GETTING TO ZERO

Costing the Earth: A fiscally responsible path to net zero

A plan for how to decarbonise the UK economy without undermining competitiveness, hitting consumers or overburdening taxpayers.
Ted Christie-Miller
November 28, 2019
Costing the Earth: A fiscally responsible path to net zero
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Minimum capital investment of £200 billion annually required to reach net zero by 2025.

Analysis in a new Onward report, Costing the Earth, reveals that achieving net zero by 2025 would 9% of GDP each year, equivalent to an eye-watering £7,336 per household annually. However, the current 2050 net zero target will cost just £1,233 per household annually.

The UK was the first major economy to legislate a net zero target earlier this year. The target states that the UK must achieve a 100% reduction in emissions from 1990 levels by 2050. Significant progress towards decarbonisation has already been made. The UK has reduced economy-wide greenhouse gas emissions by 44% since 1990, faster than any other major economic power.

Despite the introduction of a legally-binding 2050 net zero target, there still remains significant uncertainty around the costs of reaching net zero by this date. Estimates from the Climate Change Committee (CCC) predict that the costs of reaching net zero by 2050 equal 1-2% of GDP each year – equivalent to around £35 billion annually. Summing up to 2050, this implies a total cost of £1.05 trillion. However, the CCC’s estimates combine up front capital expenditure with changes in operating costs to 2050.

In many cases low and zero carbon technologies have higher capital costs than fossil fuel technologies, but then lower running costs over their lifetime. It should be recognised that there is therefore an up front capital investment requirement which could be many times higher than the aggregate £1 trillion figure mentioned above.

Bringing the 2050 net zero target forward to 2025 or 2030 would involve accelerating this capital investment over a much shorter period and so the annual costs will skyrocket. For example, reaching net zero by 2025, as called for by Extinction Rebellion, or 2030, as called for by the Green Party, would cost an absolute minimum of £200 billion or £100 billion each year respectively.

Dec 8
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Summary of recommendations

Detail

Costing the Earth puts forward 20 recommendations for the Government to decarbonise the economy and achieve the 2050 net zero target, without undermining competitiveness or overburdening taxpayers or consumers. These include:

  1. Replace the current “Contracts for Difference” regime with a system of “Carbon Contracts”
  2. Remove energy levies from consumer electricity bills and rebalance VAT for electricity and gas
  3. Replace Winter Fuel Payments, with Energy Efficiency Capitals scheme for fuel poor households
  4. Plant 1.4 billion trees by 2050 by redirecting agricultural subsidies towards an expanded Woodland Carbon Guarantee scheme
  5. End support for fossil fuel projects overseas through Overseas Development Aid and Export Finance
  6. Improve coordination on decarbonisation across Government, by aligning the remit of Ofgem to the net zero goal, and assessing the carbon impact of every Budget decision

 

  1. Replace the current “Contracts for Difference” regime with a system of “Carbon Contracts”. This would ensure the delivery of low carbon electricity generation is incentivised by pricing carbon emissions into the cost of electricity rather than through explicit government subsidies.
  2. Remove energy levies from consumer electricity bills and rebalance VAT for electricity and gas. This should be done to ensure electricity, which has been significantly decarbonised in recent years, attracts zero VAT while highly-emitting gas is charged at 20% VAT. These changes would spur investment in low carbon heating options.
  3. Replace Winter Fuel Payments, with Energy Efficiency Capitals scheme for fuel poor households. Winter Fuel Payments are paid to all pensioners and cost the taxpayer £2 billion annually. The new scheme would allow fuel poor households to upgrade their insulation and energy efficiency.
  4. Plant 1.4 billion trees by 2050 by redirecting agricultural subsidies towards an expanded Woodland Carbon Guarantee scheme. This would help to realise cost-effective carbon sequestration, which can be achieved for around £12/tCO2, as well as the wider environmental benefits associated with tree-planting.
  5. End support for fossil fuel projects overseas through Overseas Development Aid and Export Finance. 96% of UK Export Finance for energy investment currently goes towards fossil fuel projects, costing taxpayers £2.5 billion of the overseas development budget. This is counter-productive to domestic decarbonisation progress.
  6. Improve coordination on decarbonisation across Government, by aligning the remit of Ofgem to the net zero goal, and assessing the carbon impact of every Budget decision. This would remove perverse incentives where Ofgem activity can inadvertently frustrate progress towards net zero. It would also help to ensure that both the trade offs and synergies between economic growth and environmental action are transparently understood and debated simultaneously in the round, rather than as separate issues.

