UK Climate Change Act: Understanding the costs and benefits

Update 21/12/16 – We updated the article after receiving a response from Peter Lilley, eight days after we sent questions.

The Climate Change Act 2008 sets a legal framework for the UK to cut greenhouse gas emissions to 80% below 1990 levels by 2050.

It requires the government to set binding, five-yearly carbon budgets based on the latest science, and in light of economic circumstances. This long-term approach to cutting emissions is supposed to deliver results at the lowest possible cost.

From the early 2000s, there was wide discussion of the costs and benefits of a UK CO2 target. After including the savings from using less fossil energy, the costs of meeting the Act’s goal have consistently been put at around 1% of GDP.

Successive governments have viewed this as a worthwhile investment in avoiding dangerous climate change, given the very high costs of global inaction. Efforts to put a monetary value on the benefits of meeting the UK’s 2050 target suggest they would likely outweigh the costs of meeting it.

The third reading debate of the Climate Change Bill, which later became the 2008 Act, is worth revisiting. It covers many of the talking points that still arise today in relation to climate action. Speaking at the debate, then-shadow and now-secretary of state Greg Clark said:

On the question of affordability, the Bill provides the Secretary of State not just with the opportunity, but the obligation to set carbon budgets in the light of the science and the crucial economic and business issues of the day.

In any case, what is affordable? Is it clinging to a high-carbon economy and everything that that implies for our energy security, price volatility and the costs of doing business, or is it switching to secure, stable and efficient energy systems that put British business, particularly British process industries, which have long been world-beating, into the forefront of world innovation?

Climate sceptic

Speaking just before Clark at that debate was Peter Lilley, Conservative MP for Hitchin and Harpenden, and one of only five members to vote against the Bill. Some eight years later, Lilley, until recently a director at oil firm Tethys Petroleum, is still arguing against the legislation.

In a report for the Global Warming Policy Foundation (GWPF), a UK-based climate sceptic thinktank, Lilley says the true costs of the Act have been “concealed”. Lilley is a GWPF trustee. As we shall see, far from being concealed, the costs and benefits of the Act have been raked over again and again.

“A sensible debate,” Lilley writes, “has been averted by pretending that the Climate Change Act is virtually costless, that there are not more cost-effective ways of meeting these targets and that the climate risks averted are imminent, not centuries hence.”

(You can read more about the latest science on climate risks elsewhere on Carbon Brief, including the increasing severity of extreme weather, rising sea levels and acidifying oceans).

The GWPF report was first reported by the Mail on Sunday’s David Rose, who appeared on ‘GWPF TV’ the following day and has previously said he is “proud to be a friend” of GWPF. It was used by a Telegraph editorial to argue that the cost of meeting UK climate goals is “not possibly sustainable” and that targets should be revised.

Lilley’s work was also promoted by climate sceptic Conservative peer Matt Ridley, using his regular column in the Times. The column did not disclose that Ridley is on the GWPF’s academic advisory board. This detail was also edited out of a letter to the Times, prior to publication.

The only other publication to cover the report was far-right website Breitbart, where James Delingpole used it to describe climate policy as “pointless”. (Delingpole and Rose sat together at this year’s GWPF annual lecture, which was given by Ridley.)

All of these articles reproduced, without question, Lilley’s headline estimate that the Climate Change Act will cost households a cumulative £319bn to 2030. Lilley reaches this total with his own figures for annual costs to households, that are many times higher than official estimates.

Carbon Brief put five questions to Lilley and the GWPF on the day their report was published. Eight days later, we received answers to some of these questions. We have published Lilley’s response in full, along with the questions.

Notably, in his response, Lilley suggests that the benefits of avoiding dangerous climate change are a matter of personal belief, rather than of extensive evidence showing them to significantly outweigh the costs of inaction.

Cost-benefit analysis

So what are the costs and benefits of the Climate Change Act? Before we start, let’s turn to the Treasury’s Green Book, which explains how to assess and compare policy proposals:

Appraisals should provide an assessment of whether a proposal is worthwhile, and clearly communicate conclusions and recommendations. The essential technique is option appraisal, whereby government intervention is validated, objectives are set, and options are created and reviewed, by analysing their costs and benefits.

The guidance goes on to explain:

Cost-benefit analysis [is] analysis which quantifies in monetary terms as many of the costs and benefits of a proposal as feasible, including items for which the market does not provide a satisfactory measure of economic value.

The Climate Change Act impact assessment, published in 2007, sets out the rationale for government intervention: “Climate change is the result of the externality created by the emission of greenhouse gases to the atmosphere. Those who emit do not have to bear directly the full cost of their actions.”

It goes on to say that the Act aims “to avoid the impacts of dangerous climate change in an economically sound way”. The Act’s target was for UK emissions to be cut at least 60% by 2050, though the impact assessment also considered a 70% or 80% goal.

It says the cost of meeting the 60% carbon reduction goal, based on estimates from models of the energy system and economy, amount to between 0.3% and 1.5% of GDP, or in the range of £1.6bn to £12bn per year. It also points to several earlier studies, which found broadly similar results.

