Key Issues for Policies on Climate Change

This paper was prepared by the BIIE Climate Change Policy Group in May 2008 to summarise a number of general issues the group believes should be considered by the new Committee on Climate Change: use of cumulative targets, urgency and the need for an indicative framework, and reliance on markets to deliver CO2 reductions.

The BIIE Climate Change Policy Group is a group of senior professional economists with an extensive collective experience in energy policy and the energy industries.
Our antecedents pre-date the Stern report, when we called for much greater attention to be paid to climate issues. We have previously endorsed the general recommendations of the Stern report, without necessarily an unqualified acceptance of every feature of its detailed analysis. We believe coordinated international action is essential, and that UK action can have an important role to play within a global strategy of “contract and converge”. We have been advocates of unilateral UK action on both exemplary and self-interest grounds, and we welcomed the Climate Change Bill and the creation of the Climate Change Committee (CCC). We have in the past submitted evidence to the Environmental Audit Committee and to the Joint Parliamentary Committee considering the Climate Change Bill.

In this note we wish to focus on a small number of general issues to which we believe the CCC needs to give consideration at an early stage in its deliberations. We have selected particular issues which we believe are important, under-emphasised and on which we believe our group has developed a particular and distinctive view:

• Defining the right basis for UK and international targets for CO2 reduction – as essentially cumulative. Doing this also reinforces the general case for urgency of action.
  
• What we have described as a “time-critical” approach - the value of developing an indicative framework by sector.
  
• The balance of instruments available to Government – concerns about the ability of the present market and institutional framework to provide the necessary incentives and momentum for change.
  

BASIS FOR TARGETS.

The clear implications of the best available evidence from the climate science are that CO2 policies need to align with the global objective of preventing concentrations from reaching dangerous levels. This implies a focus, at the level of global objectives, on keeping cumulative emissions within “safe” limits. Targets for annual emissions in particular years are useful indicators of progress, but are ultimately of secondary significance, since they should be determined by, and should not obscure, the primary objective. This implies, potentially, more pressure for more demanding reduction regimes in the early years. It reduces the very serious risk of postponing necessary policy actions by making the consequences of poor early performance more transparent. This is reinforced by further practical and economic considerations.

First, as a matter of simple arithmetic, the shape of the path from the baseline to a given 2050 annual emission level has a very large impact on cumulative emissions over 43 years. To illustrate the point, a 60% reduction over 45 years can be met by a steady 2% pa reduction. However a 3.5% pa reduction for 20 years followed by a 1% pa reduction for 25 years yields the same annual emissions after 45 years, but a cumulative emissions total that is lower by the equivalent of 9 years emissions at the end of the period, loosely speaking “gaining” an additional 9 years of time.

Second, the undeniable primacy of cumulative emissions, implied by the climate science, means that a rational approach to the design of any international regime and its associated market mechanisms is also more likely to be based on cumulative emissions from a baseline, or on some cumulative measure of emission costs. This would allow carryover of emission rights/savings between time periods, and would place less emphasis on rigid annual numbers. It is hard to see how international agreement could be obtained for a scheme that ignored the inequities of very different national pathways to a single year target. Aligning national targets consistently with the shape and structure of future international regimes, including the ETS, will be essential.

Third, and contrary to an impression created, unintentionally, by the recent DEFRA report on the social costs of carbon, the economic damage attributable to emissions[1] is higher the earlier they occur. It follows that the economic calculus should in principle be weighted even more towards a front end loading of reductions than would be implied by a pure cumulative target, and certainly more than would be implied solely by an “end year” annual rate. It also follows that the advantage of measures to sustain early reductions is twofold. Early reductions reduce CO2 at the time when that reduction is of most value (in terms of reduced damage); assuming they can be sustained they also reduce emission in all future years. Larger early reductions, if they can be achieved and sustained, are disproportionately beneficial in reducing cumulative emissions, and hence in delaying adverse climate impacts and/or easing the pace of transition to low carbon in later periods. This is one of the factors supporting greater urgency. This should be reflected in the value attaching to early reduction in emissions, and in more emphasis on cumulative emissions as the primary objective.

Fourth the above considerations will assume much greater significance if, as part of the review of the 2050 target, policy is to be based on a UK contribution to limiting CO2 concentration to 450 ppm (rather than the 550 ppm adopted since the 2003 White Paper). Not only would allowable cumulative emissions to 2050 be significantly lower, but also, because of lack of progress over the last decade, much larger reductions are required over a shorter period, further strengthening the case for urgency.


TIME CRITICALITY AND BASIS FOR A UK STRATEGY

Our approach emphasises “time criticality”. We believe that a focus on timescales, once targets are settled and clearly linked to a science based limit for cumulative emissions, is a key to embedding urgency into climate change policy. By working back from the answer, establishing feasible trajectories would help to illustrate not only the scope for progress within the first three carbon budgets but also the rate of progress required after 2020 to stay within the cumulative limit. This would focus attention on the most critical and urgent issues. Simple illustrations indicate, inter alia, the central importance of the power sector, and the rates of change necessary in transport or in heating of buildings to recover to a cumulative target after failure to reach White Paper targets.[2]

Implementation, as distinct from budget setting, must also address the issue of lead-times. Although effective short term measures are vital and should be maximised, their scope is limited and over the whole period to 2050 realistic solutions will entail the often protracted lead-times involved in removing sources of inertia and “barriers” to change, and in introducing low carbon technologies and systems, with associated changes in infrastructure, institutions and financial and economic frameworks.

Accordingly the successful implementation of any path of UK CO2 reduction by 2050, consistent with keeping global concentration levels below 450 ppm, (or such other target as may be agreed) will require rigorous scheduling of measures from now on. Given the starting point there will be frequent tension between the urgent need to accelerate emissions reduction, and the lead-times involved in taking effective action. This tension gives rise to time critical issues. We have argued elsewhere that each of the main sectors (power generation, transport and heating of buildings) should be analysed by the relevant Government departments to identify these time critical issues and to indicate the timing of key decisions and commitments and the main agents of change. We cannot see how sustainable progress on CO2 reduction can be made without this kind of time critical analysis on a rolling basis endorsed by Government and conducted throughout with emphasis on urgency and lead times, with explicit timetables for action. Such an analysis needs to become an integral part of the accountability process associated with carbon budgets.

BALANCE OF INSTRUMENTS

We have a fundamental concern that, even if government objectives and carbon budgets are clearly linked to the urgency of the science, and even if time-critical analysis is effectively incorporated into the carbon budgeting process, the present market and institutional framework will not provide the necessary incentives and momentum for the rate of change that is required.

This would require a comprehensive survey of existing incentives, regulations and market structures to determine the extent to which they assisted or impeded the rate of reduction of CO2 emissions. The BIEE group intend to carry out work in this area, initially concentrating on some of the issues that will need to be addressed in the crucially important power sector.

The context is defined by the existing market and regulatory structure; this includes large incumbent private sector firms and smaller potential new entrants, and a regulatory authority historically and statutorily focussed on competition issues, price control (of monopoly sectors) and consumer protection. The economic instruments currently perceived as available to government in pursuit of CO2 related objectives are limited to what can be applied within this liberalised market framework. Essentially this means reliance primarily on emissions trading (EU ETS), with some targeted support to renewables or other low carbon capacity.

Some features of these market and regulatory structures may create the potential for market failure, and for outcomes that impede or frustrate policies geared to achieving early and substantial CO2 emission reduction. Particular concerns include the following:

• the White Paper placed considerable emphasis on carbon trading within the EU ETS. However a carbon price from this scheme may not only be volatile but may reflect only the market’s short term view of the cost of abatement, rather than the value of long-term low carbon investment.
  
