The Analytical Annex to the UK Low Carbon Transition Plan. Power outages in the offing

8/14/2019 The Analytical Annex to the UK Low Carbon Transition Plan. Power outages in the offing.

1/108

Analytical AnnexThe UK Low CarbonTransition Plan


2/108


3/108

1

List of Charts 2

List of Tables 3

List of Boxes 3

Executive Summary 5

Structure of the Annex 9

Chapter 1:The Long Term 13

Chapter 2:

Getting there: transforming the UK economy

and energy system to 2050 17

Chapter 3:

Reducing UK emissions of greenhouse

gases from 2008-2022 29

Chapter 4:

Aggregate costs of the package

of policies 53

Chapter 5:

Estimated impacts of the package of policies

and proposals on energy prices and bills 61

Chapter 6:

High level summary of impacts on

energy security 79

Chapter 7:

Macro-economic costs of climate change

mitigation measures 89

Chapter 8:

Sustainability 99

Contents


4/108


5/108

3

Chart 27 GDP costs (relative to baseline) by sector 95

Chart 28 CO2 cost screen: sectors potentially exposed under unilateralCO2 pricing 96

Chart 29 The net air quality benefit associated with Climate Change measures 104

List of Tables

Table 1 MARKAL scenarios 22

Table 2 Carbon budgets level 30

Table 3 Impacts on emissions in policies from this Transition Plan (MtCO2e) 45

Table 4 Detailed breakdown of savings delivered by Transition Plan policies bybudget period (MtCO2e) 46

Table 5 Overall costs of the package 55

Table 6 Net Present Value and cost-effectiveness of policies achieving savings inthe non-traded sector 58

Table 7 Policies assessed in the Department of Energy and Climate Changemodels on Climate Change Impacts 63

Table 8 Estimated impact of energy and climate change policies on averagedomestic energy bills 66

Table 9 Estimated impact of energy and climate change policies on averagedomestic gas bills 66

Table 10 Estimated impact of energy and climate change policies on averagedomestic electricity bills 67

Table 11 Industrial Gas Eurostat size band Annual consumption (MWh) 68

Table 12 Industrial Electricity Eurostat size band Annual consumption (MWh) 68

Table 13 Estimated impact of package on average non-domestic energy bill atvarying levels of energy consumption 69

Table 14 Estimated impact of package on average non-domestic gas bill formedium sized consumers 69

Table 15 Estimated impact of package on average non-domestic electricity billor medium sized consumers 70

Table 16 Estimated impact of energy and climate change policies on averagedomestic energy bill 71

Table 17 Estimated impact of energy and climate change policies on averagenon-domestic energy bill for medium sized consumers 71

Table 18 Projected Impact of Transition Plan Measures on Fossil Fuel Consumption 81

Table 19 Projected Percentage of UK Consumption Imported Before and AfterTransition Plan Measures 83

Table 20 MARKAL-MED cost estimates for scenarios 91

Table 21 Technologies, learning rates and cost-reductions in the MARKAL model 92

List of BoxesBox 1 HMRC Computable General Equilibrium (CGE) model 90

2Contents 3


6/108


7/108

ExecutiveSummary

5


8/108

6 The UK Low Carbon Transition PlanAnalytical Annex

This annex provides the analysis and

evidence underpinning the conclusions of the

main body of the UK Low Carbon TransitionPlan. It focuses in particular on the impacts

of the policies set out in the Transition Plan,

including impacts on emissions over the

first three budget periods, on security of

supply and on the local environment. It also

assesses the overall costs of the policies and

how they are borne among different parts

of society.

The package of policies saves about 700

million tonnes of CO2e (MtCO2e) and putsthe UK on track to meet the first three

carbon budgets. Taking into account the

impact of the Transition Plan policies, central

emissions projections show emissions below

each of the first three carbon budgets with a

cumulative over-achievement of 147 MtCO2e

by the end of the third budget.

There is substantial uncertainty over

emissions projections and the 147 MtCO2e

of projected over-achievement provides acontingency reserve to draw on in the event

that emissions are higher than projected.

In combination with the flexibility to bank

over-achievement from one carbon budget

period to another and other policy options

being considered within Government, the

projected contingency provides confidence

that the UK will meet carbon budgets

domestically. This prepares the UK for tighter

carbon budgets following a comprehensive

global deal.

Overall the package comes at a cost of

25 to 29 billion.1 This is consistent with

other estimates of the costs of action to

the UK. These costs, though significant,

are substantially lower than the damage

costs which would be associated with

unmitigated climate change. These were

estimated at between 5 and 20% of GDP

in the Stern Review2, estimates which LordStern has recently commented are likely to

substantially underestimate the damages.

The package of climate change and energy

measures set out in the Transition Plan will

have an impact on energy consumers across

the UK. Compared to the counterfactual

scenario in which none of these policies

are in place, on average, domestic energy

bills will be 9% higher in 2020 and industrial

energy bills 21% higher. The additionalimpact in 2020 of the policies in this

Transition Plan relative to today is 76, which

is equivalent to approximately 6% of current

bills. Similarly, for an indicative non-domestic

user, we estimate that these policies make

up approximately 101,000, or 8%, of

current non-domestic bills. The additional

impact in 2020 is estimated to be 212,000,

equivalent to approximately 15% of current

bills. Government has sought to mitigate

these increases, through policies which help

households and businesses improve their

energy efficiency.

There will be a variable impact on individual

houses owing to differential take up of

energy efficiency, renewable heat and

micro-generation measures those who

take up measures will find impacts on bills

substantially reduced. Sustained higher

prices for fossil fuels would reduce the cost

of some climate change policies, lowering

the cost passed through onto consumer

bills. A sustained oil price of $150 per barrel

means that policies set out in this Transition

Plan in 2020 would reduce bills slightly

compared to the projected bill in 2020

without these policies.

1 This is a one-off figure covering the lifetime of the measures that the policies in the package implement.

2 Stern Review on the Economics of Climate Change Available at:http://www.hm-treasury.gov.uk/sternreview_index.htm
http://www.hm-treasury.gov.uk/sternreview_index.htmhttp://www.hm-treasury.gov.uk/sternreview_index.htm


9/108


10/108


11/108

119

Structure of theAnnex


12/108


This annex presents the analysis and

evidence underpinning the conclusions of the

main body of the Transition Plan. It focusesin particular on the impacts of the Transition

Plan package of policies. It is divided into two

main sections.

The first section considers the long term,

focusing on our 2050 target of reducing UK

net emissions of greenhouse gases (GHG) to

at least 80% below 1990 levels. This section

sets out the size of the task, and assesses

the costs and benefits both for the UK and

globally of meeting our 2050 goals. It alsoconsiders the different possible pathways

to 2050 and beyond, including the variety of

technologies that will need to be brought on.

The second section assesses the impacts

of the policies set out in this Transition Plan

for the period covering the first three carbon

budgets. This section considers the impacts

of the package on the UKs GHG emissions,

the costs of the package and how these are

distributed, the impact of the package onsecurity of energy supply, macro-economic

costs and finally wider environmental impacts.

GHG emissions. In the third carbon

budget period (2018 2022) the UK has

committed to reduce its net emissions of

GHGs to at least 34% below 1990 levels,

a level which puts the UK on track to meet

its 2050 emissions reduction target.

The annex presents projections for UK GHG

emissions and shows that the policies setout in this Transition Plan give us confidence

that our carbon budgets will be met.

Costs and their distribution. Policies

to reduce emissions or improve energy

security will impose costs on sections

of the UK population and UK economy.

Overall the costs of action will be lower

than the costs of unchecked increases

in global GHG emissions and they will

also be distributed more fairly, as climatechange would hit the poorest in the world

hardest. However, it is important to ensure

that the burden of action does not fall

disproportionately on some sections of theUK population or sectors of the economy.

This annex considers the distribution of the

costs within the UK.

Security of energy supply. The package,

particularly the policies relating to the

renewable energy target in 2020, will have

an impact on security of energy supply.

