Studies indicate that the long-term growth benefit from avoiding climate change will exceed the cost of co-ordinated global action to tackle climate change by helping to avoid the potentially catastrophic implications of failing to act. Most notable of these studies is the Stern review, which found that the global costs of climate change could be between 5% and 20% of GDP per annum if we fail to act, dwarfing the costs of effective international action, estimated at 1-2% of global per capita consumption by 2050(l). Most published analysis also suggests that current UK ambition on climate change can be achieved without large impacts on overall short-term economic output.
The Department of Energy and Climate Change (DECC) does not possess an analysis of the historical impact of climate change and energy policies on the UK's gross domestic product (GDP). However, as part of the Carbon Plan, the impacts of the policies to meet the first three Carbon Budgets and illustrative measures to meet the fourth budget were modelled using the HM Revenue and Customs (HMRC) Computable General Equilibrium model(2). It should be noted that there is substantial uncertainty around the results of this modelling, and this is inherent in all similar analyses.
The HMRC model estimated that the first three carbon budgets could be met at an average cost of around 0.4% of GDP over the period 2011-22 (i.e. the level of GDP is on average 0.4% lower compared to a baseline scenario without carbon budget policies), and the fourth carbon budget could be met at an average cost of around 0.6% of GDP over the period 2023-27. The actual impacts on GDP will depend on a range of factors, including fossil fuel prices and future technology costs.
As stated above, there is significant uncertainty around these estimates. Furthermore, certain potential costs and benefits were not reflected in the HMRC model at the time of the Carbon Plan. Importantly, innovation benefits and the productivity improvements from energy efficiency were not captured, nor are the benefits on future UK growth of the avoided risks from global climate change. Furthermore, it should be noted that the modelling largely assumes that the UK acts unilaterally. Potential welfare costs of resulting behaviour changes are not accounted for, or any cost or time overruns in policy delivery. Each of these excluded factors also has a high degree of uncertainty with regards to scale.
(2) The results of this analysis are presented in Annex B of the Carbon Plan (2011), available on DECC's website: