Economics

The UK has an ambitious decarbonisation plan. But does it have a credible one?

2021 will be the critical year for climate change policy. The UK’s enthusiasm is no guarantee of success

December 29, 2020
Photo: Daniel Law/PA Archive/PA Images
Photo: Daniel Law/PA Archive/PA Images

The UK has set some bold climate change targets. Aspirations are easy. Now comes the hard part—explaining who will pay and demonstrating that other countries are sharing the burden.

A new White Paper and 10-point plan launched by the Prime Minister follow the announcement of a target of reducing emissions by almost 70 per cent over the next 10 years, from a 1990 baseline. It is all to help meet the overriding objective of UK energy policy—decarbonisation. By 2050 the goal is to achieve net zero. The 10-year target in particular marks the biggest shift in energy policy since the run down of the coal industry in the 1980s. Much of the detail is sketchy. There is clearly no road map to 2030, let alone 2050—simply a range of options, some of which are within reach, others highly improbable. The declaration of intent has been made—now the real debate on the economics and politics will begin.

Within the UK the key issue will be who pays. The White Paper devotes many pages to reassuring consumers that their household bills will not increase. That assertion is backed up by modelling designed to show that efficiency gains can more than offset any costs involved in switching to new equipment and new sources of supply. The government is clearly nervous that public sensitivity to rising utility bills and other energy costs could make action on climate change a new cause for populist activism against expensive elitist projects.

The results of the modelling are counter intuitive. It is hard, for instance, to see how more new nuclear power stations can be built without consumer bills rising. Indeed, the White Paper endorses the idea of regulated asset-based pricing—a formula which adds the costs to bills as the plants are being built. Sizewell C, the next planned nuclear facility, is projected to cost £20bn—contributions to which could start to appear on bills as soon as construction begins.

Nuclear is particularly capital intensive but is not the only item which will need to be paid for. Installing 600,000 heat pumps each year, which absorb heat from outside sources and transfer it to provide heat for homes or offices, is not cost free. Nor is the provision of charging facilities for electric vehicles or smart meters, the construction of hydrogen hubs, or the enhanced grid which will be needed to cope with added supplies of renewables such as offshore wind and multiple sources of distributed power.

Private investment could meet some of these requirements but will only be available if there is a guaranteed return. That will be the case for the anticipated surge in offshore wind capacity because the costs of generating power from wind are falling so rapidly. Most of the other actions proposed, including the development of infrastructure, will require large-scale public investment, funded through public borrowing and ultimately taxation. If consumers are to be largely protected from increased charges, the balance of the cost of the energy transition will fall on taxpayers.

This is where the proposals begin to stretch credibility. The UK government has shown a remarkable appetite for spending and borrowing over the last year. Long-term interest rates are low. But the accumulation of debt cannot be unlimited. Taxes will have to rise and there will be many demands on any available money, from social care to education to defence.  

The willingness to pay to secure a clean environment and to reduce the risks of climate change has not yet been truly tested. Much will depend on whether consumers and taxpayers believe that the costs involved will actually deliver the intended result.

The amount of spending required to achieve the reduction target by 2030 will meet resistance if the UK appears to be moving too far ahead of other countries where emissions continue to grow. If the decline in UK emissions, which contribute only 1.5 per cent to the global total, continues to be offset year by year by increases from China, India and other emerging economies, financing the measures could start to seem a futile gesture.  

That is why the international climate change conference planned for the autumn of next year is crucial. So far the aim has been to collect support from as many countries as possible for a commitment to achieve net zero by 2050 or sooner.

The last few months have seen several countries, including Japan and Korea, make commitments to decarbonisation. President Xi has talked about China achieving net zero by 2060. Such long-term aspirations are necessary but not sufficient. To be serious they need to be matched by short-term plans for substantial reductions by 2030, backed by hard details spelling out what will change and when.

2021 will be the critical year for climate change policy. After the fall in emissions in 2020 resulting from Covid and the forced lockdown, any economic recovery is likely to be hydrocarbon-based. The International Energy Agency is already forecasting a growth in coal demand as Asia leads the world out of recession. Oil, gas and coal still supply 80 per cent of the world’s daily energy needs. By the end of 2021 it will be clear that the energy transition has barely begun and this realisation will set the context for the COP26 meeting.

To be credible, climate change policy must be global. That does not mean that universal agreement is required. There will always be some who refuse to participate. But a broad consensus is essential to convince those who will have to pay for change that the burden is shared. For the UK government which will host the meeting, achieving substantive agreement is a huge diplomatic challenge. Decarbonisation in one country is not enough.