Continuity of energy supply is fundamental

to the functioning of our economy and a

central element of the Governments longterm energy policy. Overall security of

energy supply may be expressed in different

ways, but embraces at least the following

three components in the long term:

Physical security: avoiding involuntary

physical interruptions to consumption

of energy.

Price security: avoiding unnecessary

price spikes due to supply/demand

imbalances or poor market operations

and maintaining competitive prices

relative to other countries.

Geopolitical security: avoiding undue

reliance on specific nations as sources

of energy so as to maintain maximum

degrees of freedom in foreign policy.

The macroeconomic and transitional

costs. Macroeconomic modelling of

the costs of transforming the UK to alow carbon economy is considered.

This modelling consistently suggests

that the costs in both the short and the

long term, though significant, are likely

to be manageable. The costs, as part

of co-ordinated global action, are much

lower than the damages associated with

dangerous climate change.


13/108

1111

wider environmental impacts

of the package are considered. The Climate

Change Act 2008 states that proposalsand policies for meeting carbon budgets

must, when taken as a whole, be such as

to contribute to sustainable development.

Considering the impact of the package

on greenhouse gas emissions, energy

security, fairness and economic growth

goes a great way towards assessing the

sustainability of the package. However,

it is also necessary to take account of

wider environmental impacts such as air

quality, biodiversity and the landscape. Thisannex values these wider environmental

impacts wherever possible and provides a

qualitative analysis in other cases.

Structure of the Annex


14/108


15/108


16/108


17/108


18/108

16 UK Low Carbon Transition PlanAnalytical Annex

rise for a mitigation scenario (the CCC

mitigated scenario) in 2050 would be 1.8oC

but crucially it would only be about 2oCin 2100.10

The key point is that while temperatures

in 2050 may not be that different between

the mitigated and the most optimistic

unmitigated scenarios, by 2100 there will be

a huge difference the difference between

catastrophic global warming and mere

warming, which while very challenging,

is something to which human society can

adapt. The main beneficiaries of urgentaction now, because of the long life time of

greenhouse gases in the atmosphere, will be

our descendants.

The CCC estimated that the costs to the

UK of meeting an 80% target would be

in the order of 1-2% of GDP in 2050.Government has published its own estimate

of the costs of meeting the 80% target

in the Impact Assessment of the Climate

Change Act.11 This estimate drew upon a

variety of modelling work including the work

commissioned by the CCC and estimated

costs to be of a similar order of magnitude.

Overall, the costs to the UK of meeting

our 2050 target are affordable given the

consequences of not acting providing wereduce emissions cost-effectively as part

of co-ordinated global action. This means

bringing on the right technologies and getting

the policy mix right. This is explored in the

next section.

10 These are global mean average temperatures which are averaged over land and sea. Land temperatures are generallyhigher and temperatures in summer are higher than temperatures in winter. UKCP09 downscales global models togive projections for climate variables for the UK. For the UK, it is possible that the summer temperature for the CCCmitigatedscenario, where we are on track to reach an 80% reduction in GHG emissions by 2050, will be about 3 oChigher than pre-industrial levels, similar to the most optimistic unmitigated scenario.

11 Available from http://www.decc.gov.uk/en/content/cms/legislation/cc_act_08/cc_act_08.aspx
http://www.decc.gov.uk/en/content/cms/legislation/cc_act_08/cc_act_08.aspxhttp://www.decc.gov.uk/en/content/cms/legislation/cc_act_08/cc_act_08.aspx


19/108

1117

Chapter 2:Getting ThereTransforming the UK Economy and Energy System to 2050


20/108


21/108

1119

13 Road to Copenhagen DECC p43 http://www.actoncopenhagen.decc.gov.uk/en/ambition/road-to-copenhagen/

14 Carbon Valuation in the UK Policy Appraisal: A Revised Approach (July 2009) www.decc.gov.uk

15 The GLOCAF (Global Carbon Finance) model combines bottom up abatement cost curves from all regions of the world.The model provides analysis of the global finance flows that result from global deals, with regional burden shares andvarying limitations on international carbon markets.

16 Real 2009 prices.

Use of international

carbon trading to meetthe 2050 targetThere is uncertainty over the extent to

which the long term target will be met by

reducing UK territorial emissions or through

purchasing international carbon allowances.

In 2050, the UKs vision for international

action to reduce emissions includes a global

carbon market, where global emissions are

capped and the purchase of an internationalcarbon allowance will fund an additional

tonne of abatement elsewhere. Trading

enables the same environmental outcome

to be achieved at lower cost, by allowing

nations with relatively high cost abatement

options to fund emissions reductions in

countries with lower cost opportunities,

while also contributing to decarbonisation

in developing countries. An effective global

market would provide a mechanism to

ensure these low-cost opportunities arefinanced in the most efficient way. Estimates

suggest that through an effectively designed

carbon market the global costs of the action

required by 2020 could be reduced by at

least one third and possibly up to two thirds

depending on market design.13 National

costs of abatement will differ, owing to

differing geographies and endowments of

natural resources, infrastructure stock and

specialisation in production. An efficient

delivery of the UKs long term target

would therefore involve the UK purchasing

international carbon units where they are

cheaper than the cost of reducing emissions

in the UK or, alternatively, undertaking

additional abatement in the UK and selling

the excess internationally where the

international price is higher than the marginalcost of abatement in the UK.

In assessing which of these scenarios is

likely to hold, it is important to note that

international carbon allowances are likely to

be scarce in 2050. The absolute quantity of

allowable global emissions in 2050 would

be at least 50% below 1990 levels and

the global economy would be expected

to be several times larger. As part of the

Governments review of carbon valuation,published in July 200914, Government

analysts have estimated global carbon

prices in 2050 using the GLOCAF15 model

and estimates available from other models

and evidence. On the basis of this work,

Government economists have adopted,

for 2050, a central estimate of 200/tCO2e,

with a low sensitivity of 100/tCO2e and a

high sensitivity of 300/tCO2e.16 The range

reflects uncertainty in the global availability

and cost of abatement in 2050.

Even at the lower end of the spectrum, these

carbon prices are a significant increase on

current market prices for carbon. In 2050,

it is likely to be cost-effective for the UK to

undertake substantial domestic action and it

is anticipated that much of the UKs long-term

target would be achieved through domestic

abatement. Analysis by the Committee on

Climate Change (CCC) suggests that in most

2050 scenarios, when access to allowances

is unrestricted, international allowances do

not contribute more than 10% of total UK

emissions reduction effort. This reflects the

relatively cost-effective nature of domestic

Chapter 2:Getting There
http://www.actoncopenhagen.decc.gov.uk/en/ambition/road-to-copenhagen/http://www.decc.gov.uk/http://www.decc.gov.uk/http://www.actoncopenhagen.decc.gov.uk/en/ambition/road-to-copenhagen/


22/108


abatement options, although the CCC analysis

suggests a changing use of credits over the

timeline to 2050.

Government analysis suggests that

international carbon trading might play a

greater role in meeting the UKs long term

target. This analysis17 used GLOCAF for

all abatement costs meaning that both

domestic abatement costs (within the

EU) and international abatement costs

were modelled using the same underlying

methodology.18 However, interpreting

the results for implications to the UK iscomplicated as GLOCAF carries only regional

abatement costs. Each region was given

a burden share of international action to

meet the goal of stabilising atmospheric

concentrations at 450ppm in the long term.

The European burden share was an 80%

reduction on 1990 emissions.

The modelling indicated that Europe would

meet its target most efficiently by importing

20% of its reduction target in the form ofinternational allowances, reducing emissions

within the EU to 64% below 1990 levels. If

it is assumed that the UK is typical of the EU

as a whole, then the GLOCAF modelling can

provide an insight into the extent to which

the UK would achieve its target domestically

under a global least cost approach to avoiding

dangerous climate change.

In summary, uncertainty about the relative

national and international costs of abatement

implies uncertainty about what the UKs

80% reduction target means for the level

of reduction in UK territorial emissions by2050. This highlights the importance of

flexible market based instruments such as

international trading to ensure that climate

change is tackled cost-effectively.