• asymmetry between incumbent fossil generation and low carbon new entry in terms of the commercial risk associated with new capacity investment (separately identified by Anderson and Newberry); it arises from the fact that fossil plant costs continue to be the price setter over an extended period.
  
• potential conflict between the acceptability of instruments within a liberalised market framework and the achievement of optimal outcomes; for example undue reliance on market and trading solutions will fail if other political imperatives such as fuel poverty constrain prices.
  
• theoretically at least, the adoption of intermediate targets could lead to outcomes that are perverse in relation to the “true” overarching objective of minimising cumulative emissions; this could occur for example if targets were too loose, delaying investment, or too tight, with shorter term trading signals adversely affecting necessary longer term technologies by inducing “quick fix” solutions.
  
  
• since there is no certain long term carbon price and since the private sector uses a discount rate which is well above the social rate of time preference, the private sector cannot be expected to take socially optimal decisions about the time critical sequencing of low carbon power sector investments (ie there is a market failure).
• while the twin objectives of low carbon and security of supply may, in the long-run, be wholly compatible, there are likely to be short-term conflicts which cannot always be resolved in favour of carbon; ie security is the more immediately binding constraint
• general concerns for investors about regulatory risk, and certainty about policy and market frameworks
• the main regulatory bodies relevant to the power sector have consumer protection and competition policy traditions that do not necessarily sit well with policies that attempt to attach primacy to climate policy
  
• market participants do not need to design strategies to cover the risks of overall policy failure; governments do.
  

For these reasons it seems imperative that the Committee will need to focus on market and regulatory frameworks to make sure they are delivering not just on annual targets but also on future investment on a timescale compatible with overall objectives.

CONCLUSIONS

The group hopes the above observations will be useful to the Committee, particularly in:

• the review of the 2050 targets and the effect on carbon budgets
• linking the carbon budgeting process to the corpus of measures required to achieve sustainable momentum for CO2 reduction
  
  
  
  
  
  
  BIEE Climate Change Policy Group. List of Earlier Papers.
  
  1. Bringing Urgency Into UK Climate Change Policy. Paper by the BIEE Climate Change Policy Group. December 2006
  
  2. Time Critical Pathways For UK CO2 Reduction. Supplementary Note by the BIEE Climate Change Policy Group. 27 February 2007
  
  3. Draft Climate Change Bill. Response by the BIEE Climate Change Group. 24 May 2007.
  
  4. Shaping Carbon Budgets. Practical Application of an Approach Based on the Notion of Time Critical Pathways. Mike Parker, John Rhys and Gordon Mackerron on behalf of the BIEE Climate Change Policy Group. 3 January 2008
  
  5. Observations on the Time Profile for the Social Cost of Carbon. Technical Note by John Rhys. April 2008.

[1] The PAGE model results, which underpin both the Stern review and the DEFRA work, make it clear that a tonne of CO2 emitted in 2008 does c. 1.0 % more damage than the same emission in 2009. See also John Rhys note on this subject.
[2] Reference earlier paper on shaping carbon budgets

Urgency in Reducing Power Generation Emissions.

Time Critical Issues in Reducing CO2 Emissions in the Power Generation Sector.

This paper was prepared on 23 March 2008 by Mike Parker, John Rhys and Gordon Mackerron as an application of an approach to identifying time critical issues in the power sector. It reflects the continuing focus of the group on injecting urgency into UK policy on carbon and greenhouse gas reduction.

Introduction

1. The group has consistently emphasised urgency in the conduct of climate change policy. The tension between urgency and the lead-times involved in implementing necessary steps, particularly investments, has led us to define what we have called “time critical” issues. Our earlier analysis has identified the UK power generation sector as absolutely central, within a time critical framework, to the achievement of targeted overall CO2 reduction trajectories. This first note on the identification of sector specific issues therefore concentrates on time criticality within that sector and on the implications for the carbon budgeting system. Resolution of these issues falls in large measure within the responsibility of government. Without attempting to prescribe particular resolutions, we believe the government needs to state clearly the resolutions, measures and initiatives that are required, and the timing that is needed, so that progress can be monitored within the carbon budgeting system.

Matters affecting power generation emissions up to 2020

2. The White Paper central projection has power generation emissions falling from 47 Mtc to 36 Mtc by 2020, consistent with a straight line reduction in CO2 to nil by 2050, which is broadly what will be required if the 80% path is adopted. The White Paper analysis rested on:

• i) delivery of demand/ efficiency measures sufficient to keep electricity demand broadly stable, rather than rising under business as usual (BAU) conditions
• ii) a trebling of renewable power generation by 2020 nearly offsetting the decline in nuclear
• iii) a large fall ( c 40%) in coal reflected mainly in higher gas generation

Of the above (i) requires a conventional monitoring process, but (ii) and (iii) raise important time-critical issues. We therefore deal in turn with renewables and fuel substitution.

3. The whole question of the feasible expansion of renewables by 2020 was difficult even in the context of the White Paper expectation of around 15% of UK electricity generation. Now that the “EU obligation” may be for 30% or more from renewables (from a current position of 5%) in little more than a decade, any sensible discussion of feasibility must be grounded in a realistic view of what can be delivered from different renewable sources within that timescale. This may be considered to be a form of indicative plan but its essential requirement is a framework within which to monitor the effectiveness of policies, and to identify failures or gaps at an early stage. Quite apart from the renewables target per se, an early realistic assessment of the feasible expansion of renewables by 2020 is vital in order to determine the extent to which new gas and coal plants (to offset old coal and nuclear retirements) are unavoidable.

The “indicative plan” for renewables would need to indicate:

• whether, and if so what, combinations of renewable technologies could in principle meet the 2020 target, based on time profiles, by technology, of capacity or projects under construction, in the planning system, or yet to be submitted?
  
• the lead times for the capacity component elements of such combinations need to be identified, together with the extent to which these are affected by
  - constraints in construction capacity
  - complex planning issues for major projects (eg tidal barrages) and generalised planning issues for smaller scale technologies
  - insufficient R&D
  - very high costs and their implications for financing
  - any other potential resource constraints
• implications for infrastructure; which in turn may require review of regulatory incentives and conditions governing transmission investment, as well as the integration of “distributed” supply within lower voltage local networks
• addressing the issues associated with any potential intermittency constraints, by progressing electricity storage or other load curve adjustment measures such as sophisticated tariff and load control systems
• whether and what changes may be required to the financial framework for investment in renewables. In particular will the Renewables Obligation, even with the reforms proposed in the White Paper, be able to cope with the quantum and speed of what is needed? How soon could a new approach be introduced?

4. It is not clear from the White Paper how the substantial switching out of coal, mainly into additional gas, is to be achieved by 2020 or precisely how the workings of the EU ETS will contribute, and when. There is currently considerable uncertainty [notwithstanding the explanatory note in Annex 1, DTI Paper URN/947]about the carbon price which will emerge, either in Stage II or III, and how this will interact with the variable and uncertain relativity of international coal and gas prices.

Proposals for a new coal-fired plant underline the seriousness and relevance of the issue. Failure to solve this problem soon could have a significant effect on the cumulative CO2 emissions from the power sector in the period to 2020, and thereafter.

Matters affecting power generation emissions after 2020.

