20. Despite the continued growth in emissions from gas-fired generation, the emissions from power generation level off toward the end of the forecast period, a result mainly of the phasing-out of coal-fired generation not fitted with FGD end-of-pipe filters. This levelling-off in power generation emissions after 2015, reinforced by lower emissions from industry, road transport, households and commerce, is partially offset by the continuing rapid growth in carbon emissions from air transport. By 2020, CO2 emissions, at around 455 MtCO2, are expected to be 22.8% below the 1990 baseline and some 7.6 MtCO2 lower than our August 2009 forecast, due largely to the knock-on effects of the recession, which mean that energy use and hence emissions from road transport, households and commerce are lower than previously forecast.

Based on our estimate of net trading of allowances within the EU ETS, CO2 emissions are forecast to decline by around 27% between 1990 and 2020. However, these latest projections, in common with our previous forecast, only take into account those government policies that have been supported by concrete policy measures (see Context section below).

The UK is expected to meet easily its Kyoto target for greenhouse gases

The sharp reduction in CO2 emissions, estimated on the basis of energy-use data in 2009, and the further decline expected in 2010, is due to the knock-on effects of the 2009 recession which affected both the largely energy-intensive sectors covered by the EU ETS and also the non-ETS traded sectors (whose definition is given below). This means that, when coupled with the declines already achieved over 2004-09, the UK will surely meet its target, under the Kyoto Protocol, of a 12½% reduction between the defined 1990 baseline and the average for 2008-12 in the emissions of a group of six GHGs (see chart: Compliance with Kyoto Target). An additional factor ensuring that the Kyoto target will be met is the relatively low level of non-CO2 GHG emissions to date when compared with their corresponding levels in the 1990 baseline.

Official figures suggest that in 2008 GHGs were some 19.4% down on the 1990 baseline as a result solely of domestic effort; the decline was 22% with allowance for trading under the EU ETS as permitted under the Kyoto Protocol.

On a net UK carbon account basis, taking into account trading of allowances under the EU ETS, the decline in GHGs between the average for 2008-12 and the 1990 baseline is expected to be around 22¼%.

The UK is likely to come very close to meeting its carbon budgets for the first two budget periods, but the performance in the third will depend on future government policies on renewable energy in the non-traded sectors.

We forecast that the UK will come very close to achieving its carbon budgets in the first two budget periods (2008-12 and 2013-17), but is set to fall short of its carbon budget in the third (2018-22) period (see chart: UK Carbon Budgets and CE Forecast of Net GHG Emissions). In the traded sector, our forecast points to the UK purchasing an increasing quantity of EU ETS allowances (EUAs), particularly in power generation, as it will find it difficult to reduce traded emissions below the EU ETS caps, based on domestic effort alone.

Our forecast also indicates that EUAs, equivalent to an annual average of around 22 MtCO2, will need to be purchased over the third and final five-year budget period. This result occurs in our forecast for two main reasons:

  1. we predict a lower share of renewables in electricity generation, of around 15% by 2020, well below the current official aspiration, as expressed in the lead scenario of the Renewable Energy Strategy, of a 30% share of total electricity supply by 2020.
  2. we do not model the construction of any new nuclear capacity, which might have a minor impact in reducing the need to buy permits towards the end of the forecast period, as firm polices following the Nuclear White Paper are not yet in place.

Emissions from the non-traded sector are defined as those emanating from those UK sectors not included in the EU ETS ie households, transport, the majority of the commercial and public sectors, land-use change and non-CO2 GHGs. In our forecast, we expect that the UK will meet its EU target of a 16% cut in non-traded GHG emissions by 2020 compared with the level in 2005.

However, while our forecasts indicate that non-traded emissions will be close to the implied target in the first two periods, we expect the budget in the third 2018-22 period to be exceeded. This is because the 2008-09 recession reduces energy use, and hence emissions, over the short term. Over the longer term, the policies that we have either modelled or taken into account in the forecast are not enough to bring emissions within the target budget.

The role of renewable energy in heat supplied and transport will be critical in determining whether or not the official carbon-budget targets are met, as there is now a firm policy commitment, but as yet no firm policies in place (ie after 2015 in the case of transport and over the remainder of the forecast period in the case of heat). If, the incoming Government puts in place effective policies that promote the increased use of renewable energy in transport and for heat supply, and if the vehicle fuel efficiency targets in road transport are extended beyond 2015 as currently proposed, it seems quite likely that non-traded sector emissions will move more in line with the carbon-budget target in the third 2018-22 period. However, the key issue, that will need to be urgently resolved by the incoming Government, will be to specify fully the details of these policies, as this will determine whether or not the carbon targets in the third budget period will in fact be met.