The underlying uncertainty about the level of

domestic abatement in 2050 is captured in

the scenarios set out below, which consider

both a case where the domestic energy

system decarbonises by 90% relative to

1990 levels in 2050, and one in which a 70%reduction is required.

Modelling of the UK energysystem and associatedcarbon dioxide emissionsto 2050Government and the CCC have previously

commissioned research using the

MARKAL-MED19 model, which models the

UK energy system and associated carbon

dioxide emissions.

Different scenarios have been analysed,

which consider various constraints on

the level of allowable emissions in 2020

and 2050 and variations in the underlying

availability and cost of energy technologies.

Given these constraints on emissions and

costs, the MARKAL model finds the lowest

cost way to meet UK energy demand.

17 Previously published in the Climate Change Act Impact Assessment.http://decc.gov.uk/Media/viewfile.ashx?FilePath=85_20090310164124_e_@@_climatechangeactia.pdf&filetype=4

18 The CCC analysis modelled domestic and international abatement using two different models with different underlyingcost data MARKAL15 and GLOCAF. The UK Market Allocation (MARKAL) model is a least cost optimisation modelof energy use that investigates least cost solutions to meeting energy service demand while meeting emissionsconstraints. Most notably, the model is rich in technological detail (e.g. costs, lifetime and efficiency) and itsassumptions have been extensively peer reviewed. The main limitation of this modelling approach is the unrealisticassumption of perfect foresight out to 2050. Owing to this assumption, the modelling estimates produced by MARKALshould be interpreted as the lower bound estimates of the long term costs of carbon abatement.

18 Previously published in the Climate Change Act IA.

19 The Markal MED model is an extension of MARKAL with more complex treatment of demand elasticities. Additionalinformation on the Markal MED can be found in MARKAL-MED model runs of long term carbon reduction targets in theUK: http://www.theccc.org.uk/reports/supporting-research
http://decc.gov.uk/Media/viewfile.ashx?FilePath=85_20090310164124_e_@@_climatechangeactia.pdf&filetype=4http://www.theccc.org.uk/reports/supporting-researchhttp://www.theccc.org.uk/reports/supporting-researchhttp://decc.gov.uk/Media/viewfile.ashx?FilePath=85_20090310164124_e_@@_climatechangeactia.pdf&filetype=4


23/108


24/108


Forecasting these variables out to 2050

is inherently uncertain and changes in

assumptions can lead to significantlydifferent modelling results. Depending on

the scenario, different sectors contribute

to a greater or lesser extent to the overall

reduction in UK emissions. The technologies

within a sector can also differ significantly.

A further uncertainty is the possibility of

one or more technology shocks. Over the

period to 2050 there could be breakthroughs

in low carbon technology, unanticipated in

the MARKAL model, which could radicallyalter the lowest cost approach to reducing

emissions.

In combination, these factors mean that

it is not possible for a precise pathway for

the UKs transformation to a low carbon

economy to be forecast. To demonstrate

this point, Table 1 below describes eight

scenarios produced by the MARKAL model,

which are all consistent with meeting the

2050 target for an 80% reduction in net UK

GHG emissions relative to 1990, but whichdiffer in their assumptions relating to the

price and availability of key technologies and

the extent of domestic abatement from the

UK energy system.

It should be noted that these scenarios have

been commissioned for a variety of purposes

over the last two years, and have not

therefore been defined with a constraint that

they must be consistent with the package

of policies contained in this TransitionPlan. We have, however, commissioned

three scenarios the 70%, 80% and 90%

renewables scenarios that meet the

constraint of meeting the UKs renewable

energy target. The purpose of presenting

these runs here is not to make a prediction

about the future, but to illustrate the extent

of uncertainty and commonality in possible

future pathways to our 2050 goal.

Table 1

MARKAL scenarios

Scenario

CO2 Emissions

reductions

(relative to 1990)

Other assumptions

70% scenario 29% in 2020,

70% in 2050

Commissioned by the CCC. Max nuclear

and CCS build rate 3GW p.a. in the 2020s,

5GW p.a. thereafter.

70% RES 29% in 2020,70% in 2050

Commissioned by DECC for this TransitionPlan. Model constrained to deliver

sufficient renewable generation in 2020 to

meet the Renewable energy target.

80% base case 33% reduction by

2020. 80% reduction

by 2050

Commissioned by the CCC. Max nuclear

and CCS build rate 3GW p.a. in the 2020s,

5GW p.a. thereafter.

80% high bio-energy 31% in 2020,

80% in 2050

Commissioned by Defra in 2007. High

availability of domestic and imported

biomass, with high capacity for biomass

liquids to meet transport energy demand.


25/108


26/108


27/108

1125Chapter 2:Getting There

All scenarios share some characteristics.

These include by 2050, electricity

accounting for an increased shareof energy consumption, a radical

de-carbonisation of electricity supply and

a dramatic improvement in

energy efficiency.

Chart 7 shows the carbon intensity of

electricity for each of the scenarios over the

period to 2050. Substantial decarbonisation

of electricity supply is achieved in all

the scenarios, but there is considerable

divergence in the rate at which the

decarbonisation is achieved. The MARKALmodelling indicates that a relatively wide

range for the carbon intensity of grid

electricity in particular years, such as 2030,

would be consistent with reaching the long

term goal of an 80% decarbonisation.

Chart 7

Rate of decarbonisation of the electricity sector under MARKAL scenarios

Source: Department of Energy and Climate Change chart based on MARKAL (2009)

500

400

300

200

100

0Averageemissionfrom

powergeneration

(gCO

2p

erkWh)

70% base

80% resilience

70% RES

80% RES

80% base

90% base

80% high bio

90% RES

2010 2015 2020 2025 2030 2035 2040 2045 2050


28/108


Chart 8

Energy consumption across scenarios

Source: Department of Energy and Climate Change chart based on MARKAL (2009)

Note: This chart compares energy consumption in 2005 with energy consumption scenarios in 2050.

0

200

400

600

800

1000

1200

1400

1600

1800

2005 70% 70% RES 80%

base

80% high

bio

80%

resilience

80% RES 90% 90% RES

TWh

Achieving the UKs climate change

mitigation goals will require the use of many

technologies in the power sector thereis no silver bullet. The MARKAL modelling

provides evidence that there will be a

significant role for renewables, coal and gas

with carbon capture and storage (CCS) and

nuclear to achieve the required

emissions reductions.

Analysis indicates that energy efficiency is

essential to meeting our 2050 target and is

cost-effective too. Achieving a greater than

tenfold reduction in the carbon intensityof the UK economy in 2050 will not be

achievable solely through a de-carbonisation

of the UK energy supply but will also require

a much more efficient and less wasteful

use of energy. Cost-effectiveness analysis

indicates that energy efficiency should be the

first choice of measure in moving to a low

carbon economy.

Chart 8 compares the energy demand for

each of the scenarios in 2050 with the energy

demand in 2005. Significant energy demandreductions of between 26 and 43% are

achieved across the scenarios. Taking into

account the higher level of GDP we would

expect in 2050 this is equivalent to the energy

intensity of GDP falling to around a quarter

of the 2009 level. MARKAL modelling shows

that this can be achieved primarily through

energy efficiency measures, but there will

also be some energy demand reduction from

substitution to less energy intensive activitiesand less waste of energy. These last two

effects are encouraged by the higher energy

prices that are the result of adopting low

carbon technologies.

To achieve a tenfold reduction in carbon

intensity of GDP by 2050 (see the first section

of this chapter), energy supply will also need

to be decarbonised. The MARKAL modelling

shows that the carbon intensity of energy

falls between 50 and 80% by 2050.


29/108

1127Chapter 2:Getting There

The policy regime for

the futureAs the above discussion shows, there are

some commonalities in the outcomes of the

different scenarios assessed. Where there

is a clear pathway policy should focus on

removing constraints and barriers that prevent

or slow progress. Accordingly, the package

of policies in the Transition Plan seeks to

address barriers that act to slow the uptake

of energy efficiency measures and to support

key low carbon generation technologies.

