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