 

Professor Paul Ekins of the UCL Energy Institute at University College London, who is Senior Consultant to Cambridge Econometrics and co-editor of its report UK Energy and the Environment, comments on our forecasts and singles out their most important messages:

      'The outgoing Government is to be applauded for setting statutory carbon targets and budgets, but the new administration will need to appreciate the difference between setting targets and having firm policies in place that help to achieve them. The challenge now is to ensure that the 2020 targets are met by policies that cause emissions to fall substantially in a context of economic growth.

      ‘The UK Low Carbon Transition Plan (LCTP) and Renewable Energy Strategy, published in July 2009, were welcome statements of the previous Government’s intent to reduce emissions in line with its targets. Numerous existing and forthcoming policies on emissions reduction have been consolidated into a single strategy for meeting the UK’s statutory emissions targets to 2020 and the LCTP also proposes strengthening some of those policies. Our forecasts, which only incorporate current policies and those with firm timetables and details of implementation, suggest that the UK is likely to nearly meet its carbon budgets for the first two periods, 2008-12 and 2013-17, largely due to the knock-on effects of the current recession, but is set to fall short of its carbon budget in the third 2018-22 period and hence miss, by around 2 pp, its legally-binding goal of a 34% reduction in GHG emissions by 2020.

      ‘In the traded sector, our forecast points to the UK becoming an increasingly large purchaser of EU ETS allowances, particularly in power generation, as this sector finds it difficult to reduce traded emissions below the EU ETS caps based on domestic effort alone. Our forecasts are less optimistic than official projections, as, firstly, we expect the contribution of renewables in 2020 to be around a half of the former government’s aspiration of a 30% share in total electricity supply; and secondly because we have assumed that no new nuclear capacity will come on stream by 2020 that might well bring the target within reach and reduce the need to buy permits towards the end of the forecast period.

      ‘We do expect, however, that the UK will meet its EU target of a 16% cut in non-traded GHG emissions by 2020 compared with the level in 2005. But our forecasts also indicate that non-traded emissions (from those UK sectors not included in the EU ETS, namely households, transport, the majority of the commercial and public sectors, land-use change and non-CO2 GHGs) will be close to the implied target in the first two periods, 2008-12 and 2013-17, but will exceed the budget over the third period 2018-22. This is because the 2008-09 recession reduces energy use and hence emissions over the short term. But over the longer term, the current and firmly announced policies, that we have taken into account in the forecast, are not enough to bring emissions within the target budget.

      ‘However, if the previous Government's aspirations are followed by the incoming administration devising concrete policies that substantially increase the share of renewable energy in heat supplied and transport by 2020 and beyond, then official carbon budget targets could be achieved. The previous Government made a clear policy commitment, but the challenge for the new Government is to specify firm policies covering the next ten years for these two sectors. If the incoming Government puts in place effective policies that ensure that renewable energy and energy efficiency make a greater contribution, then it seems quite likely that non-traded sector emissions would move more in line with the carbon budget target in the third 2018-22 period.

      ‘The central forecast, therefore, implies that the incoming Government will need urgently not only to set out  the details of the ambitious carbon-reduction policies it has inherited, but also move swiftly to their implementation if the UK is to achieve the statutory goal of a 34% reduction in GHGs by 2020. The achievement of the 2020 target would make it more likely that the UK will be on track for its longer-term target of an 80% reduction in emissions by 2050’.

 

Context of the forecast

Cambridge Econometrics today publishes the latest edition of UK Energy and the Environment containing detailed forecasts of energy demand and CO2 and SO2 emissions by fuel user and fuel type to the year 2020. The projections for CO2 are expressed in MtCO2, in line with international reporting practice.

These forecasts are produced using MDM-E3, Cambridge Econometrics' integrated energy-environment-economy model of the UK. They are a timely, independent private-sector assessment of the latest energy-environment developments that the incoming Government will have to take into account in framing its energy and climate change policies for the medium and long term. However, there is a broad political consensus among the major political parties on the emissions reductions targets to 2020 and the policy framework within which the new administration will need to operate. The coalition agreement between the Conservatives and the Liberal Democrats, signed ahead of the formation of the new Government, suggests that much of the existing framework including the legally-binding GHG targets set by the Climate Change Act 2008 will remain in place.

The previous Government was committed to meeting a number of targets for reducing UK greenhouse gas emissions, but the first annual progress report to Parliament from the Committee on Climate Change (CCC), Meeting Carbon Budgets: the need for a step change (http://www.theccc.org.uk/reports/progress-reports) published on 12 October 2009, indicated that the policies are not yet in place to do so. The key targets are those set out by the Climate Change Act 2008, which sets legally binding targets to reduce emissions by 26% in 2020 on 1990 levels, and by 80% in 2050. The Act also set up the CCC to advise the Government on setting 'carbon budgets': acting on the CCC's advice, the Government has now tightened the 2020 target to 34% and introduced three detailed carbon budgets for the period to 2022 in line with this target.

