Energy: Carbon Reduction

House of Lords written question – answered on 25th May 2011.

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Photo of Lord Donoughue Lord Donoughue Labour

To ask Her Majesty's Government what is their estimate of the financial costs to the United Kingdom economy, including the cost to consumers, of published carbon emissions targets over the periods stated.

Photo of Lord Marland Lord Marland The Parliamentary Under-Secretary of State for Energy and Climate Change

Evidence on the net costs and benefits of the economy wide package of policies and proposals to deliver the first three legislated carbon budgets (2008-22) and EU commitments (reflecting a 34 per cent cut in emissions on 1990 levels by 2020) was published in July 2009.

This estimated that the net costs of the package of policies was £25-29 billion over the lifetime of the policies. These costs reflect technology costs, fuel savings and wider impacts (such as air quality and congestion impacts) where possible to value them. The macroeconomic cost associated with the package of policies was estimated of the magnitude of a GDP reduction of around 0.35 per cent in 2020 (relative to a baseline which does not reflect any economic costs of inaction on climate change).

Since various individual impact assessments which estimate the net costs and benefits of individual policies have been produced for new policy initiatives, for example to support the Energy Bill, and an impact assessment on the Electricity Market Reform.

DECC's assessment of the impact of energy and climate change policies on gas and electricity prices and bills was published alongside the annual energy statement in July 2010 with a commitment to publish updated analysis each year.

The headlines messages were that energy and climate change policies would:

add 1 per cent to the average household energy bill in 2020 compared with a bill in 2020 in the absence of these policies; andadd 26 per cent to the average medium-sized non-domestic user's energy bill in 2020 compared with a bill in 2020 in the absence of these policies.

Since July 2010, the Government have announced plans to fund the renewable heat incentive and carbon capture and storage demonstrations through general taxation rather than a levy on energy prices, which will reduce these impacts. The Government also announced the introduction of a carbon price floor and plans to reform the electricity market, price and bill impacts for which were estimated in their respective impact assessments.

Government recently announced their proposal to legislate a fourth carbon budget level of 1950 MtCO2e over 2023-7 and are determined to meet this carbon budget in a way that ensures the most cost effective pathway to our long-term 2050 target to reduce emissions by at least 80 per cent from 1990 levels.

The overall costs to the economy and the impact on households and business will depend on how Government plan to deliver the fourth carbon budget and what policy instruments are in place.

The CCC estimates costs of the order of 1 per cent of GDP or £13.5 billion a year by 2025 based on their modelling and their suggested mix of technologies to deliver emissions reductions to meet the 1950 MtCO2e fourth carbon budget level through domestic action.

Government estimate of the net cost and benefits over 2023-7 range from a cost of at least £1.9 billion if the budget is met with trading, rising to at least £7 billion if the budget is met wholly through domestic abatement. These costs reflect the marginal cost of meeting the fourth carbon budget over the five year period only, given technology abatement costs, operating costs and fuel savings, together with other wider impacts. They do not reflect a full assessment over the lifetime of as policy, and do not reflect a full assessment of policy costs, macroeconomic costs or distributional implications from the additional effort required to meet the fourth budget nor current policies. More detail will be available in the impact assessment published this week.

Government will publish further detail on policies and proposals to deliver the fourth carbon budget in October, and this will include an assessment of the policy costs. They will also provide a re-assessment of the overall costs of the package of policies and measures to deliver carbon budgets.

Costs of climate change mitigation need to be compared against the costs of inaction. The Stem review found that the negative impact of climate change could be equivalent to a fall in global per capita consumption of 5-20 per cent now and forever. This is as a result of adaptation costs (such as increased heating and cooling bills, and flood defences) and impacts which cannot be adapted to (such as health impacts and increased flood damages).

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