(The Act’s target was later increased to an 80% reduction by 2050. The final, 2009 impact assessment of this goal put the costs at £15bn to £18bn per year).

Early work

One pre-Climate Change Act example is the 2003 energy white paper, which set out a case for cutting UK emissions 60% by 2050. It said this would cost between 0.5 and 2% of GDP in 2050, when the economy would have tripled in size. (If the economy in 2003 was worth, say, a nominal £100 and it tripled to £300 in 2050, that 0.5-2% cost would reduce GDP in 2050 to £294-299).

Steve Pye, senior research associate at the UCL Energy Institute, authored some of the main early assessments of the cost of implementing the Act. He tells Carbon Brief:

We undertook two key analyses; first for Defra, in 2007, using the MARKAL-Macro model (essentially a cost-optimising energy system model capturing wider economic impacts via a simplistic macro-economic model). This put the GDP impacts in the region of 1.6% to 1.8% losses, in 2050, compared to the reference case. While relatively small in percentage terms, it is around £45bn (in today’s money) out of a £2.8 trillion economy in 2050. So I don’t think there was any hiding these considerable costs.

He says models’ reference cases are often based on the unrealistic assumption that we continue to use all the same technologies and fuels, even though there might be good reasons to move away from these other than climate. Relatedly, he says that these early models did not include all of the benefits of climate policy, such as the creation of new industries or reductions in air pollution.

Pye’s second analysis, carried out for the CCC in 2008, estimated costs of 1-1.5% of GDP in 2050. He adds: “Another important insight was that the overall costs of the transition would be much higher if we delayed action and/or made the wrong investment choices, leading to lock-in.”

Consistent findings

Subsequent cost-benefit analyses, including the most recent advice from the Committee on Climate Change (CCC), also put the cost at around 1% of GDP. The CCC tells Carbon Brief:

Assessments of costs should be holistic and transparent, including the full range of costs and benefits. This has been a consistent feature of CCC’s detailed published analyses, which have consistently found the costs of meeting carbon budgets to be around 1% of GDP.

That estimate covers the full costs of variable renewables (the CCC have published some of the most advanced assessments in this area), a range of fossil fuel prices (including costs that continue at current low levels) and savings from reduced fossil fuel use alongside increased investment costs for low-carbon technologies.

It does not include the value of reduced carbon emissions, although we note that 1% of GDP is a much smaller cost than the expected impacts of dangerous climate change.

The committee’s most recent advice says that meeting the UK’s fifth carbon budget for 2028-2032 will cost around 0.5% of GDP, while meeting the UK’s 2050 target might cost 1-2% of GDP. Again, these costs would be offset by the benefits of avoided climate change.

For those that disagree with these consistent findings, common approaches include exaggerating costs, ignoring benefits or both. Another frequently used tactic is to ignore the costs of alternative options, or to reject the policy’s objectives without explicitly saying so.

Carbon Brief asked Lilley if he had assessed the costs and benefits of an alternative approach to current policy. His response confirms that he did not do so. We also asked what contribution the UK should make to the globally-agreed goal of keeping warming well below 2C. He did not answer, instead saying this “is for another report”.

Energy bills

At a more personal level, climate policy affects how much households pay for energy bills, because many schemes are funded via levies on electricity prices. These levies have become a political football, most notoriously after then-prime minister David Cameron’s reported comments on “green crap“.

Government and CCC estimates published in 2014 said these levies would add in the region of £100 to £200 to average household energy bills in 2020 and in 2030. These costs were expected to be outweighed by fuel cost savings due to energy efficiency policies.

Government and the CCC have continued to update their figures, including in the CCC’s fifth carbon budget advice published this year. The CCC tells Carbon Brief:

We find that energy bills for a typical household will be around £100-150 higher by 2030 as a result of policies to decarbonise electricity supply (including carbon pricing). In most cases this could be fully offset by potential energy efficiency improvements.

In contrast, Lilley’s GWPF report says climate policy will increase average household bills by £584 in 2020 and £875 in 2030. Lilley says his figures are so high because the “true cost” to households is being “concealed” by “ministers” and “environmentalists”. Let’s look at his arguments in turn.

First, Lilley argues that savings due to energy efficiency policy should be ignored. He writes: “The aim of climate policy is to reduce carbon dioxide emissions not to reduce energy consumption. Indeed, the aim is to decarbonise energy so that we can use as much energy as we choose.”

This view is at odds with a consensus finding of almost all climate policy analysis, which is that the UK must significantly reduce its energy demand if it is to meet its carbon targets.

A government study of how to reach the UK’s 2050 target, backed by then-chief scientist Prof David MacKay, found among many credible routes “several common messages emerging from the pathways: [firstly, that] ambitious per capita energy demand reduction is needed.”

Lilley also says that energy efficiency improvements are likely to happen even if there is no policy. He concludes: “We therefore exclude…estimates of energy savings and the costs of energy efficiency programs…from our estimates of the cost of climate change policies per household.”

Pye tells Carbon Brief that there is a “vast” quantity of research on why energy efficiency improvements do not, in fact, happen in the absence of policy, even though they appear to make economic sense. He says: “It’s largely a simplistic argument to say these things happen anyway.”