Our forecast therefore provides a yardstick for assessing the likelihood, under current policies and those with firm time tables and details of implementation, of the 2020 targets being met.

Our current projection takes into account: 

  • the existing and additional policies announced in the May 2007 Energy White Paper
  • the firmly announced policies (as opposed to the aspirations) in the July 2009 UK Low Carbon Transition Plan,
  • other government programmes including the Renewables Obligation on electricity suppliers and the Renewable Transport Fuel Obligation
  • the Budget 2009 measures increasing the Climate Change Levy in line with inflation respectively after the freeze in 2010/11, with indexation of rates assumed to continue over the forecast period and the extension of the Climate Change Agreements to 2017, which is conditional on EU state aid approval with, as indicated in PBR 2009, the discount reduced from 80% to 65% from 2011
  • the uprating of the main fuel duties over 2007-13 above the expected rate of inflation with increases of 1p per litre in April 2010, 2011 and 2012; and including the reversal of the temporary 2.5 pp cut in VAT in 2009 from January 2010
  • the third phase of the EU ETS covering the period 2013-2020: the emissions cap for industry within the System is assumed to decline by 1.74% each year and to be 21% below 2005 level in 2020 (the caps are expected to be published officially by the European Commission by 30 September 2010); and the inclusion of aviation in the EU ETS from 2012

However, we have not taken into account the following official documents because they have not as yet all been followed by concrete policy measures or because the policies have not been specified in sufficient detail:

  • the May 2007 Energy White Paper
  • the January 2008 White Paper on Nuclear Power (the possible new-build of nuclear power generation is therefore excluded from our forecast since no planning permission has been granted and there is as yet no concrete time-scale)
  • the aspirations embodied in the July 2009 UK Low Carbon Transition Plan.

The CERT, CRC Energy Efficiency Scheme (previously known as the Carbon Reduction Commitment), the Renewable Heat Incentive have also not been taken into account as sufficient details are not yet available to allow their modelling. The Feed-in-Tariff to promote microgeneration also has not been modelled and hence is not taken into account in our forecast. On the economic side, we have not included widely expected measures to reduce the public sector deficit as there are at present insufficient details to enable them to be modelled. 

An  average allowance price of around €15/tCO2 is now expected in 2010, as the impact of the recession in reducing demand for permits in 2009 is only partially reversed. An increase to €23/tCO2 is assumed by the end of Phase 2 in 2012 as the economy recovers; a rise of around 2% pa to €28/tCO2 has been assumed thereafter to 2020.

Notes for Editors

Cambridge Econometrics is an independent private limited company and is owned by a charity, the Cambridge Trust for the Promotion of New Thinking in Economics. It has been providing detailed economic and industrial forecasts since 1978. Our company also provides detailed regional and energy forecasts for the UK, and regional forecasts for the European Union. We provide the most detailed long-term economic and industrial forecasts available for the UK. The projections are produced using the 'Cambridge model', known as the Multisectoral Dynamic Model of the UK economy (MDM), which was originally developed in the University of Cambridge Department of Applied Economics. This large computerised system has approximately 5,000 endogenous variables and nearly 16,000 behavioural parameters and other coefficients. The model is continually revised and improved to take account of new data and advances in economic theory and econometric techniques.

Our system of quality management for economic modelling has been approved as complying with the international standard ISO 9001:2000. In the energy-environment aspects of MDM-E3, demand for eleven fuel types by 25 fuel users (expanded in this forecast from our previous classification containing 13 fuel users to allow even more detailed E3 analysis) is modelled, and a capacity-based sub-model of the electricity supply industry is included. Energy demand for sectors other than power generation is determined econometrically, and is consistent with the macroeconomic and industrial forecasts released on 25 February 2010. The economic and industrial projections take into account the fall in overall UK economic activity recorded in the year to mid-2009 and the knock-on effects in restricting economic growth expected over the short term.
All historical energy data are consistent with the 2009 Digest of UK Energy Statistics and environmental data with the UK's National Atmospheric Emissions Inventory maintained by AEA Energy and Environment.
The cut-off date for the information used in the model run for this forecast was 28 February 2010.
UK Energy and the Environment is published twice a year. The forecast and analysis are available on our Knowledge Base website to companies and Government departments by subscription to our Energy-Environment-Economy Forecasting Service, which combines energy and environment forecasts with detailed projections for the whole UK economy.

For further information the following persons may be contacted:
Sudhir Junankar
Associate Director and Manager, Energy-Environment Service
Tel (01223) 460760
Email sj@camecon.com

Chris Thoung 
Senior Economist 
Email ct@camecon.com