Embargoed until 00.01 Tuesday 27 October 2009
UK Energy and the Environment Press Release
Latest projections indicate that:
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the recession will help to cut the UK's emissions but the Government's carbon-reduction goal for 2010 will most likely be missed
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the UK is expected to meet its carbon budgets for the first two periods (2008-12 and 2013- 2017), but will just miss the target for the third (2018-22)
The recession will help to reduce UK carbon emissions by around 7% between 2008 and 2010, but the Government’s long-standing domestic goal of a 20% reduction by 2010 is still likely to be missed by a wide margin
Cambridge Econometrics forecasts suggest that CO2 emissions will decline sharply by just over 4% in 2009 and by a further 3% in 2010 as energy use by final users, particularly in industry and road transport, declines due to the large reduction in economic activity and the substitution of gas for coal in electricity generation. Power generation, road transport and industry, when taken together, account for more than three-quarters of the 7% reduction expected between 2008 and 2010. We now forecast emissions in 2010, (see Chart 1: Compliance with Domestic Policy Goal) to be 497 MtCO2 (15.8% below the 1990 level). This implies a fall far steeper than the estimated 10.3% reduction achieved between 1990 and 2008 based solely on domestic abatement effort and the corresponding reduction of 12.8% between 1990 and 2007 including the impact of the EU Emissions Trading System (EU ETS).
Following a 3% fall in 2002, CO2 emissions rose by around 2% in 2003, and increased very slightly over 2004-05, as high gas prices led to a shift from gas to coal in power generation. Emissions fell by around ½% in 2006 and fell further by around 1½%% in 2007, primarily because power generators shifted back into gas and away from coal as the gas-coal price differential narrowed and energy use and emissions in industry and commerce fell. Provisional DECC figures, based on energy use data, suggest that emissions fell by around 2% in 2008 due to fuel switching from coal to natural gas for electricity generation combined with lower fossil fuel consumption by industry and road transport as the recession took hold. The figures for 2005-08 are based on domestic abatement effort and exclude the net purchases of allowances under the EU ETS.
We forecast that
the Government will fall well short of its renewable electricity targets
for 2010 and 2020, and also not meet its EU-set target of a 15% share
for renewable energy in total final energy consumption by 2020
We
forecast that renewables will account for around 6½% of UK
electricity sales to final users by 2010, just over half way towards
meeting the 10% target. However, if final electricity demand grows at
around ¼-1% 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 10¼%
by 2015, still short of the 15% target set by the RO, and around 15¼%
by 2020, well below the Government’s aspiration through the RO
for a much higher, though as yet unspecified, 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 there will be less demand
for new renewables to fill the gap left by the decommissioning of most
of the UK’s nuclear and older non-FGD coal-fired power stations.
The government published its Renewable Energy Strategy (RES) in July
2009 alongside the Low Carbon Transition Plan. According to the RES,
the 15% target will be split between electricity, heat and transport.
In the ‘lead scenario’ (for renewables as share of final
energy demand) electricity will make the largest contribution to the
target: 30% of electricity hoped to be generated from renewable sources
in 2020, thus accounting for over 7% of total final energy demand. In
2008 around 5½% of UK electricity sales on a Renewables Obligation
(RO) basis came from renewables. Renewables will account for 12% of heat
demand and 10% of transport demand in 2020, compared to around 1% and
1½% in 2008 respectively. Therefore, renewable heat will meet
around 4½% of total final energy demand and renewable transport
will account for around 3%.
Our forecast highlights the extent of the challenge facing the Government as it seeks to meet the UK’s legally-binding 15% renewable energy target for 2020 as part of the 20% target for the EU as a whole. We predict that the share of renewables in UK final energy demand will increase to around 5% by 2020, compared with around 2% in 2008. This is because we expect renewables to account for around 15% of electricity generation, compared with the Government’s aspiration of a 30% share. In addition we have modelled the take-up of renewable biofuels in transport only up to 2015, largely because there are concerns among policymakers about sustainable sources and the potential threat to food production and the EU has, as a result, not yet fully formulated its renewable transport fuels policy beyond 2015. Lastly, the penetration of renewable fuels in heat supply has not been modelled over the forecast period, as various policies associated with the Renewable Heat Incentive have not yet been specified in sufficient detail.