The significance of ignoring fuel savings goes beyond household bills. For instance, the government’s impact assessment for the fifth carbon budget finds present costs of £36bn, balanced by fuel savings worth £24bn. It estimates benefits of avoided climate change, worth £10bn, and reduced air and noise pollution, worth another £1bn.

Carbon Brief asked Lilley why he had ignored the benefits of energy efficiency policy. In his response, which mainly quotes his published report at length, he picks out two of the UK’s least successful energy efficiency policies, arguing that they were unlikely to have saved money through reducing energy use, because they spent money on reducing CO2. This is a non sequitur: one does not follow logically from the other.

A burden shared

The second argument made by Lilley and some others is to assume that households, which use one third of UK electricity, face 100% of the costs of climate levies. He says that businesses, which pay two thirds of these levies, will pass all of those costs to consumers through higher prices.

The net effect of this assumption is to triple the apparent climate cost on household bills. Given its import, Carbon Brief asked the GWPF and Lilley if they could supply any evidence to support this claim. In his response, Lilley offers a series of assertions without evidence. He says:

By definition, all costs ultimately fall on households – normally as consumers but, if not, as employees, taxpayers, managers or shareholders.

This assertion raises the question of who owns wealth in the UK. According to the Financial Times, more than half of shares in UK companies are not owned by UK residents. Only a small portion are owned by private individuals or pension funds, it says. It adds that the richest 10% of the population have 56% of all financial wealth and 54% of pension wealth.

As such, it seems difficult to assign 100% of business costs to UK households as a group, still less as an equally shared cost among 27m average UK households, given this unequal distribution of wealth. Meanwhile, Dr Robert Gross, director of the Centre for Energy Policy and Technology at Imperial College, tells Carbon Brief:

These arguments were thoroughly rehearsed several years ago. There was no evidence then and no evidence now that the costs borne by the commercial sectors are all passed through to households. Price formation in the economy is far more complex than that and it is quite wrong to ascribe them all to household bills in such a simplistic and misleading way.

Gross discusses this question in more detail in a 2012 report. When the Centre for Policy Studies (CPS), a right-leaning thinktank, used the same argument a few months ago, the department for Business, Energy and Industrial Strategy (BEIS) made the following statement:

The CPS has assumed the costs which fall to business energy bills are ultimately passed onto households through inflation. We do not think this is a sensible assumption, and it results in a trebling of the cost figure to households.

This single assumption, therefore, goes a long way to explaining how Lilley arrived at his “£319bn” cost to households of implementing the Act. Though his report argues that replacing current policies with carbon pricing “could reduce the cost”, he makes no effort to demonstrate how much might be saved.

System costs

A third point of difference for Lilley is to argue that the costs of integrating renewable sources of electricity into the grid are far higher than the CCC assumes. He cites several publications from 2011/12 in support of his claim, including one report produced for the CCC.

This found that building a flexible electricity grid, including adding more interconnectors to other countries and fitting smart meters in all homes, could cost £5-5.7bn per year in 2030. Lilley appears to ascribe all of this cost to households. He counts it as a sole consequence of climate policy and does not consider its benefits, nor whether it might happen without climate action.

Yet building this flexible grid would actually save money, regardless of whether or not electricity supplies are decarbonised, the CCC tells Carbon Brief. The National Infrastructure Commission is among several bodies quoting an estimated £8bn saving to the UK each year by 2030.

BEIS has refused to publish a study it commissioned on the idea that wind and solar impose unusually high costs on the electricity system as a whole. Renewable groups believe it will show the costs are low and analysis for the CCC agrees.

Climate Change Act conclusion

In voting the UK’s Climate Change Act into law back in 2008, MPs were 463/5 in support of the government’s judgement that it was worth investing considerable sums to avoid dangerous climate change. The costs of meeting the Act, which were discussed from the outset and consistently estimated at around 1% of GDP, were to be offset by reduced climate impacts and other environmental benefits.

The current government has reaffirmed its commitment to the Act by legislating the fifth carbon budget for 2028-2032. It also recently ratified the Paris Agreement, drawn up among nearly 200 countries with the goal of keeping warming “well below 2C” by cutting emissions to net zero later this century.

This goal means that, far from weakening its climate efforts, the UK will have to raise its ambition. The challenge will be to reach the Paris goal in the most cost-effective way possible. The CCC tells Carbon Brief:

The Climate Change Act and the carbon budgets have been deliberately designed to chart a steady course for reducing emissions in the UK. That steady course, and the setting of stable targets for the medium and long term, allows the UK to ramp up effort steadily and predictably over time in line with technology developments and capital stock turnover.

This is the lowest cost way to reduce emissions in the UK and prepare the UK economy for the low-carbon world that is emerging internationally.

Andrea Leadsom, then-minister for energy and climate change, told parliament in March: “The government believe we will need to take the step of enshrining the Paris goal of net zero emissions in UK law — the question is not whether, but how we do it.”

Notes

Carbon Brief asked the GWPF five questions relating to its report on the cost of the Climate Change Act. You can read the full questions and answers.

Carbon Brief also asked the CCC to respond to the GWPF report. You can read the CCC’s comments.