 

Summary of recommendations

Costing the Earth puts forward 20 recommendations for the Government to decarbonise the economy and achieve the 2050 net zero target, without undermining competitiveness or overburdening taxpayers or consumers. These include:

  1. Replace the current “Contracts for Difference” regime with a system of “Carbon Contracts”
  2. Remove energy levies from consumer electricity bills and rebalance VAT for electricity and gas
  3. Replace Winter Fuel Payments, with Energy Efficiency Capitals scheme for fuel poor households
  4. Plant 1.4 billion trees by 2050 by redirecting agricultural subsidies towards an expanded Woodland Carbon Guarantee scheme
  5. End support for fossil fuel projects overseas through Overseas Development Aid and Export Finance
  6. Improve coordination on decarbonisation across Government, by aligning the remit of Ofgem to the net zero goal, and assessing the carbon impact of every Budget decision

 

Detail

  1. Replace the current “Contracts for Difference” regime with a system of “Carbon Contracts”. This would ensure the delivery of low carbon electricity generation is incentivised by pricing carbon emissions into the cost of electricity rather than through explicit government subsidies.
  2. Remove energy levies from consumer electricity bills and rebalance VAT for electricity and gas. This should be done to ensure electricity, which has been significantly decarbonised in recent years, attracts zero VAT while highly-emitting gas is charged at 20% VAT. These changes would spur investment in low carbon heating options.
  3. Replace Winter Fuel Payments, with Energy Efficiency Capitals scheme for fuel poor households. Winter Fuel Payments are paid to all pensioners and cost the taxpayer £2 billion annually. The new scheme would allow fuel poor households to upgrade their insulation and energy efficiency.
  4. Plant 1.4 billion trees by 2050 by redirecting agricultural subsidies towards an expanded Woodland Carbon Guarantee scheme. This would help to realise cost-effective carbon sequestration, which can be achieved for around £12/tCO2, as well as the wider environmental benefits associated with tree-planting.
  5. End support for fossil fuel projects overseas through Overseas Development Aid and Export Finance. 96% of UK Export Finance for energy investment currently goes towards fossil fuel projects, costing taxpayers £2.5 billion of the overseas development budget. This is counter-productive to domestic decarbonisation progress.
  6. Improve coordination on decarbonisation across Government, by aligning the remit of Ofgem to the net zero goal, and assessing the carbon impact of every Budget decision. This would remove perverse incentives where Ofgem activity can inadvertently frustrate progress towards net zero. It would also help to ensure that both the trade offs and synergies between economic growth and environmental action are transparently understood and debated simultaneously in the round, rather than as separate issues.

 

To date, emissions reductions have primarily been achieved through the decarbonisation of the power sector, achieved by a price on carbon in the sector, energy efficiency improvements, and subsidies for renewable power.

The analysis also shows the progress made in other sectors. However, emissions from transport and buildings are lagging behind; transport emissions have increased while emissions from heating buildings have only decarbonised by 20%. Heating represents a particular problem, due to poorly insulated housing stock, 86% of properties using gas central heating, and 2.53 million households in fuel poverty. The costs of insulation and heat pumps, which will be required to decarbonise the sector, remain prohibitively expensive for many households, while electricity prices are also significantly more expensive than gas due to levies used to fund investment in renewables.

The research also notes the complex policy and intervention framework for the energy sector, which hinders efficiency. The number of interventions is “so great that few if any could even list them all”, while they are administered and enforced by at least 19 departments, regulators and non-departmental bodies. Many of these policy changes and consumer levies have meant that energy prices for consumers have risen in spite of wholesale energy costs, especially from renewables, falling in recent years. Energy costs disproportionately hit those on lower incomes: the lowest 10% of households spend an average of 8.4% of their income on energy bills, compared to 2.6% of those in the top 10% of incomes.

Finally, the report finds that decarbonisation has clashed with competing Government priorities, with environmental objectives often subjugated below other departmental priorities meaning the UK has been trying to reduce emissions with one arm behind its back. In addition, the report describes how international action on climate change is insufficient, while noting that when including “imported” emissions, the UK’s carbon footprint in 2015 was no lower than 1990.

Richard Howard, co-author of the report, appeared on LBC to speak about the findings from the report:


 

Following the publication of Costing the Earth, Onward has since established the Getting to Zero research programme. Ahead of COP26, the programme will look at three aspects of the net zero transition: how to decarbonise incumbent industries; how to retrain and upskill workers at risk of disruption; and how to create the regulatory and financial conditions for innovation. It will use statistical research, polling and focus groups and engage a wide range of Whitehall departments, industries and campaigners.

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