Conversely, where there is significant

uncertainty in predicting the least cost

pathway towards achieving our 2050 targets,

flexibility in policy design is important there

is a danger that if policies are too prescriptive

about the route map in the long run, then we

may lock ourselves in to a high cost emissions

reductions path if certain technologies turn

out to be more or less costly than anticipated

or assumptions about the future turn out tobe wrong. This is an argument for providing

a clear and stable investment framework

underpinned by the 2050 target but

allowing individual investors to decide which

technologies to deploy to meet it.

The level of investment in low carbon

technology research and development is

an important determinant of the future

costs of abatement. Market and regulatory

failures with respect to investment ininnovation justify intervention to minimise

the medium to long term costs of meeting

carbon budgets. Intervention could increase

investment by addressing:

positive externalities arising from

investment in innovation; and

the short term weakness of the carbon

price signal arising from immature carbon

markets and regulatory uncertainty over

future global deals and caps on emissions.

Overall, the policy package put forward in this

Transition Plan is designed to meet the long

term investment and innovation challengescreated by the 2050 target. It comprises:

A transparent regime for pricing carbon in

the long term, through international carbon

trading systems (such as the EU Emissions

Trading System).

Direct support for individual technologies,

or groups of technologies, where there is a

compelling argument that they are needed as

part of the global effort to reduce emissionsand yet are unlikely to be brought on through

the carbon price alone. Key technologies

may not be brought on sufficiently quickly

without direct support until deeper

emissions reductions targets are agreed

globally resulting in a stronger and more

credible carbon price signal, and without

intervention to address innovation market

failures. Government has chosen to support

directly renewable and low carbon energy

technologies through the policies in theRenewable Energy Strategy and to support

Carbon Capture and Storage demonstration.

Broader support for a range of potentially

viable technologies where there is greater

uncertainty over which will be the lowest

cost solution.

A stable, credible regulatory regime for

reducing emissions in the UK in the long

term, based around the 2050 target and

interim five yearly carbon budgets,

to give companies sufficient confidence

to invest in low carbon technologies.

The budget levels that have now been set

by Government for the period 2008 2022

put us on track to meet the 2050 target

and reflect the key importance of achieving

a global deal on climate change.

These principles are discussed in greater

detail in relation to the Transition Plan

package of policies in Part Two.


30/108


31/108


32/108


Carbon budget levels

The CCC proposed two sets of carbonbudgets for the UK, one to apply now

before a global deal on climate change is

reached (Interim budgets), and a more

challenging set to apply once a global

deal on climate change has been agreed

(Intended budgets). Based on this advice,

the Government has set carbon budgets that

are based on the CCCs Interim budgets,

consistent with the UKs share of the EUs

target to reduce greenhouse gas emissions

to 20% below 1990 levels by 2020.

The CCC recommended that, in the event

of a satisfactory global agreement through

the Copenhagen negotiations, the UK

should move to its Intended budgets.

The Government agrees that as part of a

successful global deal it should move to

tighter carbon budgets. The appropriate

level of the tighter budgets will depend on

the outcome of international negotiations on

climate change. The CCC will therefore be

asked to review its recommended Intended

budgets following a global deal and once

proposals on sharing out the new EU target

are agreed. The Government will amend

the carbon budgets in the light of those

discussions and taking into account the

advice of the CCC.

In the event of successful negotiation of

a global deal the EU would adopt a more

ambitious target of up to a 30% reductionin GHG emissions across the EU by 2020

over 1990 levels. The intra-EU effort share

of this more stringent target has not been

negotiated; however, the UK would take on

a tougher target than under the current EU

Climate and Energy Package. In line with

CCC advice and the requirement of the

Climate Change Act, the Government will

tighten carbon budgets in response to these

more stringent international obligations.As the final shape of the 30% EU package

has not been negotiated it is not possible

to be precise about the level of the more

ambitious UK carbon budgets following a

global deal. However, the CCC provided

illustrative estimates of the level of tighter

Intended budgets. These showed a smaller

UK share of a tighter EU ETS cap, with a

consequent reduction in UK emissions in

the traded sector. In the non-traded sector,

the intended budgets required the UK

to achieve an additional 140MtCO2e of

abatement over budgets two and three.

20 Comparing average annual emissions over the budget period to UK emissions in 1990 of 777.4 MtCO2e based on 2007inventory methodology.

Table 2

Carbon budgets level

Budget 1

(2008-2012)

Budget 2

(2013-2017)

Budget 3

(2018-2022)

Budget level (MtCO2e) 3018 2782 2544

Percentage reduction

below 1990 levels2022% 28% 34%


33/108

1131

21 See the following section for a description of the net UK carbon account.

22 Section 10 of the Climate Change Act lists the matters to be taken into account in connection with carbon budgets.http://www.opsi.gov.uk/acts/acts2008/pdf/ukpga_20080027_en.pdf

23 Meeting the current non-traded portion of carbon budgets domestically prepares the UK to meet the tighter budgets.Purchase of international credits might be expected to form an important part of the additional effort required to meetmore challenging carbon budgets. The CCC advice stated that use of credits from outside the EU, under the tightercarbon budgets to be set following a global deal, would be acceptable given the feasibility and cost-effectiveness ofgoing further domestically.

24 Climate change is caused by various greenhouse gases. The Kyoto Protocol applies to emissions of a basket of

six greenhouse gases: Carbon Dioxide (CO2), Methane (CH4), Nitrous Oxide (N2O), Hydrofluorocarbons (HFCs),Perfluorocarbons (PFCs) and Sulphur Hexafluoride (SF6). Non-CO2 greenhouse gas emissions arise from a number ofsources including agriculture and land use change (largely methane from livestock), the waste sector (e.g. from landfill)and industrial process emissions, for example in the cement and paper industries.

The Climate Change Act does not specify a

trajectory towards the 80% 2050 emissions

reduction target, other than requiring aminimum reduction of 34% in the net UK

carbon account in 2020 relative to 1990.21

The trajectory will be established through the

level of the carbon budgets which will be set

with regard to criteria22 including technology

relevant to climate change and the implications

for the feasibility and cost of achieving

emissions reductions in a given period.

The trajectory implied by the current level

of carbon budgets from 2008 2022 isless stringent than that required to meet

an 80% 2050 emission reduction target on

a straight line basis. But the CCC believes

this is sufficient to put us on track if met

through domestic emissions reductions.

However, were a successful global deal to

be negotiated, the level of budgets would be

amended, setting the UK on a much more

stringent trajectory.23

In practice, this means that if a comprehensiveglobal deal can be achieved at Copenhagen

this year, the UK and other EU member

states will take on greater action, earlier.

While evidence (e.g. from the IPCC 4th

Assessment Report) suggests that delaying

action to reduce emissions risks increasing

costs by locking in investments in carbon-

intensive infrastructure, the argument for this

approach is clear making highly ambitious

action by the EU contingent on action by other

countries is intended to maximise the chances

of achieving a global deal.

Mitigating global emissions will require

co-ordinated global action. Dynamically

adjusting domestic climate change policy inresponse to significant international actions

and commitments will help achieve the

overall required emissions reductions in a

cost-effective manner.

Measuring emissionsUK carbon budgets and the 2050 target

are measured in terms of the Kyoto basket

of greenhouse gases24 and specified in

terms of the netUK carbon account.

To calculate the net UK carbon account,

UK greenhouse gas emissions from the

UK national emissions inventory report

are adjusted to account for the amount of

carbon units which have been bought in

from overseas and retired by Government

and others (including participants in the EU

Emissions Trading System) to offset UK

emissions (credits), and UK carbon units

which have been disposed of to a third party(debits). Meeting the budgets and the long

term target will require a balance of effort

from CO2 mitigation, non-CO2 mitigation and

the purchase of carbon units representing

emissions reductions abroad.

