Britain’s Decarbonisation Strategy IU at LSE Lectures 29 July 2011

1. Britain’s Decarbonisation StrategyIU at LSE Lectures29 July 2011 Sam Fankhauser Grantham Research Institute and CCCEP London School of Economics Support by the ESRC and the Grantham Foundation is gratefully acknowledged

2. Overview • Britain’s carbon targets • The Climate Change Act; the 2050 target; five-year carbon budgets • Decarbonisation sector by sector • Energy, buildings, industry, transport, agriculture • The policy landscape

3. The 2008 Climate Change Act • Sets legally binding carbon targets • Long-term (2050) target set in the Act • Binding 5-year carbon budgets set 12 years ahead • First three budgets (2008–22) set in 2009 • Fourth budget (2023-27) set in 2011 • Puts in place an institutional framework for delivery • Independent Committee on Climate Change recommends budgets and reports on progress

4. The mandatory 2050 target • Climate Objective • Expected temperature change as little above 2oC as possible • Risk of 4 oC at very low levels (e.g. <1%) Science International Circumstances Set in the Climate Change Act, as recommended by the CCC • UK 2050 legislated target 80% reduction in GHG from 1990, all sources Global emissions peak by 2020, halve by 2050

5. The carbon budgets 2008 - 27 Interim Budget is currently legislated, CCC recommends tightening Source: Committee on Climate Change (2010)

6. Indicative emissions trajectories Different sectors will have different emission reduction paths Source: Committee on Climate Change (2010)

7. Overview • Britain’s carbon targets • The Climate Change Act; the 2050 target; five-year carbon budgets • Decarbonisation sector by sector • Energy, buildings, industry, transport, agriculture • The policy landscape

8. Electric power emissions Electricity generation needs to be all but carbon-free in 20 years Source: Committee on Climate Change (2010)

9. Wholesale replacement of generating assets Many power stations due for replacement in the 2020s anyway Source: CCC (2009, 2010) on shoreoffshore

10. Emissions from buildings Push in energy efficiency and gradual introduction of renewable heat

11. The role of new heat technologies Renewable sources of heat emerging in the 2020s Source: Committee on Climate Change (2010)

12. Industrial emissions Some difficult-to-reduce emission sources

13. Industrial emissions Scope for emission reductions beyond energy efficiency still uncertain

14. Transport emissions Technological change dominates demand management

15. Turning over the car fleet Improvements in petrol cars followed by electrification Source: Committee on Climate Change (2010)

16. Agricultural emissions A sector were emissions may be difficult to reduce

17. Decarbonisation beyond 2030 Source: Committee on Climate Change (2010)

18. Overview • Britain’s carbon targets • The Climate Change Act; the 2050 target; five-year carbon budgets • Decarbonisation sector by sector • Energy, buildings, industry, transport, agriculture • The policy landscape

19. A complex landscape: price measures • Cap and trade schemes • EU Emissions Trading Scheme • Carbon taxes • Climate Change Levy (diluted through Climate Change Agreements) • Renewable energy incentives • Renewable obligation (large scale) • Feed-in tariff (up to 5MW) • Renewable heat incentive • “Accidental” price measures • Fuel duty: primary purpose is fiscal • Landfill tax: primary duty is waste management

20. A complex landscape: non-price measures • Supplier obligations • Carbon Emission Reduction Target (CERT) • Financial assistance • “Green Deal” (for building efficiency) • Green Investment Bank (for large investments) • Information and technical assistance • Carbon Trust, Energy Savings Trust • Reputation and management incentives • CRC Energy Efficiency Scheme

21. Issues of policy design: electricity market reform Current arrangements do not deliver the required emission cuts What market may deliver Required path Source: CCC based on modelling by Redpoint Energy and Pöyry Energy Consulting

22. Issues of policy design: Interaction of policies Additional policies add complexity, may affect each other E.g. policies promoting renewables reduce the carbon price

23. Indicative simulation Price effect of a unilateral tax in 2010 Assuming quadratic functions (i.e. linear MAC), loosely calibrated on the cost of the current EU ETS cap

24. Issues of policy design: Carbon price volatility

25. Measures to reduce price volatility Carbon price underpin, cap-and-collar or safety valve as options price price S = cap S Δp Δp D D D’ D’ quantity Δq quantity q = const Fixed cap Collar

26. Issues of policy design: Competitiveness Limited to a few industries, but are there better tools than free permits? Source: CCC (2008)

27. Issues of policy design: Fuel poverty Energy efficiency could take 300,000 households out of fuel poverty Targeted energy efficiency Income support (e.g. winter fuel payments) Tariff structure (e.g. block tariffs)

28. Issues of policy design: Job creation Quality of jobs (productivity) is more important than quantity Salaries in carbon trading (2008) Labour intensity of energy Solar PV Wind Biomass Coal Gas 7.4 – 10.6 0.7 – 2.8 0.8 – 2.9 1.0 1.0 1.0 • 2 3 4 • Jobs per MW Sources: Carbon Salary Survey 2009; Kammen et al (2006)

29. Has it worked? Emissions are within budget, but mostly due to the recession Source: Committee on Climate Change (2010)

30. Britain’s Decarbonisation StrategyIU at LSE Lectures29 July 2011 Sam Fankhauser Grantham Research Institute and CCCEP London School of Economics Support by the ESRC and the Grantham Foundation is gratefully acknowledged