Thursday, November 21, 2019
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Our climate policies: Futile and shockingly expensive

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IN previous notes for The Conservative Woman, I have attempted to show that the UK’s climate change policies, involving uniquely aggressive energy decarbonisation policies, are futile gesture politics. The UK is accountable for just 1 per cent of global CO2 emissions, whilst other major economies, not least China (nearly 30 per cent of global emissions) and India (over 6 per cent) are powering ahead with coal-fired power stations, with resultant increases in CO2 emissions.

The UK’s decarbonisation policies are, however, not just futile in terms of controlling global CO2 emissions, they are also expensive. Stating the obvious, the decarbonisation of energy supplies, whether for electricity generation, heating or transport, involves replacing relatively inexpensive carbon-based fossil fuels by relatively expensive non-carbon based sources (including renewables and nuclear power). Moreover, the increased costs are very considerable. This short note focuses on the costs originally envisaged at the time of the Climate Change Act 2008, with some follow-up developments.

Suffice to say, these extra energy costs are borne by users, whether households or businesses, as well by taxpayers. The higher costs result in squeezed household budgets, disproportionately so for the less well-off, and worsened business competitiveness. Moreover, insofar as the higher business costs are passed through to households in the form of higher prices for goods and services, household budgets are doubly affected.

Costs of the Climate Change Act 2008

As I discussed in a previous note, the UK introduced the Climate Change Act (CCA) in 2008, which unilaterally committed the UK to reduce GHG (greenhouse gas) emissions by 80 per cent of 1990 levels by 2050. The Department of Energy and Climate Change (DECC) provided a cost-benefit analysis, the ‘impact assessment’, for the Act. 

DECC estimated that the total costs over the then 43 years to 2050 amounted to £324-404billion (in discounted present value terms). Moreover, DECC qualified their estimates by saying the ‘figures presented are a partial measure of the long-run costs of tackling climate change and are based on estimates of the reduction in GDP over the period to 2020’, and, they added, the ‘figures do not include the full range of costs, in particular the short-term transition costs’. So even these huge figures were under-estimates.

The DECC also helpfully provided estimates of the ‘average annual cost’ to 2050, amounting to £14.7-18.3billion. The UK’s population was around 66million in 2018, whilst the number of households was nearly 28million. Very approximately, these annual averages translate into £220-280 per capita and £525-655 per household.

Meanwhile the climate benefits of the CCA in reducing GHG emissions, and thus avoiding ‘dangerous anthropogenic global warming’, over the period to 2050 were estimated to be £404-964billion, with the upper bound assuming effective global action. Suffice to say, effective global action is singularly absent. And, insofar as there would be any mitigation of dangerous global warming, the benefits would be global not national, with the UK, arguably, getting little in return from its enormous investment.

There have been several studies, official and non-official, into the costs of the Climate Change Act since its implementation. A very comprehensive exercise was undertaken by Lord (Peter) Lilley in 2016, using data from DECC (absorbed into the Department of Business, Energy and Industrial Strategy in July 2016), the Office for Budget Responsibility (OBR) and the Climate Change Committee (CCC). He concluded that ‘the average cost of decarbonising electricity to meet the CCA’s targets was or will be per household (in 2014 prices): £327 in 2014, £584 in 2020, £875 in 2030, £1,390 by 2050’. Not only were these numbers very substantial, note that they principally cover electricity decarbonisation, not heating and transport.

Dieter Helm’s Cost of Energy Review

It is not only the requirements of the CCA that are driving up energy costs, as explained by economist Dieter Helm in his mammoth Cost of Energy Review. It is also the current sub-optimal state of UK energy policy.

Helm’s findings included:

· ‘The cost of energy is too high, and higher than necessary to meet the CCA target and the carbon budgets.’

· ‘The scale of the multiple interventions in the electricity market is now so great that few if any could even list them all, and their interactions are poorly understood. Complexity is itself a major cause of rising costs . . . and it should be a central aim of government to radically simplify the interventions and to get government back out of many of its current detailed roles.’

· Moreover, the excessive energy costs ‘are not only an unnecessary burden on households and businesses, they also risk undermining the broader democratic support for decarbonisation. In electricity, the costs of decarbonisation are already estimated by the CCC to be around 20 per cent of typical electricity bills.’

More to come: zero emissions by 2050

There is, however, more to come. The Climate Change Committee’s last annual report (May 2019) recommended that the UK should adopt a ‘net zero’ target for greenhouse gases by 2050. Granted, they acknowledged that ‘globally, current pledges of effort do not go far enough’ in limiting global warming to ‘well below 2°C by the end of the century’ (the 2015 Paris Agreement). But, they suggested, ‘the UK can credibly adopt a higher ambition now, which can help influence those countries considering increased effort in the future’. Some would suggest this was a forlorn hope. On costs, the CCC said: ‘We estimate total costs of meeting a net-zero GHG target at around 1-2 per cent of GDP in 2050 based on a conservative set of assumptions.’ But this looks extraordinarily over-optimistic.

More realistically, the potential costs of this ‘total decarbonisation’ policy look eye-wateringly high. It was reported in June that the then Chancellor Philip Hammond had suggested the costs could be about £1trillion, whilst other commentators have said that even this could be a gross underestimate. But whatever the costs, former Prime Minister Theresa May committed the UK to the zero emissions target, as part of her ‘legacy’.

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Ruth Lea
Ruth Lea
Ruth Lea CBE is economic adviser at the Arbuthnot Banking Group

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