Carbon emissions
in the UK are expected to decline more slowly after the recession, at
around ¾% pa, over
2010-20
Over 2010-20, total carbon emissions are forecast to decline more slowly, by around ¾% pa. Despite the continued growth in emissions from gas-fired generation, the emissions from power generation fall by ¾-1¼% pa, a result mainly of a phasing-out of coal-fired generation not fitted with FGD end-of-pipe filters. This decline in power generation emissions, reinforced by lower emissions from industry, commerce, road transport and households, is partially offset by the continuing rapid growth in carbon emissions from air transport. By 2020, CO2 emissions, at around 463 MtCO2, are expected to be 21.6% below the 1990 baseline and some 17 MtCO2 lower than our February 2009 forecast, due largely to the knock-on effects of the recession, which mean that energy use and hence emissions from industry, road transport and power generation are much lower than previously forecast. Our current forecast, which is based on domestic abatement effort, includes only the direct impact of the EU ETS allowance price on UK emissions. 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 the Kyoto target for greenhouse gases
The forecast reduction in CO2 emissions for 2009 and 2010, when coupled with the declines already achieved since the late 1990s, means that the UK will easily 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 2: Compliance with Kyoto Target). Provisional official figures suggest that in 2008 GHGs were some 19.3% down on the 1990 baseline based solely on domestic effort; the decline was 21.7% up to 2007 (the latest year for which data are available) with allowance for trading under the EU ETS.
Our forecast (on the basis of domestic effort alone) of around 22% decline between the 1990 baseline and the average over 2008-12, relies on the assumption that, under the EU ETS, the average allowance price will rise from its estimated level of €13 in 2009 to reach €23 by the end of Phase 2 in 2012. Unlike the earlier UK scheme which ended in December 2006, the EU scheme is mandatory and includes power generation. In this forecast we have also taken account of the inclusion of aviation in the EU ETS from 2012 and the proposed reduction in the EU-wide cap over Phase 3 (2013-20) of the scheme such that it is 21% below the 2005 level by 2020. On a net UK carbon account basis, taking into account the expected trading of allowances under the EU ETS, the decline in GHGs between the average for 2008-12 and the 1990 baseline is forecast to be similar, at around 23%.
The UK is likely to meet its carbon budgets
for the first two periods, but not the third (2018-22), unless the
Government’s renewable
energy policies for the non-traded sector succeed
We forecast that the UK will achieve its carbon budgets in the first two periods (2008-12 and 2013-17), but fall short of its carbon budget in the third 2018-22 period (see Chart 3: UK Carbon Budgets and CE Forecast of Net GHG Emissions) and hence miss, by around 2 pp, its legally-binding goal of a 34% reduction in GHG emissions by 2020.
In the traded sector, where the emissions will be set at the level of the UK share of the EU ETS cap over Phase 3 of the scheme, our forecast points to the UK becoming an increasingly greater purchaser of EU ETS allowances (EUAs), particularly in power generation, as it finds it difficult to reduce traded emissions below the EU ETS caps. Our forecast suggests that EUAs, equivalent to an annual average of around 20 MtCO2, will need to be purchased over the third five-year budget period. There are two main reasons for this. First, we predict a lower share of renewables in electricity generation, at around 15% by 2020, well below the current government aspiration, as expressed in the lead scenario of the ‘Renewable Energy Strategy’, of a 30% share in total electricity supply by 2020 and, secondly, because 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 our forecasts also indicate that non-traded emissions will be below the implied target in the first two periods, 2008-12 and 2013-17, but will be above the implied target (which specifies a much sharper reduction than in earlier periods) over the third period 2018-22. This is because the current recession has only a once-and-for-all impact by reducing energy use and hence emissions over the short term. But over the longer term, the policies that we either have modelled or taken into account in the forecast are not enough to bring emissions within the lower target budget.
However, the role of renewable energy in heat supply 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, after the 2010 General Election, the incoming government puts in place effective policies that promote the increased use of renewable energy in transport and for heat supply, then it seems quite likely that non-traded sector emissions would move more in line with the carbon budget target in the final 2018-22 period.
Professor Paul Ekins of 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 these results and singles out their most important messages:
‘The Government is to be applauded for setting statutory carbon targets and budgets, but seems still to need appreciate the difference between setting targets and achieving them. Our forecast for 2010 suggests that even with a 7% fall in emissions from 2008 levels, due largely to the recession, the Government will fall short of its 20% carbon-reduction goal from the 1990 level, despite this target having been in two election manifestos and the principal subject of two Climate Change Programmes. It is imperative for UK credibility in this area that the 2020 targets do not go the same way, but this requires strong action soon.
