CREDS: The distributional effects of pathways to net zero and the implications for fuel and transport poverty

A key challenge associated with the transition to net zero is how to fairly spread the costs and benefits of policies used to achieve decarbonisation across all aspects of society.

This study formed part of the CREDS-funded FAIR project, and explored whether new inequalities may emerge, or existing inequalities worsen within UK society, because of policies designed to transition the UK to a net zero economy and society. It specifically considers the vulnerability of different types of representative households to fuel and transport poverty as a result of three different policy approaches to achieving net zero.

Key takeaways

• Households on low-income, households with children, ethnic minority households and households with health and/or mobility difficulties are all predisposed to experience energy and transport poverty combined. Without the appropriate support, these groups are vulnerable to financial hardship when paying their energy and transport costs in the UK’s energy transition.
• Without appropriate policy that recognises the potential ‘winners’ and ‘losers’ of the transition to net zero, worsening inequalities may emerge.

Policies examined

Three scenarios were designed to explore the impacts of alternative pathways to net zero for the UK economy and for different household archetypes.

•  Scenario 1: Designed to replicate major climate policies and targets included in the UK Government’s “Net Zero Strategy” (NZS). When the NZS was modelled in Cambridge Econometrics’ global macroeconomic model E3ME, it does not achieve net zero emissions by 2050.

Two further scenarios outlined alternative pathways to net zero (both achieving higher emissions reductions than the NZS scenario).

• Scenario 2: used a range of regulatory measures to achieve emissions reductions.
• Scenario 3: relied on a market-based instrument (MBI), to incentivise the decarbonisation of the economy.

Economic impacts

 The Macroeconomic results of the scenario modelling.

Two key findings:

1. Climate policy generates favourable outcomes for the environment, economy and society as a whole, creating a win-win situation in which emissions are reduced, while at the same time the economy grows, and new employment opportunities are created.
2. More ambitious climate action (in terms of emissions reductions) can lead to even greater gains for the environment, economy and society.

Distributional impacts

The distributional outcomes of the decarbonisation policy pathways.

Three key findings:

1. There can be ‘winners’ and ‘losers’ in each of the policy pathways in 2035.
2. In 2035, households which are vulnerable to fuel and/or transport poverty, for example pensioners with health conditions, or low-income households, particularly from ethnic minorities and living in social housing, will be disproportionately affected by the decarbonisation pathways. Their equity-weighted energy bills are estimated to be higher than more affluent, and they cannot take advantage of switching to electric vehicles which have lower running costs than petrol and diesel cars.
3. Less vulnerable groups are not as greatly affected, or even benefit from the transition to net zero. Retired couples and families on average incomes and young to middle-aged households on high income tend to pay substantially lower annual household energy bills (when equity-weighting is taken into account). Wealthier households are expected to make financial savings from their ability to switch from using a petrol or diesel car to driving an electric vehicle.