5. Even if power generation emissions are reduced to 36 Mtc by 2020 (as in the White Paper central case) reductions in emissions after 2020 will be crucially dependent on decisions and measures taken before 2020. For developments post 2020 we need to be concerned with four main issues:

• the follow-on for renewables development
• the development of the nuclear component
• the development of carbon capture and storage
• preliminary indications of the role of carbon-free electricity in reducing emissions in the building and transport sectors, since this may influence plans for the development of nuclear and carbon capture after 2020 and some decisions at an earlier stage

6. Renewables. The level and momentum of renewables generation after 2020 will be heavily influenced by the performance of the sector before 2020, and, as we argue above (para. 3) this requires the time-critical analysis of an indicative plan as soon as possible. In addition further RD&D will be required to create new or improved technical options to mature after 2020 (whether on a UK, EU or other international basis). Many of the issues identified for attention pre-2020, such as issues of intermittency, and load balancing and control, will remain post 2020 although the emphasis and detailed parameters will alter with the development of both demand and other supply options in the power sector (electricity substitution in transport and heating, and the advent of nuclear and CCS contributions). Given the inherent lead times work needs to begin soon.

7. Nuclear. Generation from new nuclear is unlikely to be significant before 2020, and the overall capacity and timing of new plant thereafter remains very uncertain. Our last paper identified key issues as: licensing, reactor choice and tendering, construction, planning constraints, infrastructure provision. These issues, together with that of assuring a robust financial framework need to be resolved in the next 2/3 years to ensure the earliest feasible achievement of carbon reduction from any nuclear programme, and to get a clear view of the nuclear contribution to the position in 2030 and thereafter.

8. Carbon capture and storage (CCS). Our last paper identified key issues in terms of steps to a demonstration project, identifying storage facilities with appropriate capacity, testing security of storage, mechanisms for moving from demonstration to large scale, decisions on extent of retrofitting, infrastructure provision specifically in relation to CO2 gas gathering and liquefaction/pumping, as well as general infrastructure and financial framework issues common to renewables and nuclear.

Great store is being placed by policy makers, both in the UK and internationally on CCS. but no commercial scale CCS power generation has yet been developed in any country. Without further effort, it is unlikely that the feasibility and economics of CCS can be fully established from currently envisaged pilot plant studies (UK/EU) before 2020. If commitment of investment in major CCS projects has to wait until then, significant CO2 reductions will be further delayed, and there will be a problem of “lock-in” to “unimproved” fossil capacity, capacity that cannot realistically be expected to accomodate CCS at an early date.

With gas and coal plant further increased there is an urgent need to examine how this difficulty can be overcome by addressing, among others, the following questions:

• i) can technical knowledge be accelerated by access to projects beyond the UK pilot scheme?
• ii) to what extent are potential UK CCS sites limited by geography or geology? How soon can the best sites and capacity be identified?
  
• iii) what infrastructure will be required for identified sites? Given lead-times, when does investment need to begin?
• iv) when will the UK CCS Regulatory Task Force report? Which details are time-critical? [in the sense of affecting lead-times on CCS projects]
  
• v) how soon can a financial framework [including incentives] be determined, both for CCS plants and infrastructure? And how far can this precede full feasibility tests from pilot plant?
• vi) in the meantime how far can the carbon readiness requirements for new gas or coal plant be strengthened as a means of accelerating CCS preparations generally?

9. Electricity Substitution in Heating and Transport. It was implicit in our earlier paper that, at least under some feasible scenarios, we expected this to be a core component of a realistic pathway to meeting 2050 targets. The questions here are perhaps less obviously or immediately time critical for the power sector per se, but neverthless it is probable that early identification of alternative options could assist in better decision taking with respect to the power sector. The nature and pace of this substitution is relevant, inter alia, to:

• the overall scale of power generation capacity required
• accentuation of intermittency and load curve issues (heating load) or their partial resolution through the conversion to stored energy (batteries or hydrogen)
  

Reliance on the EU ETS

10. One of the themes that has been implicit in some of our analysis of time-critical issues in the power generation sector is the extent to which the Government appears to rely in future on the EU ETS to promote low carbon investment. While we believe that given the proposed reforms in Stage III, EU ETS will have a significant role, we remain sceptical on how to important the carbon price generated from the EU ETS will be for three reasons: first it is uncertain whether this carbon price will be high enough and stable enough, and how long this uncertainty will continue; second the carbon price effect will continue to be heavily conditioned by the absolute and relative prices of fossil fuels and of wholesale electricity which are themselves uncertain; third the exposure to commercial risks will vary between different potential investors - new nuclear, CCS (coal and gas) and a range of renewable technologies. This difficulty was in fact recognised in the White Paper which stated (para 5.1.34):

“Given the scale of investment in new generation assets required in the UK over the next two decades UK investors need clarity over carbon market fundamentals in good time [our italics] if they are to make investment decisions consistent with the Government’s energy policy goals. We will therefore keep open the option of further measures to reinforce the operation of the EU ETS in the UK should this be necessary to provide greater certainty to investors.”

Confidence that the scheme can deliver as required is itself time-critical and early resolution of these uncertainties is therefore required.

Implications for the carbon budgeting system

11. We have set out in this paper the main time-critical issue in the power generation sector. If the required rate of progress towards a virtually carbon-free UK electricity system is to be achieved, all these issues need an effective response by government, with clear statements on the measures/ initiatives required, and their timing, within the next 2/3 years [well within the first carbon budget period].

12. On the other hand because of inherent lead-times, even very rapid response by government would result in very limited CO2 savings in the first carbon budget period; a crash programme on renewables would show up in the second and third carbon budget periods; and enabling measures on new nuclear, CCS and second generation renewables would not deliver significant CO2 reductions until after the third budget period.

13. In the case of the time-critical issues set out in this paper, the gross mismatch of timescales, between government initiatives and measures and their full effects in terms of CO2 reduction, needs to be recognised in the accountability process, since the issues are too important to be excluded. The DEFRA note of Feb 2008 “Government Proposals for strengthening the Climate Change Bill” proposed strengthening the compliance mechanism by requiring the Secretary of State to bring forward proposals and policies to enable the three carbon budgets that have been set to be met, and having regard to the duty to meet the 2050 target.

14. In our view this can be done effectively only if, in addition to conventional monitoring of short term “incremental” measures on energy efficiency and demand management, there is detailed annual scrutiny of the progress of all government measures designed to “create the conditions“ for CO2 reduction, not only within the three budget periods but also beyond. In the interest of urgency in policy implementation, such scrutiny should include the time critical issues set out above.

Shaping Carbon Budgets

SHAPING CARBON BUDGETS.

Practical application of an approach based on the notion of time critical pathways

This note was prepared in January 2008 by Mike Parker, John Rhys and Gordon Mackerron
on behalf of the BIEE Climate Change Policy Group . Its purpose was to stimulate ideas on how to use a "time criticality" approach to work from an overall and long term (2050)cumulative target for CO2 reductions to a set of sectoral policy requirements.

1. We strongly welcomed the lead given by government in the Climate Change Bill, with the creation of a new institutional framework to back a system of “carbon budgets” which will set legal limits on UK CO2 emissions within rolling five year periods.

2. However we are concerned that the carbon budgeting system, with its associated accountability and monitoring arrangements, cannot be effective without public scrutiny of the whole corpus of policies and measures concerned with the low-carbon issue, since these arrangements will need to highlight not only recent performance of carbon emissions against budget, but also those steps being taken to increase the momentum of carbon savings in the short-run[1], and to create the conditions for transition to longer term technological and system changes.

3. Moreover these procedures need to address directly the issue of urgency in the conduct of UK climate change policy. Given the long lead times involved in removing the sources of inertia and “barriers”, introducing low carbon technologies, and making the associated changes to infrastructure and institutions, the successful implementation of any 60% path to CO2 reduction is already on a very tight schedule. For an 80% reduction path the schedule would be even more demanding. Procedures therefore need to place great emphasis on lead-times and time criticality.