‘The UK Low Carbon Transition Plan (LCTP) and Renewable Energy Strategy, published in July 2009, are welcome statements of the 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. However, our forecasts, which only incorporate current policies and those with firm time tables and details of implementation, suggest that the UK is likely to 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, where the emissions will be set at the level of the UK share of the EU ETS cap over Phase 3 of the scheme, our forecast points to the UK becoming an increasingly large purchaser of EU ETS allowances, particularly in power generation, as it finds it difficult to reduce traded emissions below the EU ETS caps. 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 current 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 under 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 current recession has only a once-and-for-all impact by reducing 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 government aspirations are reflected in concrete policies that increase substantially the share of renewable energy in heat supplied and transport by 2020, then official carbon budget targets could be achieved. We have now a clear policy commitment, but firm policies covering the next ten years have yet to be specified for these two sectors. If, after the 2010 General Election, the incoming government puts in place effective policies that ensure that renewable energy makes 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 following the 2010 General Election the incoming Government will need urgently to set out not only the details of its ambitious carbon-reduction policies, but also move swiftly to their implementation if it 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 now expressed in MtCO2, in line with international reporting practice, replacing our previous practice of reporting emissions in terms of million tonnes of carbon. 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 follow the Government’s commitment to meeting a number of targets for reducing UK greenhouse gas emissions and also the Committee on Climate Change (CCC) first annual progress report to Parliament entitled Meeting Carbon Budgets: the need for a step change (http://www.theccc.org.uk/reports/progress-reports) published on 12 October 2009. 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 increased 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 government policies and those with firm time tables and details of implementation, of the 2020 targets being met.
In July 2009, the government published the ‘UK Low Carbon Transition Plan’ (LCTP), which forms its present strategy for meeting its emissions targets to 2020. The LCTP consolidates the government’s numerous existing and forthcoming policies on emissions reduction into a single strategy, and also proposes strengthening some of those policies. The other main purpose of the LCTP is to share out the overall emissions targets between six key sectors: power & heavy industry will contribute 54% to the 2018-22 carbon budget; transport will contribute 19%; homes & communities will contribute 13%; workplaces & jobs will contribute 9%; and farming, land & waste will contribute 4%. Responsibility for meeting these targets will be shared among the relevant government departments. Finally, the LCTP also sets out how £405m that was made available in Budget 2009 will be shared for the development of various low-carbon technologies.
Our projections take into account:
- the Budget 2009 measures increasing the Climate Change Levy in line with inflation in 2009/10 (with indexation of rates assumed to continue over the forecast period)
- the extension of the Climate Change Agreements to 2017
- the uprating of the main fuel duties over 2007-13 above the expected rate of inflation with increases of 2p per litre in September 2009, 1p per litre in April 2010, 2011 and 2012
- the temporary 2.5 pp cut in VAT in 2009 and its reversal in 2010
We have also taken into account firm policies such as:
- the Renewables Obligation on electricity suppliers
- the Renewable Transport Fuel Obligation (RTFO)
- and make some allowance for, but not formally modelled, energy efficiency policies (eg the Carbon Emissions Reduction Target, aimed at households and the Carbon Reduction Commitment, a mandatory cap-and-trade scheme aimed at large organisations in the service industries and in public administration that will introduced gradually from April 2010 and fully operational by April 2103)
However, we have not taken into
account the following official documents because they have not as yet
all been followed by concrete policy measures:
- the proposals outlined in the July 2006 Energy Review
- the May 2007 Energy White Paper
- the January 2008 White Paper on Nuclear Power
- the aspirations embodied in the July 2009 UK Low Carbon Transition Plan.
An average allowance price of around €13 tCO2 is now expected
in 2009, largely reflecting the impact of the recession in reducing
demand for permits. An increase to €23 is assumed by the end of
Phase 2 in 2012 as the economy recovers; a rise of around 2% pa to €28
has been assumed thereafter to 2020. In this forecast we have also
taken account of the inclusion of aviation in the EU ETS from 2012
and the proposed reduction in the EU-wide cap over Phase 3 (2013-20)
of the scheme such that it is 21% below the 2005 level by 2020. Although
there is a reduction of 13% in the allocation of allowances for participating
installations between Phases 1 and 2 of the EU ETS, the forecast suggests
that this is not sufficient to achieve the 20% domestic goal by 2010.
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 thirteen fuel users 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 industrial forecast released on 17 July 2009. The industrial projections take into account the fall in overall UK economic activity recorded in the year to mid-2009 and the knock-on effects expected over the short term. All historical energy data are consistent with the 2008 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 30 June 2009.
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 Service, which combines energy and environment forecasts with detailed projections for the whole UK economy. The information is also available to subscribers in printed format.
For further information contact
Sudhir Junankar
Associate Director
or
Chris Thoung
Economist
Tel: 01223 460760
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