The emissions coverage of UK carbon

budgets is not identical to the scope of the

UKs commitments under the Kyoto protocol.

While carbon budgets cover UK emissions

only, the UKs commitments under the Kyotoprotocol include emissions from the crown

dependencies and certain overseas territories.

Chapter 3:Reducing UK Emissions of Greenhouse Gases from 2008-2022
http://www.opsi.gov.uk/acts/acts2008/pdf/ukpga_20080027_en.pdfhttp://www.opsi.gov.uk/acts/acts2008/pdf/ukpga_20080027_en.pdf


34/108


Under carbon budgets, emissions associated

with land use, land use change and forestry are

treated in line with current UNFCCC reporting

requirements, in a more comprehensive way

than under the Kyoto protocol which only

considers a subset of these emissions. As is

the case under the Kyoto protocol, emissions

from international aviation and international

shipping are not included in carbon budgets,

as there is currently no internationally agreed

methodology for attributing these emissions to

individual countries. However, section 10 of the

Climate Change Act requires we take accountof these emissions in setting carbon budgets.

Where we are now:current emissionsThe most recent year for which full inventory

data on UK GHG emissions are available is

2007. In 2007, approximately 85% of UK

GHG emissions were CO2 emissions, the vast

majority of which are energy system related.

The other 15% are non-CO2 GHG emissionssuch as methane emissions from livestock

and waste.

Around 40% of the UKs emissions are

covered by the EU Emissions Trading

System. This is a cap-and-trade scheme

which sets a limit (cap) on emissions in the

EUs power and heavy industry sectors.25

The UKs share of the EU Emissions Trading

System cap in 2007 was 12.5% of the total

cap. Within the UK, emissions of CO2 in theEU ETS (traded sector) were 256.3 MtCO2

in 2007. To comply with the EU Emissions

Trading System, UK installations were net

importers of EU allowances, importing 25.7

MtCO2e of allowances. Within the UK, in

sectors of the economy not covered by the

ETS (the non-traded sector), CO2 emissions

were 286.3 MtCO2.

Non-CO2 GHG emissions were 93.7MtCO2e

in 2007, which is 48% lower than in 1990.This reflects the already substantial progress

that has been made to reduce non-CO2

GHG emissions in a number of sectors. For

example, methane emissions from waste

landfill have fallen by 59% between 1990

and 2007, and are projected to fall by 63%

by 2020 (relative to 1990 levels). Likewise,

overall GHG emissions from agriculture

(predominantly nitrous oxide and methane)

have fallen by 21% since 1990. Overall,

non-CO2 GHG emissions were 48% lower

in 2007.

In total, the net UK carbon account was 610.6

MtCO2e in 2007, in 1990, the corresponding

figure was 777.4 MtCO2e. There has therefore

been a 21% reduction between 1990 and 2007.

25 See Reducing emissions in sectors covered by the EU ETS section later in this chapter for further detail.


35/108

1133Chapter 3:Reducing UK Emissions of Greenhouse Gases from 2008-2022

Principles for developing

policies to reduceemissionsAchieving the 2050 GHG emissions

reductions target will require Government

intervention. This section sets out the

economic principles underlying that

intervention and informing the policies set

out in this Transition Plan. These are set out

in more detail in a Government publication

Making the right choices for our future,

published in March 2009.26

There are extensive market failures and

barriers to action, the combined impact of

which lead to a higher level of emissions

than is socially optimal. Without intervention,

the market will under-allocate resources

to reducing GHG emissions. Where policy

instruments address one or more of these

market failures, and do so effectively, overall

welfare will be increased.

The emission of greenhouse gases is a

negative externality. Those who emit

them do not suffer the damages that they

cause. This results in more greenhouse

gas emissions than is optimal for society

as a whole.

There are behavioural barriers to exploiting

low and negative cost abatement options.

For instance imperfect information about the

options and availability of energy efficiency

technology, or the costs of the energy

being used, may lead to under-investment

in reducing energy consumption.

Those investing in innovation create

positive externalities in the shape of

new knowledge and skills which spread

beyond the investor. Owing to this

positive externality, without intervention,

investment in low carbon research and

development would be lower than the

socially optimal level. There are further

barriers to innovation which will further

dampen investment, such as regulatory

uncertainty and information asymmetries.

Individual policy interventions are justified on

their ability to address specific market failures

or barriers which prevent the exploitation

of cost-effective carbon abatement

opportunities. The Impact Assessments of

the individual policies comprising our overall

plan all set out the rationale for intervention

on this basis.

The greenhouse gas emissions externalitycan be addressed through ensuring that those

who release emissions face a price for doing

so, that reflects not just their private costs

of releasing emissions but the wider social

costs too. Increasing the cost of producing

emissions aligns the incentive for individuals

or firms to reduce their emissions with the

social benefit from lowering emissions. It

increases the incentive for individuals or firms

to invest in installing low carbon technologies.

A price can be placed on greenhouse gasemissions through the introduction of carbon

taxes, cap and trade schemes or implicitly

through regulations requiring investments in

more costly low carbon technologies.

There are a diverse set of behavioural barriers

to the exploitation of carbon abatement

options. These range from informational

barriers and split-incentives to psychological

and sociological factors creating inertia.

Policy interventions to address thesebarriers can include regulations, information

campaigns and technologies to raise the

visibility and therefore the awareness of

energy use and the associated emissions.

Tackling the greenhouse gas emissions

externality and behavioural barriers above, is

fundamental in laying the foundation for low

carbon innovation to take place, as it largely

determines the likely level of demand for

future goods and services.

26 http://www.defra.gov.uk/environment/climatechange/research/economics/framework.htm
http://www.defra.gov.uk/environment/climatechange/research/economics/framework.htmhttp://www.defra.gov.uk/environment/climatechange/research/economics/framework.htm


36/108


Government also needs to give support at

the appropriate time and in the appropriate

way if it is to bolster low carbon industriesinnovation. This will depend on the sector,

its market structure and the profile of

organisations operating within it.

Overall, the ideal policy framework is

one that is flexible enough to adapt to

changing circumstances while still providing

businesses and individuals with policy

certainty to make long-term investment

decisions. Fundamental to this effort is

securing a global agreement to reducegreenhouse gas emissions. Designing

domestic climate change policy around

international interventions, and adjusting

it dynamically alongside significant actions

to tackle the problem at the global level,

will help achieve the required emissions

reductions in a cost effective manner.

In estimating the impacts of this plan on

emissions and its overall costs, it is necessary

to define which policies are included in thepackage and to compare the world with their

impact to a baseline case, the counterfactual,

without them. The following section sets out

the approach taken to defining the baseline.

Baseline used in thisanalysisThe Transition Plan sets out a package

of policies to meet the first three carbonbudgets. To assess the impacts of this

package it is necessary to define firstly the

scope of the package which policies are

included and secondly what the baseline for

comparison is the world without the policies.

Defining the scope of the package requires

a decision on the inclusion or exclusion of

particular policies. The decision has been

taken to include those policies which have

been announced more recently than the 2006

Climate Change Programme. Where there has

been an extension to policies which existed

prior to the Climate Change Programme the

extended ambition has been included in the

package. A detailed list of policies includedis shown below. This list includes policies

announced in the 2007 Energy White Paper,

the Renewable Energy Strategy policies and

additional policies set out in this Transition

Plan. This decision has been taken as it goes

far enough back to capture the most active

policies contributing to meet the first three

carbon budgets, and aligns the policy baseline

with that used by the Committee on Climate

Change in their December 2008 report.The policies set out in the Transition Plan

which are included in the package of policies

and proposals are:

The December 2008 EU Climate and

Energy Package agreement to a tightening

of the EU Emissions Trading System cap in

Phase 3 (2013 2020) (baseline assumes a

continuation of the Phase 2 EU ETS cap);

The Renewable Energy Strategy

(Renewable Electricity and Renewable

Heat). This includes the extension of the

Renewables Obligation, Feed-in-Tariffs,

the Renewable Heat Incentive and the

extension of bio-fuels to 10% by energy;

Vehicle efficiency standards, EU new car

average fuel efficiency standards of 130g/

km by 2015, the additional impact of

further new car efficiency improvements

to 95g/km by 2020 and new van average

efficiency standards of 160g/km.