4. Accordingly we believe that the carbon budgeting system should incorporate detailed descriptions, endorsed by Government, on how and at what rate the emission reduction targets are to be achieved. We call these descriptions “time critical pathways” (TCPs). Our purpose here is to indicate our preliminary views as to how this approach would work, and how these ideas can be developed further.


PART 1. DEVELOPMENT OF THE TCP CONCEPT. THE TASK


DISAGGREGATION INTO SECTORS

5. Policy analysis in the White Paper and elsewhere has been based on disaggregation into sectors, given the very wide range of detailed issues involved in terms of technologies, market structures and policy instruments. We recognise there is an element of overlap in certain cases – for example micro-generation and other decentralised electricity on energy use in residential and other buildings, and the use of electricity in transport. The core sectors in our view are electricity, transport, and heating of buildings (residential, commercial and service sectors). All three depend to a very significant degree on UK-specific factors, potentially demanding UK specific strategies and policies.

6. Industrial process heat, though a significantly smaller contributor to total emissions than the above, is still substantial. The adaptation of UK industry and its competitiveness will be a large and important issue, albeit one that needs to be viewed primarily in the wider international context of the EU ETS. Two other very significant sectors – aviation and shipping - also need to be included in a comprehensive strategy and in emission targets, as we have argued in earlier papers.

BASIC CHARACTERISTICS OF “TIME CRITICAL” PATHWAYS

7. We envisage TCPs for each of the main sectors being drawn up by the relevant Government departments (with coordination on overlaps). These would be consistent with the achievement of the aggregate target of CO2 reduction by 2050, with the minimisation of emissions in years to 2050 and associated targets for cumulative emissions, and would clearly set out the order and timing of the key developments, decisions and commitments involved. This process would clearly need to recognise uncertainties, to retain elements of flexibility, and to provide reasonable certainty of achieving targets and objectives. TCPs would be subject to periodic revision. Subject to these constraints and objectives the process would also seek to minimise the overall costs of the measures required.

8. These TCPs should also be capable of phasing into the first three carbon budget periods (2008-12, 2013-17, and 2018-22) and more broadly thereafter by decades to 2050. Moreover not only would the TCP set out what has to be done and when, but also what actors/agents would be involved and when.

9. For each sector the drawing up of TCPs would necessarily involve covering the following ground:

(a) assessment of CO2 savings available from short term measures to reduce demand, increase efficiency and achieve fuel switching for existing assets and systems, including measures already identified up to the recent White Paper, and the timing of these savings.

(b) identification of the likely portfolio of options for key technology and system changes [over and above those in (a)] which could contribute to the sector’s transition to a nil or very low carbon future by 2050, and an assessment of the speed at which they might be introduced in the light of :

• Current state of technical development



• Lead-times to widespread adoption



• Age and turnover of existing capital stock including infrastructure



• Nature of factors creating inertia and barriers to progress, including fiscal, regulatory and institutional factors, and the potential speed of their removal
  

THE PROBLEM OF UNCERTAINTY: ALTERNATIVE SCENARIOS

10. For any given sector, technology pathway evolution is inherently uncertain, and also path-dependent. Within a portfolio of options, some are less certain than others and some options may conflict with others; this means that more than one pathway may need to be described, to provide an element of flexibility. This applies particularly to the electricity sector, where it will be essential to consider the relative time criticality issues arising from potentially different pathways for nuclear, CCS and renewables (centralised or decentralised). It might be thought that the use of alternative scenarios might weaken the essential urgency of policy, but this need not be the case. Indeed in such a circumstance the use of alternative TCPs would be a powerful tool in exploring the implications of such unavoidable uncertainties in terms of conflicts or synergies between policy options, particularly in the first two carbon budget periods (2008-2017). Indeed the use of alternative scenarios for the electricity sector, to decide what should be done in the next ten years, is in any case a matter of great urgency.

THE BALANCE OF INSTRUMENTS QUESTION

11. Our position is that the whole question of the balance of instruments should be addressed pragmatically relative to efficacy in reducing CO2 emissions at a rate compatible with urgency, whether or not the result is an increase in Government involvement. The use of TCPs which set out not only what has to be done and when, but also who is involved and when, would be a powerful tool in determining the most effective balance of instruments, including the role of “government” and “markets”. We are not advocating a detailed long term plan determined and controlled solely by Government, but rather a framework to create the conditions for large scale investment and system change to deliver a very low carbon economy in the UK, at a rate compatible with the urgency of the task and in ways that safeguard security of supply and minimise long-run resource costs.

TCPs AS A MEANS TO URGENCY

12. TCPs as described in this note could be a vital and distinctive means of injecting urgency into UK climate policy because they:

(i) incorporate time criticality and lead times as essential building blocks in policy formulation

(ii) enable the phased timing of necessary measures to meet CO2 reduction targets to be clearly identified, in a way which can be related to the proposed carbon budget system. Comprehensive and coherent timetabling will be a necessary feature of any urgent conduct of CO2 reduction policy.

(iii) help to resolve potential conflicts between alternative technologies

(iv) provide a way to improve the rationale and coherence of the “balance of instruments” in a way compatible with the necessary speed and progress

(v) above all, allow much greater focus on what has to be done in the first two budget periods (2008-2016), irrespective of whether the resulting CO2 savings occur in these budget periods or later, in terms of
· major investments to be committed, started and completed,
· research and development to advance new options,
· fiscal regulatory and institutional measures to remove barriers to urgent progress


PART 2. BASIS FOR A WORKED EXAMPLE

13. In this illustrative example the idea of time criticality is used in different ways and at different stages to show how a broadly defined strategy, with a loose collection of plans, policies and forecasts, could be developed and articulated in a coherent way using the notion of TCP, and how TCP would assist in some of the ways described in the first section of this paper.

14. As this is intended only as an illustration of TCP, it ducks some of the questions we have talked about earlier, in terms of where the strategy sits in the spectrum between centralised planning and a pure market approach. The distinction may be more illusory than real, if it is clear that even a market-based approach demands that particular engineering, regulatory and financial events inevitably happen in a well defined sequence. However a TCP may well indicate very quickly when either plans or markets are failing to deliver on their part of the strategy.

15. The example deliberately uses a very stylised and simplified approach, in order to avoid, as far as possible, a misleading impression of a level of precision and consistency that could be expected only after incorporation of more detailed analysis, which would have to be a feature of a real “live” application of TCP. As a first step this illustration uses a simple spreadsheet and some assumed annual percentage reductions to get a broad feel for the arithmetic of individual sector effects in relation to targets for cumulative emissions and 2050 annual emission targets. Even this very simple and approximating approach, however, quickly gives a feel for scale and orders of magnitude. Material derived from more elaborate energy sector models such as Markal, and numerous additional assumptions within a chosen strategic framework, inclusion of additional sectors and subsectors, and more precision about targets[2], could be used to convert this illustration into a more solid and reliable exercise with real UK data.

16. The example describes a fictitious world in which there are only three sectors to consider: electricity generation, heating of buildings, and (road) transport. Aviation, shipping, and process heat for industry[3] are excluded, as is the possibility of purchasing international[4] credits. Annual emissions total an annual 10000 “GHG equivalence” emission units in 2007, and the relative shares of the three sectors are of the same order as the 2005 shares for CO2 quoted in the White Paper. The relevant targets to be considered are 60% or 80% reductions by 2050, with associated cumulative emission targets based on constant percentage reductions.

AN ILLUSTRATIVE STRATEGY

17. A particular strategy has been chosen here to illustrate the TCP approach; it includes a strong supply side approach, including centralised electricity decarbonisation as a core component. In this sense it broadly resembles the recently published IPPR strategy except in that it does not rule out nuclear. It can be characterised as follows:

• Reliance on White Paper measures in early years. Reductions to 2020 are largely limited to what can achieved through fuel switching in existing assets, including the impact of ETS, plus the impact of White Paper measures which include energy efficiency.


