Energy Systems Catapult study concludes that cost of cutting carbon emissions varies by up to £700 a tonne
How much does it cost to cut a tonne of carbon dioxide emissions? The answer, according to an eye-opening new report from the UK's Energy Systems Catapult (ESC), is 'it depends'.
Phase one of the new study, entitled Rethinking Decarbonisation Incentives, was published this week and took the microscope to the full range of emission reduction policies deployed across the British economy. It concluded that a complex web of policies, subsidies, taxes, and other measures have built up over the past decade and resulted in an 'effective carbon price' that varies widely across different parts of the economy.
As a result a raft of policies impose effective carbon prices that fall well outside the government's target range of between £40‑£119/tCO2, which officials reckon is required to ensure the UK gets back on track to meet its legally binding emissions reduction targets for the early 2030s.
For example, the report details how rail subsidies, which can be regarded as a measure to curb emissions by getting commuters out of their cars, deliver emissions savings at an eye-watering cost of between £139/tCO2 and £568/tCO2.
Similarly, the cost of emissions savings derived from nuclear power is said to hover around the £200/tCO2 mark, while savings delivered through the feed-in tariff incentive scheme vary massively from close to zero to well over £200/tCO2. Policies designed to curb emissions from road transport also vary hugely, with effective carbon costs ranging from under £50 to close to £200 a tonne, according to the report.
The findings will play into both complaints about the cost of decarbonisation from opponents of climate action and criticism from environmental and clean energy campaigners who accuse the government of pursuing policies that undermine the cheapest forms of clean energy.
For example, the report notes the rewards for solar PV closely straddle the government's target range, with effective carbon costs of between £45 and £130/tCO2 and argues solar PV is an area where carbon savings are "undersubsidised". However, the government continues to block solar projects from competing for clean energy contracts, a stance industry maintains is leading to higher costs for consumers.
Meanwhile, a separate report this week from renewable energy consultants BVG Associates calculates that removing the block on onshore wind farms bidding for contracts for difference (CfDs) could deliver 5GW of onshore wind capacity between 2019 and 2025 that would result in a net payback for UK households and businesses of £1.6bn.
The report, which was backed by renewable energy developers ScottishPower Renewables, Vattenfall, innogy and Statkraft, details how the cost of new onshore wind energy projects is expected to drop beneath the government's forecast wholesale electricity price from 2023 delivering net savings for consumers. Over the proposed five auctions the report predicts 86 per cent of the projects by capacity would be built in Scotland and 12 per cent in Wales, with less than two per cent built in England made up of small scale projects, sub 50MW, projects.
The report comes in the same week as chair of the Committee on Climate Change, Lord Deben, gave an interview where he called on the government to allow communities that want to develop onshore wind farms to do so, or make clear "how much of an extra cost" opposition to onshore wind imposes on the public. He also called on industry and government to step up efforts to improve building energy efficiency - an approach that experts have long argued delivers the most cost effective emissions savings for the economy.
The government has consistently argued it does not think new onshore wind farm projects are appropriate for England, but is yet to fully rule out some further development in Scotland and Wales. It has also indicated that new policies to promote cost effective energy efficiency measures are in the pipeline. However, Ministers have repeatedly resisted calls to schedule a new CfD auction at which onshore wind and solar farms could compete, and there is still no set timetable for when new efficiency policies will emerge.
As the new Catapult report makes clear, the government's approach to onshore wind and solar projects is indicative of a policy landscape where the costs of cutting carbon emissions vary enormously. "The first phase of the study has highlighted the unintended consequences of a range of policies introduced over the years, that have produced 'effective carbon prices' in different parts of the economy that vary by as much as £700/tCO2," explained Energy System Catapult head of markets, policy and regulation, George Day. "This is the result of a complex combination of taxes, subsidies, contracts and regulations, many not explicitly introduced with climate change policy goals in mind, but the effect has been that we are paying different prices to cut carbon emissions in different sectors of the economy, even though the harm in terms of climate change doesn't discriminate by sector."
He added that the aim of the Catapult report is to "provide a baseline from which to assess in more detail the different sector drivers and longer-term options to improve market incentives". As such it will play into a growing feeling amongst both supporters and opponents of decarbonisation that the current policy landscape is resulting in the UK over-paying in its effort to drive emissions reductions. However, the report also highlights how some crucial sectors continue to operate with an effective carbon price that is far too low to deliver the emissions savings required to meet the country's legally-binding targets.
"Nearly half of all current carbon emissions (48 per cent), including gas usage and agriculture, face effective carbon prices which are clearly too low to meet legally binding carbon targets," the report states.
Specifically, gas use in residential homes has a low effective carbon price of between minus £33/tCO2 and plus £4/tCO2 due to reduced VAT rates and the 'taxes' on low-carbon electric heating alternatives. Similarly, farm subsidies result in negative effective carbon prices of up to minus £45/tCO2, as farmers are effectively subsidised to pursue practices that lead to higher emissions. Oil and gas production, coal and gas-based power generation, and fuel use by industry are also described as currently "under-taxed" from an emissions perspective.
But the challenge for government is what to do with this new "baseline". The report builds on last autumn's Cost of Energy review from Professor Dieter Helm, which made the case for a "radical" simplification of the UK's clean energy policy landscape based on streamlined capacity auctions and a universal carbon price across the whole economy. However, that report appears to have subsequently been consigned to a dusty drawer somewhere within the Department for Business, Energy, and Industrial Strategy (BEIS).
In a statement BEIS did not respond directly to the report, but repeated that the UK has cut its emissions by 40 per cent since 1990 and last year produced 52 per cent of electricity from low carbon sources.
"Through our modern Industrial Strategy we are determined to cut emissions even further, keep costs down for bill payers and grow the low carbon economy which is we we'll have invested more than £2.5 billion on low carbon innovation by 2021," the statement added.
The challenge for Ministers remains the way "effective carbon prices" often make more sense in economic lecture halls than in the messy world of politics and public policy.
In all the areas where effective carbon prices appear high, emissions policies are designed to deliver multiple benefits, be it through subsidised rail travel that results in reduced congestion and improved air quality, as well as emissions savings, or support for early stage renewables that helps catalyse an industry and drive down future costs. As the government is finding as it continues to mull proposals for a tidal energy lagoon in Swansea Bay, you can make a case for relatively high decarbonisation costs if projects deliver wider industrial and strategic benefits.
Equally, more effective support for some of the most cost effective emissions-savings available, such as those from onshore wind farms or domestic energy efficiency, may be popular with the public but would trigger a political firestorm within those parts of the Conservative Party that remain viscerally opposed to renewable energy and austerity-reversing increases in public spending. Moreover, hiking carbon taxes on energy and industry or axing agricultural subsidies may help deliver emissions reductions at least cost, but could also result in a full blown political crisis for the government of the day.
Sadly, unpicking the complex web of carbon policies and driving through reforms that consistently deliver emissions reductions at the lowest cost is much more easily said than done - something that in fairness the Energy Systems Catapult recognises. As Day acknowledges, the goal of the project is to "build on a 'whole system analysis' of decarbonisation, but within a policy context by developing credible approaches to market and incentivise design for system-wide emissions reduction". In this light, it will be fascinating to see how the next phase of the project pans out.
However, one thing is clear. If the government is to deliver on its stated Clean Growth Strategy goal of cutting emissions, increasing efficiency, and helping to lower the cost of energy, then ultimately it will require a more coherent decarbonisation policy. One that focuses more on delivering the lowest cost emissions savings, while more openly identifying the circumstances and co-benefits that might make some higher cost policies desirable.
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