Complementary measures for cars (gear

shift indicators/low rolling resistance tyres/

more efficient air conditioning/tyre pressure

monitoring/ low viscosity lubricants);

Low rolling resistance tyres for HGVs;

SAFED bus driver training;

Illustrative rail electrification of 750km of

single track rail line;

Carbon Reduction Commitment;


37/108


Extension to Climate Change Agreements;

The Carbon Emissions Reduction Target;

Future Supplier Obligations for domestic

energy efficiency;

Community Energy Savings Programme;

Zero Carbon Homes;

Smart-metering (households and business);

Energy Performance of Buildings Directive

Includes Energy Performance Certificates,

Display Energy Certificates for public buildings,inspections for air conditioning systems,

and advice and guidance for boiler users.

Product policy minimum standards and

labelling, in line with ambition announced in

the Energy White Paper 2007;

One-off interest free loans to SMEs;

One-off interest free public sector loans;

Agriculture proposals; and,

Waste proposals (Food to anaerobic

digestion, diverting wood waste and raising

landfill tax in budget 2009).

Meeting carbon budgets:Emissions projections from2008 to 2022The policies set out in this Transition Plan

will allow us to meet our carbon budgets

on central expectations. Chart 9 shows

central projections for the net UK carbon

account up to 202227 with and without the

27 CO2 projections from the DECC energy model, non-CO2 projections are produced under contract by AEA technology Ltd.

Chart 9

Central Projections for the net UK carbon account with and without theTransition Plan Package of Policy Measures

400

0

450

500

550

600

650

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Power & heavy industry

Workplaces Farms & countryside

Transport Homes

GreenhousegasemissionsMtCO2e

Source: Department of Energy and Climate Change (2009)


38/108


39/108

1137

for which uncertainty over emissions has

effectively been eliminated the power and

industrial sectors capped by the EU EmissionsTrading System and then the remaining

sectors of the UK economy, emissions from

which show significant uncertainty.

Reducing emissions insectors covered by theEU ETSThe EU Emissions Trading System (ETS)

covers 42% of EU GHG emissions and 41%of UK GHG emissions. There is certainty

in the overall level of emissions within the

capped sectors across the EU as a whole.

The agreement reached in December 2008

achieves an EU wide reduction of 22% in

traded sector emissions in 2020 relative

to 2005 verified emissions. The EU has

committed to a larger reduction in EU

greenhouse gas emissions following an

international deal the proportion of the

additional effort which would come from the

ETS sectors is yet to be negotiated, but once

agreed there would again be certainty over

ETS sector emissions across the whole

of the EU.

The creation of an EU wide cap has the

strengths of providing certainty over the

quantity of emissions, while the flexibility

created through the trading mechanism

allows these reductions to be achieved

efficiently, at least cost.

The net UK carbon account and thetraded sector

The traded sector (the sectors of the UK

covered by the EU ETS) makes a contribution

to the net UK carbon account that is equal to

the UKs share of the EU ETS cap. If EU ETS

installations in the UK emit more than the

UK share of the cap then there will be a net

import of allowances to the UK. Importing

allowances will fund equal and opposite

emissions reductions in the wider EU, or in

developing countries.

Chart 10 above, showing we are on track to

meet our carbon budgets, shows the net UK

carbon account. The projected level of the

net carbon account includes a credit equal

to the level of net imports of EU allowances

from the EU Emissions Trading System or a

debit where the UK is a net exporter. In some

years over the period to 2022, the UK is

projected to be a net importer of allowances,

in other years the UK is projected to be a

net exporter. Over the period as a whole theUK is projected to export a small number of

allowances (13MtCO2e). This means that UK

territorial emissions over the three carbon

budgets will be lower than the projected level

of the net UK carbon account by 13MtCO2e.

Chart 11 shows traded sector emissions in

the UK and the UK share of the EU ETS Cap.

Chapter 3:Reducing UK Emissions of Greenhouse Gases from 2008-2022


40/108


41/108


Reducing territorial UK emissions in the

traded sector reduces the number of

allowances that are imported, or increasesthe number of allowances that are exported

by the UK. This carries an economic benefit

approximately equal to the value of EU

allowances.30 Where the UK can reduce

emissions in the traded sector at a lower

cost than the EU allowance prices there will

be a net benefit to the UK with the overall

cost of complying with the EU ETS reduced.

Policies that address barriers or market

failures in the traded sector, allowing lowor negative cost abatement to be exploited,

will also reduce the price of EU allowances

and so minimise impacts on energy bills for

businesses and consumers across the EU.

Further, successfully exploiting low cost

abatement potential and supporting low

carbon innovation in the traded sector could

facilitate the negotiation of future, ambitious

caps which are consistent with a trajectory

towards the UKs 2050 target.

Reducing territorial UK emissions in the

traded sector may carry other ancillary

benefits, such as improvements to air

quality and energy security. Energy and

process efficiency savings, where these

can be achieved cost-effectively, place UK

companies in an advantageous position for

handling the tighter EU ETS and global caps

in the future.

A wide range of policies are in place to

achieve reductions in emissions in the

traded sector for example policies targeting

improvements in energy efficiency (such as

product regulations) or policies seeking to

support innovation in the traded sector and

bring down the future costs of abatement

(such as Carbon Capture and Storage

(CCS) demonstration).

Residual uncertainty over the UKshare of the EU ETS cap

The EU ETS cap creates certainty over EU

wide emissions in the ETS sectors. However,

there is still some residual uncertainty over

the UKs exact share of the ETS cap for

Phase 3 of the EU ETS, running from 2013

to 2020. Although the share of auctioning

rights allocated to the UK Government has

been agreed, there remains uncertainty

over the exact level of free allocation of

allowances to UK installations owing to

a variety of factors including uncertaintysurrounding the patterns of openings and

closures of plants receiving free allocations.

Further, the detailed implementation of

the revised EU ETS Directive is still being

negotiated, covering issues such as detailed

rules for allocating free allowances to

different industries reflecting technologies

used and the competitive pressures they

face from outside the EU. Should the actual

level of allocations to UK installations differ

significantly from the estimated level used

to set carbon budgets, the traded sector

component of the budget may need to be

amended, taking into account the advice of

the Committee on Climate Change.

Reducing emissions fromsectors not covered by theEU ETS

Governments approach todeveloping policies in sectors not inthe EU ETS

There is a much greater challenge for

Government in tackling emissions from

sectors outside the EU ETS, (the non-traded

sector) since these are not capped. The

general principles for developing policies

to overcome market failures still apply,

30 This is only an approximation owing to second order effects. Lower demand changes the market price of allowanceswhich in turn changes the distribution of EU ETS emissions, and the cost to the UK of its remaining imports ofallowances (or reduce the revenue from exports of allowances).


42/108


but in addition a number of more specific

challenges, relating to the uncertainty

surrounding uncapped emissions, needto be overcome. This section sets out

Governments specific approach to

developing policies to reduce emissions from

these sectors, based on: a clear assessment

of feasible technical potential for reducing

emissions; a focus on the potential of

individual measures to overlap and interact

with each other through the analysis of

packages of measures; and a variety of

approaches to dealing with the inherentuncertainty in emissions from these sectors.

Assessment of emissionsreduction potential

In its December 2008 report31 the CCC

provides an analytical view of the cost-

effectiveness of technical options to deliver

reductions in non-traded sector emissions.

This analysis has been supplemented

by Government analysis to inform the

development of the package of policies.

The CCCs analysis considered feasible

technical abatement potential relative to a

baseline level of emissions. The baseline was

generated for the CCC using 2008 fossil fuel

price assumptions, 2008 growth assumptions

and included the impact of policies up to and

including those which were announced in the

UK Climate Change Programme

2006 (UKCCP).32

The CCCs analysis of the cost-effectiveness

of abatement options can be presented in

the form of a marginal abatement cost curve(MACC). An example MACC is shown in

Chart 12. The MACC presents in order of

cost-effectiveness the options for reducing

emissions in the non-traded sector in 2020.