• Decarbonising the electricity sector is a central theme for the strategy as a whole. It becomes a priority in effecting reductions for the period after 2020, whether through nuclear, CCS, large scale renewables, or a combination. A critically important issue in TCP terms is the rate at which CO2-free capacity can be substituted into the power sector.
  
  
• Electricity for heating buildings; strategy on buildings can include a raft of demand side measures, some of which (such as heat pumps) depend on electricity, but one feature of this strategy in relation to buildings might be that CO2-free electricity becomes a default option for decarbonising the heating sector at some time after 2020 (notably if there is a risk of other measures proving insufficient). The timings for emission reduction in this sector might then become dependent on the pace at which sufficient electrical capacity can be added, as well as the speed and nature of decentralised, energy saving and non-electric alternatives.
  
  
• Transport and innovation. The transport sector is the most obviously dependent on radical technological innovation, as well as possibly major systemic and infrastructure changes. There is a presumption that by 2040 at the latest we should be able to start moving to a hydrogen or electric transport economy. As with heating, both depend on electricity generating capacity.
  
  
• Non-exclusive; a raft of other policies can co-exist with this basic structure, including more emphasis on feeding through of carbon pricing, second generation[5] biofuels, more renewables, regulatory controls, and planning and life style measures (“joined-up government”) aimed at reducing demand; all of these are potentially helpful in terms of time criticality and/or as stopgap measures,[eg biofuels pending more radical technology and innovation]. Some of them will affect forecasts and hence the quantum of what will be required; more detailed analysis will determine whether they impact in a major way on current required actions.
  

18. This illustration is not intended to be normative. For illustrative purposes it arguably has the advantage that its strong “supply side” element has a more containable number of technical parameters and assumptions, and in consequence some of the TCP issues are more easily and sharply defined.


APPLYING A TCP APPROACH TO THE STRATEGY. STAGE 1

19. Alternative approaches to strategy can be set out and subjected to a preliminary evaluation of what they will be required to deliver in relation to the arithmetic of targets.

20. Stage I. Making sure the strategy is consistent with the targets. In this illustration we concentrate first on the softer 60% target, reducing annual emissions from 10000 pa to 4000 pa but insist that we also meet an associated cumulative emissions target of 289000 over all years 2007-2050 inclusive. [80% would imply 220,000 cumulative.]

We input savings to 2020 based on the White Paper estimates, taking a “low reductions case” based on the White Paper, and assuming a constant annual percentage decline in this period. This is roughly speaking a 17 % decline in power sector emissions by 2020 (mainly due to coal to gas switching), a 33% reduction in heating related emissions (mainly residential), and no overall change in transport emissions by that year.

It is quickly apparent, as one would expect intuitively, that meeting targets under this strategy depends primarily on the pace at which the power sector can be decarbonised. We can experiment with different rates of progress, but the most ambitious limit so far contemplated is one in which emissions are halved between 2020 and 2030. This may seem like an excessive rate of turnover of capital stock, but would be wholly consistent, for example, with French experience in the 1980s and 1990s, or with recent proposals for UK offshore wind. However it is very hard to see how this strategy could deliver even on the 60 % target without such a rapid rate of progress in the power sector.

The next step is to consider what rate of progress is required in the heating and transport sectors after 2020. This is a bit more hypothetical and open-ended, primarily because there is a much wider raft of possible policies and technologies, but is still worth examination. However if we assumed no further reductions in these sectors between 2020 and 2030, perhaps because the White Paper measures had by then run their course and exhausted their potential, or because of insufficient electricity, then even for a 60% target, when expressed as a cumulative target, we would require 4% annual reductions in both sectors after 2030 in order to get back within the cumulative emissions limit. Given the nature and slow turnover of the building stock, and current perceptions of the intractability of the transport sector, 4% pa reductions represent a substantial challenge.

Moving to an 80% target, together with its equivalent cumulative target, is even more demanding, and implies larger and earlier contributions from heating and/or transport sectors. A possible corollary is the earlier need for demand side measures in these sectors.

Lessons from stage I.

22. Although this is no more than simple arithmetic, it is helpful in demonstrating that the strategy can deliver, in identifying key elements of time criticality, and in alerting policy makers to the adverse consequences of falling behind “planned” rates of progress.

• Significance of taking cumulative targets as compared to end year annual rates; low rates of reduction to 2020 make the achievement of cumulative targets much tougher than a “per annum by the year 2050” target



• Identification of significance and benefit of early achievement of power sector decarbonisation, by whatever route.
  


• Necessity of substantial and relatively early progress in the building sector after 2020, with continuing reductions in heating beyond what has been achieved by White Paper measures to 2020.
  
  
• First impressions of rates of change that will need to be achieved in transport sector: at least 1% pa after 2020, and significantly more if there is any growth to that point or if other sectors do not deliver.
  
  
• Sensitivities; how falling behind any part of plan will impact on pace of change required later and/or in other sectors to “catch up”.
  

In particular, any failure to deliver on the expected savings from the White Paper measures by 2020 has a very adverse effect in requiring difficult “catch up” later.
An 80% target increases the pressures for early action to constrain near term growth or to cut emissions in heating and transport.


TCP APPROACH. STAGE 2. MORE DETAIL BY SECTOR.

23. Stage 2. Drill down into the individual sectors. This process requires much more detailed consideration of alternative and complementary options in each sector. The aim is to identify explicit objectives, actions and timetables, both positive and precautionary. Above all it is vital to bring out the extent to which a strong momentum of CO2 reduction after 2020 depends on identified urgent actions being taken over the next ten years.

24. White Paper measures, 2007-2020

Objective: to ensure that the White Paper measures deliver both volume and to timetable.

Time criticality: monitoring of progress in detail, and dealing with observed shortfalls[6], if necessary seeking to strengthen existing measures or find additional savings.

Actors and agents: energy companies, government, ETS players and energy markets, regulatory bodies.

25. Power sector

Objective: to enable major carbon substitution beyond what can be achieved through the White Paper measures, with first carbon-free capacity starting 2020-22.

Time criticality: this is based around activities and preconditions associated with the alternative generation options, namely clear timetables for action on:

• CCS; steps to demonstration project, identifying storage facilities with appropriate capacity, testing security of storage, mechanisms for moving from demonstration to large scale, decisions on extent of retrofitting, infrastructure provision specifically in relation to CO2 gas gathering and liquefaction/pumping;



• Nuclear: licensing, technology choice and tendering, construction, planning constraints, infrastructure provision;



• Large scale renewables – offshore wind or tidal power; resolve technical issues and uncertainties, planning constraints, infrastructure provision.
  

In each of the above cases, it is also necessary to determine whether the market will currently support the investment and on what terms. If the answer is negative then an immediate analysis/decision is required either on a viable alternative strategy, or on taking measures to make this strategy commercially viable eg by dealing with factors that predispose to market failure[7]. Similar questions need to be asked if only one, or only two, of the three main options can be considered commercially viable.

Actors and agents: energy companies; project promoters and finance providers, national grid, government on infrastructure issues, energy markets

26 Heating after 2020.

Objective; ensure ability to effect continuing rapid rate of emission reduction after 2020.

Time criticality; closely linked to the multiplicity of individual measures affecting this sector, but may include preparation of legislative and regulatory frameworks; part of strategy dependent on power sector capacity, but also need to examine in more detail policies and timing for zero carbon new housing, and need to have additional options available.

Actors and agents: government, builders, local authorities, architects, regulatory bodies, housing markets

27. Transport.

Objectives; develop sufficient number of options to ensure capability to meet sustained rates of reduction as soon as feasible; to be consistent with target arithmetic this should be no later than 2030.

