Delivering the UK’s carbon targets by 2050 will involve structural shifts in the UK economy – and public policy has an essential role to play
Deputy CEO Jon Stenning shares his expert reflections on the UK’s Climate Change Committee’s Seventh Carbon Budget.
Yesterday, the UK’s Climate Change Committee (CCC) released their 7th Carbon Budget Report, setting out an emissions target for 2038 to 2042, and recommendations to get there. It demonstrates the scale of change needed across energy generation, major energy consuming technologies, and the choices made by households and businesses to keep the UK on track to meet net zero.
Decarbonising the economy will transform parts of the economy rather than the economy as a whole
While changes within these parts of the economy will be substantial, the CCC is right to point out that the majority of the changes are within certain sectors such as power generation, rather than transformational across the economy as a whole.
Unless Carbon Capture Usage and Storage (CCUS) becomes more cost competitive than currently expected, greening the economy by 2050 will be an existential challenge for the oil & gas sector, and will change the levels of capital expenditure, economic activity, employment and skills requirements in a number of sectors such as energy supply, agriculture, household heating and motor vehicle maintenance. While sources of energy (for transport, heating and other purposes) will change, the fundamentals of economic activity in most other sectors will not.
Public policy will have a key role in delivering a just transition to net zero for the most vulnerable in society
There is clearly a major role for public policy in delivering the transition in a way that does not disadvantage the most vulnerable in society.
Previous work carried out by Cambridge Econometrics as part of the Centre for Research into Energy Demand Solutions (CREDS) has demonstrated that different policy pathways can be utilised to deliver a decarbonised economy, and that there are economic (and potential equality) benefits to delivering it in a way that helps low-income households.
As ever, much of the devil is in the detail – for example, overcoming the split incentives problem of improving energy efficiency in rented properties, where the landlord pays for the efficiency measures while the tenant accrues the benefits of lower energy bills.
As another example, much of the CCC’s pitch around the benefits of decarbonisation centres on the potential for lower energy bills; but the UK electricity market has recently experienced (mercifully short) periods of extremely high prices, driven by high prices demanded by combined cycle gas turbine peaker plants.
The future GB electricity market will need to be designed in such a way as to minimise the impact that such periods of high prices (largely inevitable in an electricity system dominated by variable renewables) have on prices faced by consumers.
It is essential to think holistically about the costs and benefits of delivering a decarbonised economy, rather than focusing solely on financial costs
Finally, the CCC report highlights that the scale of additional capital expenditure required to deliver the decarbonised UK economy by 2050 is smaller than it previously estimated. An economy that is powered by electricity, rather than fossil fuels, is powered by domestically produced goods rather than imports, creating jobs and economic opportunity within our own borders. But there are other reasons to think that the transition will be beneficial to the UK economy at large.
Previous analysis carried out by the team at Cambridge Econometrics estimating the macroeconomic impacts of the Sixth Carbon Budget. Whilst this was not updated for the latest Carbon Budget, this analysis is insightful and important for public policy development because it demonstrates clearly the difference between system costs (broadly what is measured by the CCC) and the macro-level outcomes which reveal long-term economic growth.
Large-scale investment in new power generation capacity, and in new manufacturing sites, will act as a short-term stimulus (particularly in construction and manufacturing), as well as providing long-term employment opportunities.
Switching to more energy efficient technologies such as from combustion engines to electric motors; from gas boilers to heat pumps; and from blast furnaces to electric arc furnaces, means less going in for the same output, which can bolster economic productivity in the long term – assuming that the change in energy content as an input is reflected in the cost of that energy content.
The rest of the world will decarbonise over time, as the economic benefits (at the micro and macro levels) become clear. Decarbonising the UK economy is necessary to ensure that the UK remains competitive on the global scale, and offers an opportunity for developing expertise that can subsequently be exported to other countries that are decarbonising at a slower pace.
These impacts highlight why it’s essential to take a wider macroeconomic view of how changes in capital and operating expenditure will influence the long-term development of the economy.
They can provide important supporting evidence for how decarbonising the economy can not only limit the devastating impacts of climate change, but can also support wider policy aims of bolstering economic growth in the UK, and how it is distributed across the country.
Cambridge Econometrics has the econometric modelling tools and policy evaluation expertise to help you tackle these issues; the potential benefits from the transition to net zero, how they might be distributed across the country and the population, and how policy can help to shape those outcomes. Get in touch if you’d like to better understand these issues.