Will cutting carbon emissions save the UK money?

This report provides an important counterbalance to the economic analysis that has dominated the carbon debate in Britain. It challenges the traditional neoliberal wisdom that cutting carbon will necessarily create a drag on the economy because government interference is always less efficient that the market.

In my opinion, the fallibility of the market-dominated model is evident in its continuing failure to steer the world away from dangerous climate change - the costs of which are predicted to be 1-5% of global GDP. In other words, the market is failing to save itself from significant long term damage.

The truth is that no modelling is “right”, although proponents will argue about which offers the closest prediction of the future. What we can see is that there is likely to be a small cost or a small benefit from moving to a low carbon economy. It is important to attempt to understand the consequences of these policies. But as the CCC says, whether there is a net cost or net benefit, the carbon budget is the most cost effective way to undertake an imperative task. When faced with the overarching costs of inaction, the quibbling appears slightly academic.

The Committee on Climate Change (CCC) has published a response to the Cambridge Econometrics (CE) report.

The jist of it is that the difference between their own findings - that carbon budgets will place a small burden on the economy - and the CE conclusion that there will be a net benefit is based on the different assumptions of their models. But this difference does not change the fact that the carbon budgets are the cheapest way to achieve a low carbon economy.

The CCC says:

“Whether they imply a small cost or a small benefit, carbon budgets are worth pursuing as insurance against the large costs expected from unmitigated climate change. Carbon budgets attempt to plot the cheapest path to reducing the UK’s greenhouse gas emissions in the long term. We can cut carbon while still growing the economy, there will be a host of co-benefits for quality of life, and acting steadily and predictably will be cheaper than delay.”

Naturally the renewable response to this report has been overwhelmingly positive. Even though the sector has seen massive growth in recent years, it considers the Tory indifference to wind and solar to be an impediment to investment.

Renewable Energy Association head of public affairs James Court said the industry could provide huge employment opportunities within Britain.

“Already our industry supports over 100,000 jobs and has secured over £30 billion of private investment since 2010. By 2020, we need to double the share of renewable electricity, more than double the share of renewable transport fuels, and more than quadruple the share of renewable heat to meet our legally binding 15% renewable energy target. This will see the industry attract a further £65 billion of investment and could grow the employment total to 400,000.”

RenewableUK’s director of policy Gordon Edge said governmental commitments to the renewable industry were necessary to foster in this boom.

“[There is a] pressing need for MPs to think long-term and introduce policies which chart a course up to 2030 and beyond to attract vital investment... It will also give us control over the cost of energy by making bills less volatile, giving us energy security, which is a precious commodity, especially at a time of global instability.”

Sophie Billington from Cambridge Econometrics has emailed regarding my earlier post regarding the difference between household income and household consumption. I said that the increase in household income would be offset by a rise in the cost of living of £474. But as Billington says, this is not accurate. She explains:

“All the figures presented in the report are real effects i.e. they represent the net impact on households after taking account of the slightly higher prices (the increase in the cost of living) in the 4CB scenario. Our analysis shows that real household incomes increase by £565 and, as a result of higher incomes, households would have more money to spend and would choose to spend more (in real terms) on other goods and services, including food and leisure activities (not a £474 increase in the cost of living). The £91 you calculated is equivalent to the increase in household savings in the 4CB scenario.”

Apologies for the confusion.

This report has stimulated a flurry of analysis and commentary, which I will try to summarise here.

Economics

Tom Burke, chairman of E3G and a policy adviser to Rio Tinto, says that in 2012 Treasury predicted that the carbon budgets would wipe 1% from GDP. So who to believe? Economic models are subject to heavy assumptions and manipulation and, in practice, are an unreliable basis for policy, says Burke.

“The Treasury cannot tell you confidently what Britain’s GDP was last year. They are even less certain about what it is going to be next year. This makes believing you know what it will be in 15 years time pretty heroic.

“Different interests shop around for models, assumptions and data sets that they hope will give them the answers they want.”

But, he says, the precautionary principle should factor in to decision making.

“If the Treasury is wrong we will have taken a pass on a load of immediate benefits and put the stability of the climate at risk. If WWF is wrong we will have delayed increasing our wealth by a few months.”