Time criticality; The time dimension will be based partly around international research and development directions for the several, not mutually exclusive, options that include hydrogen, electric (batteries), and “type 3” biofuels. However the first two of these also rely on electricity, and on significant infrastructure changes (hydrogen production and distribution, and battery charging) which will tend to bring forward decision dates. Even if biofuels are supply limited they may still have a significant stopgap role.

If the overall arithmetic requires more from the transport sector, especially in the context of an 80% target, then demand side options need greater prominence. Two significant options for short to medium term reductions might be the enforcement of lower speed limits, and move to universal congestion (road) pricing, the second of these having very substantial technology, infrastructure and political/legislative dimensions.

Actors and agents: research bodies, car manufacturers, other manufacturers, energy companies, public transport bodies, government and local authorities.

CONCLUSIONS ON THE TCP APPROACH

28. The TCP approach provides a means of incorporating estimates, ideas and logical connections within a strategic framework. It differs from but may be complementary to more familiar approaches to forecasting, scenarios and optimisation models.

The BIEE group will therefore be continuing to develop the concept by examining particular projections, scenarios and sectoral policies from a TCP perspective. The objective will be to construct or identify strategies that deal explicitly with urgency and time criticality, and to do so in a form that will be useful for the carbon budgeting process, particularly for the first two periods.


Annex 1. Hypothetical 3-sector example. Indicative charts showing required rates of change over a 43 year period to 2050 in order to meet a 60% target (interpreted as a cumulative equivalent).

Chart of total emissions with sectoral breakdown. (above)

Chart of emissions for each sector

Horizontal axis is years 2007 to 2050. White Paper reductions assumed to 2020.

Chart of emission levels consistent with 60% target interpreted as an equivalent cumulative target. This profile requires a 63.5% reduction in annual emissions by 2050.

Annex 2. Same hypothetical 3-sector example. Indicative charts showing required rates of change over a 43 year period to 2050 to meet an 80% target (interpreted as a cumulative equivalent).

Chart of total emissions with sectoral breakdown. (above)

Chart of emissions for each sector

Horizontal axis is years 2007 to 2050. Emission levels consistent with 80% reduction when interpreted as an equivalent cumulative target. Almost impossible to achieve without increasing assumed White Paper savings [applied to electricity in this example] and also assuming very dramatic transport reductions from 2020. This profile requires a 90% reduction in annual emissions by 2050 to meet the cumulative target!

Footnotes.

[1] The short run in this context is defined to mean the immediate future within which no major changes to existing assets are feasible.
[2] eg on GHG as opposed to CO2 equivalence and the associated technical parameters required for a GHG calculation.
[3] If we did compare this stylized example with UK actual data, then inclusion of these sectors would tend to make the targets harder. Even though the excluded sectors are smaller, industry presents a problem because the WP measures assume little change by 2020, and aviation and shipping are fast growing.
[4] In contrast with the exclusion of the smaller sectors, allowing international credits tends to soften the impact of the targets.
[5] Sometimes referred to as “ligno-cellulose”, these biofuels are typically derived from marginal land without alternative uses for food production. Lower CO2 emissions are involved in their cultivation, and their net contribution to carbon reduction is consequently higher.
[6] Particular concerns attach to the EU ETS and its ability to deliver the amount of coal to gas switching postulated in the White Paper.
[7] This might include consideration of guarantees, floor prices or other measures.

Bringing Urgency into Climate Change Policy.

BRINGING URGENCY INTO UK CLIMATE CHANGE POLICY

This paper was prepared by the BIEE Climate Change Policy Group in December 2006, and represents both a positive response to the Stern Review and some fresh thinking on how to inject urgency into climate change policy. It sets out some of the basic ideas and arguments that have informed later papers

CONTEXT

1. Over the last year there has been a substantial further strengthening of the science based case for urgent action to reduce man-made emissions of greenhouse gases in order to combat climate change.[1] The Stern review on the Economics of Climate Change provides, inter alia, a powerfully argued and timely analysis of the fundamental economic issues, including the inter-generational and global nature of the problem.

We endorse the general arguments and conclusions of the review, and particularly the case for urgency. Urgency is in our view driven by the following factors.

· The seriousness of the ultimate consequences of inaction.
· The cumulative irreversibility of the increased emissions associated with a “business as usual” approach. The longer action is delayed, the more serious the problems become, and the greater the cost of remedial and adaptive measures will be.
· The limited scope for quick short term measures; realistic solutions depend on technical and systemic changes which will take decades to implement fully.
· Remaining uncertainties in the science, and about the precise pace and consequences of change, enhance the case for early and effective action, rather than “wait and see”.

Our primary objective here is to examine, against the background of the Stern Review, how urgency can be incorporated into the conduct of UK climate change policy.

GLOBAL AND UK CO2 REDUCTION OBJECTIVES

2. The global urgency strengthens the case for UK efforts, even pending a more comprehensive international framework for CO2 reduction, since successful early action by UK and other like-minded developed countries will almost certainly be a necessary, but not sufficient, precondition for a comprehensive post Kyoto settlement. If such a settlement is urgent then so are its preconditions. The UK is well placed to play this “leadership” role, as:

· (i) UK influence in this context is proportionately much greater than its 2% share of global emissions would suggest;

· (ii) among other factors, the UK is disproportionately represented in its share of the science relevant to climate assessment, and in energy technology;

· (iii) the UK is a member of the EU, which is both a major player in the Kyoto process and has the internal instruments to take multi-country action, and thus can provide a lead to other Kyoto participants;

· (iv) the UK has significant scope for independent action in sectors such as electricity generation, with little impact on competitiveness or GDP growth, and without compromising future international agreements;

· (v) the UK could enjoy potential economic benefits from successful early movement towards a “low-carbon” economy, in terms of expertise and technology exports across a range of industries;

· (vi) UK exposure to oil and gas geopolitical risk would be reduced.

3. Stern takes 550 ppm by 2050 as a useful benchmark for CO2 equivalent concentration targets[2], compared to a current figure of 438 ppm, with corresponding target emissions reduction for 2050 for industrialised countries of the order of 60-80 % reduction from 1990 levels. Our view is that we should at least consider the implications of a more challenging 80% target, as well as the more conservative 60% UK reduction considered hitherto, as preparation for the possibility that further analysis of climate science and climate impacts may justify a global target below the 550 ppm benchmark.

4. Whether we adopt a 60% path or an 80% path, implementation will be very challenging. Recent experience with UK emissions shows a stark divergence from the path needed. Such achievements as the UK has made since 1990 rest largely on gas for coal substitution in power generation, a move which was not driven by CO2 policy[3]. Considerations of urgency apply, therefore, not only to the case for UK participation but also to the conduct of UK climate change policy. Our purpose here is to examine how this might be done.

CONDITIONS FOR EFFECTIVE IMPLEMENTATION

5. Policy has over the last two decades been set in a “liberalised market framework”, with a mixture of competitive markets and regulation, and many economists and politicians continue to rely exclusively on market driven solutions. While recognising the fundamental importance and powerful advantages of markets, we believe the current framework, unamended, is unlikely to be capable of promoting large scale investments in new low carbon technologies or fundamental long-term change in complex UK (or for that matter international) energy systems, since:

· “Climate change represents the greatest market failure the world has seen” (Stern).

· “Carbon valuation”, to internalise the costs of CO2, is not embedded in the economic system, and it has so far proved very difficult to implement in a manner that will give confidence to investors in long term assets, eg in power generation, by ensuring that the reward for carbon reduction will remain over the life of the asset.