Each rectangle represents a technical option

for reducing emissions, with the height of

the box determined by the measures cost-

effectiveness and the width by the volume of

abatement that it is feasible for this measure

to achieve in the year 2020.The MACC below shows the high feasible

abatement potential identified by the CCC.

This includes abatement measures from

industry, domestic and non-domestic

buildings, transport, agriculture and waste

sectors. Approximately 33% of abatement

potential is from transport measures and

35% of total abatement potential is negative

cost, i.e. money saved by implementing

the measure would outweigh any costs.

Of this negative cost abatement potential,

about 20% is from non-CO2 measures

(predominantly agriculture), and 28% is from

energy efficiency measures in the domestic

sector, for example, insulating your home.

31 Building a Low Carbon Economy the UKs contribution to tackling climate change (December 2008). Available athttp://www.theccc.org.uk/pdf/TSO-ClimateChange.pdf

32 http://www.defra.gov.uk/environment/climatechange/uk/ukccp/pdf/ukccp06-all.pdf. The CCC baseline level of emissionsdiffers slightly from the no policy projection that is used in this annex. Both the CCC baseline and the no policy andproposal projection were generated by the DECC energy model, however the CCC baseline was generated in 2008

using older fossil fuel price and growth assumptions. There has also been some minor re-evaluation of policy deliveryfrom the UKCCP 2006. Though this complicates the interpretation of the CCC MACC, the differences are not sufficientlymaterial to invalidate the CCC cost-effectiveness analysis, or their assessment of the volume of abatement thatparticular technical measures could deliver.
http://www.theccc.org.uk/pdf/TSO-ClimateChange.pdfhttp://www.defra.gov.uk/environment/climatechange/uk/ukccp/pdf/ukccp06-all.pdfhttp://www.defra.gov.uk/environment/climatechange/uk/ukccp/pdf/ukccp06-all.pdfhttp://www.theccc.org.uk/pdf/TSO-ClimateChange.pdf


43/108


Chart 12

A Marginal Abatement Cost Curve in the Non Traded Sector

Source: Committee on Climate Change (2008)

Waste

Agriculture

Industry

Transport

Non-domestic

Domestic

0

100

13,950

150

200

250

4,600

50

900

-100

300

-3,450

-200

-250

-50

-150

650 10 4030 7015 4535205 25 50 55 60

/tCO2e

MtCO2e

Further analysis undertaken by Government

and other bodies indicates that potential

in some areas may be lower than the CCC

analysis suggested or come at a higher cost.

For example:

The CCC MACC analysis assumed that

the capital costs of solid wall insulation

were 4000 for an average 3 bed property.

However, there remains considerable

uncertainty over the future costs of solidwall insulation. A solid wall supply chain

review carried out by the Energy Saving

Trust in April 2009 suggested that the costs

of installing solid wall insulation for a single

property would on average be more than

three times this cost (12600) and that

even for multiple property installations the

costs would still be two and a half times as

expensive (10000).33

Research commissioned by the

Department of Energy and Climate Change

into hidden costs34 has indicated that

there are real and substantial time and

financial costs associated with domestic

energy efficiency and carbon saving

measures that existing cost-effectiveness

analysis neglects. These hidden costs

mean that the CCC analysis overstates

the cost-effectiveness of many household

measures (including, again, solid wallinsulation). This in part explains why

apparently profitable energy efficiency

measures are not being taken up by

households and reduces the cost-effective

potential from the domestic sector.

33 It should be noted that there is considerable uncertainty over learning rates for solid wall insulation which could reduceboth the cost of installation, and the hidden costs associated with the measure (for instance by reducing the thicknessof insulation required or by installing alongside other measures).

34 The hidden costs and benefits of domestic energy efficiency and carbon saving measures ECOFYS, May 2009


44/108


In agriculture, some mitigation measures

identified by the CCC were excluded from

elements of Governments analysis offeasible technical potential on the basis

that there was insufficient evidence to be

certain of their effectiveness in the UK

(e.g. nitrification inhibitors), or that they

were currently not permitted for use in the

EU (ionophores and bST hormones). Even

those mitigation measures which have been

identified as offering realistic potential are

subject to significant scientific uncertainty.

However, the evidence base and legislativesituation for some mitigation measures

may change over time and demand or other

factors may change the cost-effectiveness

of other measures. The Governments

policy strategy in agriculture will not be

based exclusively on one piece of analysis

and will consider ways that other promising

mitigation measures can be developed

through Government intervention.

In waste, the measures outlined in this

Transition Plan concentrate on reducing

landfill methane emissions. The CCC

also included abatement potential arising

from renewable energy, which overlaps

with other policies in the Transition Plan,

and hence would be double-counted if

apportioned to waste. In addition, the CCC

assigned lifetime methane savings to the

year that the waste is diverted from landfill

(the emissions savings actually occur over

100+ years), whereas for the purposes ofcarbon budgets it is necessary to assign

methane savings to the years in which

they are actually emitted.

In transport, the potential emissions

savings in the UK may be dependent

on international agreements on the

policies that would deliver the technical

abatement potential identified by the CCC.

For example, the EU new car efficiency

regulation agreed in December 2008 set atarget for new cars sold across the EU of

95gCO2/km by 2020. The CCC therefore

modelled the technology bundles that could

deliver a 95g average for new cars sold inthe UK. However, the regulation does not

prescribe the efficiency of cars that are

bought in any one member state, as the

target is for sales across the EU as a whole.

New car fuel efficiency in the UK has

historically tracked above the EU average

by around 6gCO2/km, and our central

forecast is for the UK to continue to track

above the EU average. Measures could be

implemented to encourage the take-up ofthe lowest emitting cars in the UK, but as

the target is set as an average across the

EU, this would not affect the level of global

emissions, but would displace emissions

reductions elsewhere in the EU.

These views are reflected in the package

of policies that has been developed.

The CCC MACC shows potential abatement

by technical measure (that is, it represents

assessments of the abatement that could bebrought about by the actions and behaviour

of individuals and firms, such as installing

insulation in a home). There are complications

when moving from these technical measures

to a package of policies.

Government intervention rarely targets

individual technologies;

Overlaps between policies create

difficulties in accounting for their overall

impact; and

The UK GHG inventory must be

sophisticated enough to pick up the impact

of the methods that policies incentivise.

Flexible policies

MAC curves provide a guide to the potential

and future costs of technical measures.

However, since these are subject to

considerable uncertainty, policies should not

be overly prescriptive as to the measures

that should be taken up.


45/108


Flexible market based policies can reveal

the lowest cost measures by harnessing

individual investment decisions. Priceinstruments improve the economics of low

carbon technologies relative to more polluting

substitutes. Those investing will respond

to the carbon price signal, investing in the

technologies that are most cost-effective at

the time they are making the decision.

An example of a price-based instrument is

the Carbon Reduction Commitment which

will place a cap on the emissions of

non-energy intensive businesses and thepublic sector. It does not specify which

abatement technologies must be used

to meet the cap which should result in

abatement being achieved at least cost.

Dealing with overlapping policies

Because climate change policies rarely target

specific abatement measures, several climate

change policies may be encouraging the take

up of the same underlying technical carbonabatement options. For example, a retail firm

which installs more energy efficient fridges

may do so in response to none, some or all of

the following policies: the EU ETS increasing

electricity prices, participation in the Carbon

Reduction Commitment, the Climate Change

Levy, product regulations, Carbon Trust

advice, an interest free loan or feedback from

their smart-meter, etc. If in performing policy

appraisal all of these policies are attributed

the savings associated with the more efficientfridges, then the sum of savings from all the

policies will be overstated.

To minimise the risk of over-stating the

savings from policies a package approach

has been adopted when accounting for the

impact of policies on emissions.