Trevor Maynard from Lloyd’s of London says the approach used by the report was, in his opinion, more accurate than most economic modelling. He said commonly used ‘general equilibrium models’ assume the economy is already in an optimum condition and use assumptions that “don’t appear justifiable”.

By contrast, this study used an “econometric” model. Maynard says “this differs from equilibrium models because, rightly in my opinion, it considers the past behaviours of individuals, businesses and other stakeholders when modelling the impact of a policy on the UK economy”.

Industry

Matthew Knight, from renewable energy giant Siemens, expresses delight at the report.

“It’s the first time I am aware of, that a credible and detailed analysis of the costs and benefits has been made, using the same models we traditionally use to manage the economy. This report puts sustainability right where it should be, into the mainstream of business, political and economic thinking. It’s a solid contribution. It moves us on from a wasteful debate about whether benefits of decarbonisation exist. It helps us to focus on how to maximise those benefits and ensure they are shared in a fair way.”

“It’s conclusions are not casual,” says Knight, “and they highlight some hard political issues – there will be winners and losers.”

Steven Heath, from Knauf Insulation says governmental acceptance of the conclusions of this report and the policies to support it could stimulate massive investment in the sector.

“If we, as a business, were to see this level of ambition across Government and a clear and strategic direction of travel toward achieving the fourth carbon budget, we would be at the front of the global queue for the next round of capital investment decisions. Indeed, we could then roll out solutions developed here across the globe.”

More reaction from the blogs to come...

Coauthor, Paul Ekins from University College London, said the study made a strong case in favour of reducing the UK’s carbon output.

“This report reflects a robust piece of work carried out by some of the UK’s best macro-economic modellers, using one of the UK’s most scientifically validated models,” he said. “Other benefits include greater energy security, through lower fossil fuel imports, and reduced air pollution from industry and vehicles. These are policy objectives worth pursuing vigorously. The Government’s task now is to generate through its policies the investor confidence that will enable these projections to be turned into reality.”

The report found that reducing the UK’s carbon output to 60% of 1990 levels by 2030 would:

• Increase UK GDP by at least 1.1% in net terms and create an additional 190,000 net jobs by 2030.
  
• Make households better off financially by increasing the real annual income in the average household by £565 by 2030.
  
• Improve the UK’s energy security and make energy bills less volatile by significantly reducing the UK’s consumption of fossil fuels and reducing imports of oil and gas by £8.5bn/year by 2030.
  
• Increase Government revenues by £5.7bn/year by 2030 thanks to a stronger economy which increases VAT and income tax revenues.
  
• Improve air quality, with the reduction in emissions from road transport alone meaning that healthcare expenditure could be reduced by £96m to £288m annually by 2030.

Limitations

The report’s authors concede there are aspects of their analysis that rely on certain (“conservative”) assumptions. They also note that the benefit to households will not be uniform and that their investigation does not show how this distribution of wealth will occur.

Most importantly, the report says that the positive outcomes rely heavily on government policy that supports an efficient transition.

“If policy fails to incentivise the low-carbon transition in a cost-effective manner, not only might the carbon budgets be missed but there could be negative economic consequences. The role and design of policy is therefore imperative in meeting the budgets.”

Efforts to combat climate change will save the UK money and increase the income of householders, according to a report published on Wednesday.

The Cambridge Econometrics analysis, commissioned by WWF, found that meeting the UK’s first four carbon budgets would not only help reduce the impact of climate change on the UK and the rest of the world. By 2030 it would also add £565 to the average household income, increase GDP by 1.1% and create 190,000 jobs.

The UK has set out a pathway to reduce its emissions by 80% of 1990 levels by 2050. In order to manage this transition incrementally, the Treasury has created five-yearly carbon budgets. The first four of these budgets, which last until 2027, will see the UK’s carbon pollution drop to less than half of 1990 levels.

This report undermines one of the major tenets of those who resist strong action on climate change - that it will irreparably damage the economy. It also falls into line with the predictions of the government’s advisory panel the Committee on Climate Change (CCC).

But long term economic predictions are nothing if not fallible and models are necessarily based on assumptions. Today I will be covering the commentary on this report and asking you to help by contributing your thoughts to the comments below, tweeting me or emailing me. If you are quoting figures or studies, please provide a link to the original source. Follow me on @karlmathiesen for updates throughout the day and later I will return with my own verdict.