· R&D investment may be particularly susceptible to market failure problems in industries where it is difficult for individual firms to capture the benefits. The energy sector has been notable for low and declining R&D in recent years, and the potential for market failure is enhanced by the absence of a clear and stable framework to put a value on the benefit of “low carbon”.

· Solutions based on the creation of market structures, such as for the trading of carbon, must play a hugely important role; but, to be effective, they will require not only Government endorsed targets for emission reduction, but also carefully designed policy interventions and regulatory supervision.

· In a number of cases decisions on infrastructure may have a profound effect on the economic and commercial choices of preferred technology, eg on the form of the electricity grid or on a pipe network for CO2 capture and disposal, requiring some degree of centralised decision making.

All these factors suggest the need for some amendment to existing regulatory and competitive market structures. Indeed small-scale incremental adjustments to existing market and institutional frameworks are unlikely to suffice and additional policy instruments are likely to be required.

6. The need for urgency in policy making requires that the government should demonstrate a singleness of purpose, at the earliest opportunity, by:

· (i) emphasising the importance of carbon targets within a “joined up government” approach. Wherever possible, policies to meet other objectives (eg security, competitiveness and income distribution) should be consistent with and should not obstruct CO2 reduction. Synergies should be sought with other objectives, since they will not always be in conflict. Where policies do obstruct CO2 reduction, other countervailing measures will be needed.

· (ii). reflecting the importance of the 80% path for emissions reduction in the machinery of government: this requires coherence between government departments and agencies, and appropriate duties/ powers for the “Carbon Committee”. A cross party concordat will also be important.

· (iii) ensuring that the fiscal regime, and EU/UK rules on competition, trade and regulation, assist rather than impede low carbon policies

· (iv) establishing visible progress towards “low carbon” in the stock of public buildings and other activities which are the direct responsibility of central government, of its agencies, and of local government.

· (v) Giving a high priority, in the conduct of relations with the EU and the international community generally, to the development of an effective post-Kyoto international framework. This will be important in maintaining public support for the UK’s leadership role.


7. Specifically, there is important “unfinished business” from the Energy Review, which will have a significant bearing on the urgency and effectiveness of policy.

(i) We endorse the view that the EU Emission Trading System (ETS) should be an important component of carbon policy, but it must be recognised that the achievement so far has been very limited. The ETS must be made more effective and urgent, to provide powerful and durable incentives for major long-term change. This means:

• radical reform; phases 2 and 3 must have collective/ individual caps consistent with at least a 550ppm path, and allow for the inclusion of aviation;


• phasing out of “grandfathered” allowances,


• examining new mechanisms to give greater certainty that carbon prices will be at a level and for a duration that provides adequate incentives for low carbon investment, both during and beyond phases 2 and 3.


• ensuring “supplementarity” between a stringent emission regime within the EU and the use of mechanisms to reduce emissions in developing countries

As Stern has pointed out, it may take 10-12 years to get fully established carbon trading schemes. We agree that in this transitional period “it is critical that governments consider how to avoid the risks of locking into a high carbon infrastructure”.

(ii) The Energy Review envisaged a Government–led “high powered investigation” into the optimum balance between “distributed” and “centralised” electricity generation/distribution systems. This is under way and requires urgent resolution; otherwise achievements of CO2 reduction pathways in the crucially important power sector will be put seriously at risk.

(iii) There should be an early and rigorous independent check on the feasibility of CO2 savings to 2020 projected to result from the enhanced “climate change programme” of the July 2006 Energy Review, ie 2005: 153 mtce to 2020: 118 mtce, excluding aviation. Given that the UK is currently above even the 60% path, this requires a high contribution from “energy efficiency” net of any rebound effects. In the light of lack of progress in recent years, we need to be more certain that this aspiration is achievable.

TIME CRITICAL PATHWAYS

8. However, there is also a need for an approach which will address urgency directly. Given the long lead-times involved in removing sources of inertia, introducing low carbon technologies and making the associated changes to infrastructure and institutions, the successful implementation of any 60- 80% path is on a very tight schedule. To provide clarity and credibility there is a need to draw up time critical pathways for three particularly significant sectors —electricity, transport, and buildings. These account for about 85% of CO2 in the UK. A UK reduction of 80 % by 2050 is not feasible unless all three achieve close to 80%, or at least two achieve close to 100% while the third still achieves around 50%.

9. The development of time critical sectoral pathways will require setting clearly phased sectoral targets for CO2 reduction, consistent with the 60-80% path for the UK, which is equivalent in aggregate to a 2-3 mtce[4] straight line reduction every year, starting immediately. The optimal paths, in aggregate or sectorally, are unlikely to be straight line, but this should not be used as an argument to excuse the almost negligible achievement of reductions to date, or to rely on unproven future savings. [5]

10. In addition, drawing up the pathways involves the following assessment steps:

(i) for each of the three sectors an assessment of the extent and duration of the CO2 savings likely to be available from:
· short term behavioural changes to reduce demand;
· increased efficiency of existing assets and systems;
· fuel switching between existing assets/ systems.

(ii) in the light of (i) indications of the scale and timing of contribution required from the introduction of new technology / systems involving new assets;

(iii) R&D and innovation policies, in UK and international contexts, geared to the development of new technologies; to reducing costs; and to speeding the rate of implementation of technological change.

(iv) identification of the likely portfolio of key technologies/ system changes in (iii) and assessment of the speed at which they might be introduced, taking account of:

· state of development and lead times;
· age and turnover of existing capital stock;
· nature of impediments to progress and speed of their removal.

This type of analysis is essential if we are to bring urgency into carbon policy in an effective way, by bringing into focus the order and timing of key actions and measures required to meet the phased sectoral targets for CO2 reduction.

11. Much of the above analysis could be built on work carried out for the 2003 White Paper and Energy Review, but organised to indicate:

· who will be the main agents for change; who is to be incentivised to do what, and when?
· what incentives will be most appropriate for urgent progress?
· what issues of coordination (e.g. on infrastructure) will arise and when?
· the timing of critical decisions and commitments.
· how sufficient flexibility can be retained to cope with uncertainty.

12. We cannot specify precisely, in advance of the required detailed assessments, what these time-critical sector pathways will look like. However we believe that they will be essential tools if we are to bring urgency into climate change policy in an effective way. We envisage that they would be made public, and linked specifically to the responsibilities of particular ministers and their departments. In this way the sectoral pathways would:

(i) act as a frame of reference for the evolution of detailed measures within the remit of the Government departments concerned (both individually and collectively);

(ii) provide the means of monitoring and audit by an independent agency, the proposed “Carbon Committee”, not only in terms of annual reduction of emissions against the required trend, but also of progress with measures necessary to secure sustainable momentum in future years.

Further separating the design and implementation of climate change policy, on the one hand, from monitoring and accountability on the other, would increase the credibility of the monitoring agency and thus improve the enforcement of emission targets.

CONCLUSION

13. We believe that it is crucial to bring urgency into the implementation of UK climate change policy. Given existing inertia, and the difficulties and long lead times involved in effective action, climate change policy itself is already at a critical point. We commend the prescriptions set out above as a means of beginning this time critical task.

Supplementary Note:

TIME CRITICAL PATHWAYS FOR UK CO2 REDUCTION

This note explains further some of the ideas on “time critical pathways” set out in above, particularly as they concern monitoring/ audit of UK climate change policy, in ways that build in urgency.

Link with National Emission Targets for CO2

1. The format /content of “time critical pathways” for the three main sectors (electricity, transport and buildings)[6] needs to be linked to the formulation of national emission targets. The current scientific consensus would suggest that the ultimate target for CO2 emission reduction by 2050 should be in a range of 60-80%. However it needs to be emphasised that the true objective function is defined by cumulative emissions of CO2, in order to limit the ppm concentration of CO2 and related gases in the atmosphere.

For example a 60-% reduction over 45 years requires a 2% pa reduction. However a 3.5% pa reduction for 20 years followed by a 1% pa reduction for 25 years yields a cumulative emissions total that is lower by the equivalent of nine years emissions at the end of the period, loosely speaking “buying” an additional 9 years of time. [7] Moreover the “exemplary value” of UK action, both globally and within the EU, will depend crucially on real emission reduction from now on. Thus exclusive preoccupation with ultimate targets of reductions in annual CO2 emission reductions by 2050 ignores the importance of the path of emissions reduction in determining ultimate emissions and the “exemplary value” of UK action. These considerations indicate that from now on the path of UK CO2 emissions should be targeted below that of an annual average reduction of 2-3 mtc, implied by an ultimate target of 60-80% reduction in annual emissions by 2050.

2. We consider that for the period to 2020 the government's stated aspiration to reduce CO 2 emissions to 110-120mtc with phased intermediate targets is broadly in line with the principles outlined in 1 above. Moreover this is also close to the emission level in 2020 which would obtain if the measures set out in the last Climate Change Programme and Energy Review (July 2006) were successful. (Although the problem of incorporating aviation has not yet been solved.)

3. Existing proposed measures effective by 2020 are concentrated primarily on incremental changes to existing systems, short term behavioural changes to reduce demand, increased efficiency, and fuel switching. (Most of these measures can fairly readily be “allocated” to the three main sectors.) For the period beyond 2020 the priorities are quite different, involving the progressive introduction of new assets/ systems with large and widespread investment and institutional change.

4. The scale of change required is enormous. A range of 60-80% reduction of CO2 emissions by 2050 would mean national CO2 in that year of only 30-60 mtc, compared with 150 mtc per annum now. The arithmetic identifies the three main carbon sources as electricity transport and buildings. All three sectors would require huge cumulative savings. In our view the national aims cannot be met unless the following sectoral objectives are achieved:

Electricity: aim to proceed as quickly as possible to a virtually carbon-free electricity system by 2050, not only for the electricity market per se but also to contribute to fossil fuel displacement in buildings, and in road transport (by providing a carbon free primary source for hydrogen or electric vehicles)

Transport; to move progressively towards a very low carbon outcome involving radical reconfiguration of transport demand and infrastructure, and the virtual replacement of fossil based transport fuels.

Buildings: to move progressively towards the highest possible level of “carbon neutrality” for the building stock as a whole

“Time Critical Pathways”: Content of Statements

5. We envisage that “time critical pathways” statements for each of the three main sectors, electricity, transport and buildings, would be drawn up by the relevant Government departments, both individually and collectively, with the following contents:

i) The sector’s share of existing/ identified CO2 savings by 2020 already set out in the Climate Change Programme and Energy Review, together with other feasible savings by that date from short term behavioural changes to reduce demand, increased efficiency and fuel switching for existing assets and systems. It is essential that quantification of “savings” must be based on change from a base year (say 2005), not from “business as usual” projections.

ii) Identification of the likely portfolio of options for key technologies/ system changes, over and above those in (i) above, which could contribute to the sector’s transition to a nil or very low carbon future by 2050 and an assessment of the speed at which they might be introduced, taking account of

stage of technical development (in light of R&D both in the UK and internationally)
lead-times to widespread adoption
age and turnover of existing capital stock (including associated infrastructure)
nature of factors creating inertia and barriers to progress, and the potential speed of their removal

iii) Description of “time critical pathways” based on analysis of the factors at ii), which clearly set out the order and timing of key decisions and commitments involved, if the sector’s aims are to be achieved,

iv) Because, within a portfolio of options, some are less certain than others, and because some options may conflict with others, more than one “pathway” may need to be described for each sector, to provide an element of policy flexibility. This applies particularly to the electricity sector where it will be essential to consider the relative time-criticality issues arising from potentially different pathways for nuclear, carbon capture and storage, and renewables (centralised or decentralised). In the event of more than one pathway for a particular sector being described, the Government Department concerned should also provide an assessment of the order and timing of key decisions and commitments during the next five years that is required to maintain momentum towards long term goals, notwithstanding any uncertainty arising from the existence of alternative time critical pathways.

v) An assessment of the implications of the judgements on the “order and timing of key decisions and commitments” at iii) and iv) above, in terms of the main agents and actors involved, and the balance between market-based, dirigiste and regulatory approaches. We emphasise that we are not advocating a long term plan determined solely by Government, but rather a framework to create the conditions for large scale investment and system change to deliver a very low carbon economy in the UK, at a rate compatible with the urgency of the task.

6. We also envisage that the “time critical pathways” statements would be made public in due course, and be subject to periodic reviews to reflect significant changes in circumstances.

Application to Policy Monitoring and Audit

7. We consider that time critical pathways statements for the three main sectors of electricity, transport and buildings, with contents set out above, could not only act as a frame of reference for the evolution of detailed measures within the remit of the Government departments concerned, but also provide the means of monitoring and audit by the proposed Carbon Committee.

8. Here it is useful to draw a distinction between two main routes to CO2 saving, namely

a) “incremental” improvements to existing systems: the “Energy Challenge” (July 2006) postulated that presently identified measures could reduce UK CO2 emissions to about 120mtc by 2020. If achieved this would signal that the problem of inertia had been solved, and the CO2 emissions would reduce at a rate compatible with “urgency”. On this the accountability question is delivery and realism.

b) fundamental change with major investment in new low carbon technologies/ assets/ systems. Here the accountability question is progress with measures to create the conditions for long term change to maximise cumulative carbon savings by 2050.

9. The crucial point is that both a) and b) have to be considered at the same time. Thus we would envisage the Carbon Committee conducting annual hearings with ministers/ departments to deal with both delivery of the present programme of carbon saving measures, and with progress with measures to stimulate long term change, which need to be put in train progressively from now on.

10. We consider that the drawing up and publication of time critical pathways statements[8], as set out in 5 above, could be a vital tool for the Carbon Committee and would ensure due weight being given to the dimension of urgency in the implementation of UK climate change policy.

Footnotes

[1]The seriousness of the issue is no longer in dispute. We regard as absurd the “conspiracy theories” promoted by some economists, politicians and journalists, dismissing anthropogenic climate change as a notion promoted by scientists for self-seeking or ideological reasons.
[2] CO2 is not the only greenhouse gas to which man-made activity contributes; others such as methane, less in volume but more potent, need to be included; references to CO2 equivalent are therefore simply a shorthand for a wider category of greenhouse gases. The target cannot be regarded as precisely defined but reflects a balance of current scientific opinion and some analysis of probabilistic outcomes.
[3] And which in this context can be seen as largely fortuitous.
[4] Million tons coal equivalent
[5] Indeed the real objective is not to achieve particular annual emission levels by 2050, but to make sure that their cumulative effect on concentration in terms of parts per million is restricted to safer levels. It follows that larger reductions early in the period, if achievable, are disproportionately beneficial in reducing cumulative emissions and/or easing the pace of transition in later periods. For example a 60% reduction over 45 years requires a 2% pa reduction. However a 3.5% pa reduction for 20 years followed by a 1% pa reduction for 25 years yields a cumulative emissions total that is lower by the equivalent of 9 years emissions at the end of the period, in effect “buying” an additional 9 years before the concentration target is reached.
[6] We appreciate that there will be an element of overlap between these sectors and also that this categorisation excludes bulk industrial heat and other smaller categories. However we believe this is a useful simplification for a broad analysis.
[7] Likewise a “back-end loaded” path adds a similar amount to cumulative emissions.
[8] Subject to annual review