In the transport sector, policies are modelled

sequentially through the National Transport

Model. Transport emissions are modelled

after the introduction of each additional

policy with the additional policy attributed

the change in emissions since the previous

run of the model. This ensures that thetotal savings attributed to individual policies

sum to the total modelled savings from the

package of all the policies acting together.

In the non-transport sector there are three

overarching policies which provide a degree of

aggregate certainty over the level of emissions

reductions that will occur within their scope.

These policies are the Carbon Reduction

Commitment (CRC), the Climate Change

Agreements and obligations on domesticenergy suppliers. Each of these policies and

the policies they interact with are treated as

packages the non-energy intensive business

and public sector package, the energy

intensive business package and the domestic

energy efficiency package respectively.

Some non-transport abatement options

occur outside of the three packages notably

non-CO2 GHG abatement, abatement from

non-energy intensive organisations too smallto be included in the CRC and lifestyle changes

in the domestic sector. For policies targeting

these reductions, particular vigilance is

required to account for policy interactions

when assessing savings.

The costs and benefits of renewable

measures are attributed to the Renewable

Energy Strategy policies owing to the

substantial incentives that these policies

offer. For instance, owing to their eligibility forrenewable incentives, the costs and benefits

of on-site micro-generation installed as part

of zero carbon homes building regulations are

not accounted for in the net present value of

Zero Carbon Homes but in the net present

value of the renewables policies.

Each policy appraisal has been peer reviewed

through the Inter-Departmental Analyst

Group35 to ensure consistency of the policy

appraisal and to ensure that the policyoverlaps have been fully considered.

35 See www.decc.gov.uk
http://www.decc.gov.uk/http://www.decc.gov.uk/


46/108


Sensitivity of the inventory

The UK GHG inventory used to record

emissions from agriculture is based on a very

simple methodology, using absolute numbers

of livestock, area of land under arable crops

and amount of fertiliser used. This means

that, in its current form, it would be unable to

account for many of the emissions reductions

which would occur as a result of the measures

currently envisaged for the agriculture sector

within this Transition Plan. In addition, many

of these measures are in any case subject to

significant scientific uncertainty in terms oftheir abatement potential.

Measuring the impact and effectiveness

of these measures would require moving

from the current Tier 1/2 system within the

inventory to a Tier 2 or 3 system, facilitating

a considerably higher temporal and spatial

resolution and a focus on land management

activities at a much more detailed level. This

would allow individual mitigation measures to

be accounted for in a verifiable way. This will

need substantial investment and a proposal

has been drawn up to take this forward.

Overall Impact of Policieson Emissions From 2008to 2020Bringing the analysis of policies together

forms a central estimate of emission

savings from the EU ETS and sectors not

covered by the EU ETS. Table 4 lists the

policies with their carbon savings. The overallcarbon savings differ from the sum of the

individually appraised policy savings owing

to macro-economic interactions that arise

in the Department of Energy and Climate

Change energy model. With the policies

set out in this Transition Plan, we are on

track to meet all three carbon budgets on

the central projections and save in total

around 700 million tonnes of CO2e.


47/108


36 The savings from the package of policies, when modelled in the DECC energy model, do not exactly equal theappraised savings from the policies owing to interactions within the model. The interaction effect is small relative to thevolume of appraised savings.

37 Negative value implies emissions are lower than the budget. Figures may not sum due to rounding.

Table 3

Impacts on emissions in policies in this Transition Plan (MtCO2e)

MtCO2eBudget 1

(2008-12)

Budget 2

(2013-17)

Budget 3

(2018-22)

Budget level 3018 2782 2544

Central projections

Without Transition Plan policies2987 2961 2964

Savings from policies

Package of policies appraised and entered into

the model

12 232 455

Macro-economic interaction

Within the Department of Energy and Climate

Change model361 11 3

Total Savings 13 243 459

Central projections with Transition Plan policies 2974 2718 2505

Carbon budget Gap37 -44 -64 -39

Range for carbon budget Gap -145 to 62 -184 to 65 -170 to 126


48/108


Table 4

Detailed breakdown of savings delivered by Transition Plan policies by

budget period (MtCO2e)

MtCO2eBudget 1

(2008-12)

Budget 2

(2013-17)

Budget 3

(2018-22)

Policies (firm and funded) EU ETS

Reduction in UK share of EU ETS cap38 0 155 248

Transport

New Car CO2 standards to 2015 0 5.1 20.1

Additional Renewable Transport fuels, 10% by

energy by 20200 9.1 30.1

Low Carbon Buses 0 0.2 0.9

SAFED training for bus drivers 0.4 1.0 1.0

Households

Domestic energy efficiency package39 9.3 30.4 45.8

Product Policy (additional to the domestic

energy efficiency package)40-0.8 -2.4 -4.5

Zero Carbon Homes 0.1 0.6 2.2

Smart-metering and better billing(lifestyle changes)

0.9 2.1 1.8

Community Energy Saving Programme 0.2 0.1 0.1

Business and Public Sector

Non-energy intensive business and public

sector package410.3 2.4 4.6

One-off interest free public sector loans 0.1 0 0

One-off interest free loans to SMEs 0.2 0.2 0

Product Policy for SMEs -1.1 -2.5 -3.9

Smart-metering for SMEs 0.1 2.2 4.7

38 Reductions due to policies introduced prior to the Energy White Paper 2007 are not shown, and the EU ETS cap for2008-2012 was set before then which means that savings for that period are not shown here. Savings in budget 2 and 3 arerelative to the UK share of the cap in 2008-12.

39 Includes: the full impact of CERT (a minority of this ambition was announced prior to the 2007 Energy White Paper, whereit was extended. It was subsequently further extended in September 2008); Future supplier obligation; Energy performanceCertificates; better billing and smart-metering; product policy, and Heat & Energy Saving Strategy Supporting Measures.In a separate exercise estimated savings from residential smart meters have been revised and, whilst overall CO2 savingsare broadly similar, they are more weighted to the non-traded sector and to later years than is suggested here.See: http://www.decc.gov.uk/en/content/cms/consultations/smart_metering/smart_metering.aspx

40 Product Policy savings are negative because of the Heat Replacement Effect: more energy efficient products create lessambient heat which needs replacing via alternative fuel sources. Overall, products policy provides a significant net benefit,due to savings in emissions in the traded sector and their associated benefits. Non-traded sector emissions increasespresented above for products policy are not the most up-to-date, and should be treated as higher-bound/cautiousestimates, which we plan to improve on in the future as further evidence becomes available.

41 Includes the Carbon Reduction Commitment, Energy Performance of Buildings Directive, Business Smart-metering,Product Policy, Public sector targets and loans, Carbon Trust advice and loans.
http://www.decc.gov.uk/en/content/cms/consultations/smart_metering/smart_metering.aspxhttp://www.decc.gov.uk/en/content/cms/consultations/smart_metering/smart_metering.aspx


49/108


EPBD for SMEs 0 0.3 0.7

Renewables

Renewable heat (RHI plus supporting measures) 0.7 11.1 42.6

Waste

Increased Landfill Tax (Budget 2009) 0 0.8 1.7

SUBTOTAL (firm and funded policies)

Excluding EU Emissions Trading System

Including EU Emissions Trading System

10.5

10.5

60.7

215.4

147.6

395.8

Further intended abatement

Transport

EU New Car CO2 regulation: 95g/km by 2020 0 1.0 18.5

EU New Van CO2 regulations 1.0 5.2 9.3

Complementary measures for cars 0.3 2.6 3.7

Low rolling resistance tyres for HGVs 0 0.1 1.1

Illustrative Electrification of 750km of

single track rail line0 0 0.8

Business and Public Sector

Energy intensive business package42 0 8.0 8.0

Waste

Diverting food waste away from landfill0 0 3.3

Diverting wood away from landfill

Agriculture

Crop management and fertiliser use

0 0 15.0Enteric fermentation and methane

Manure management

SUBTOTAL (further intended abatement)

1.3 17.0 59.6

TOTAL43

Total savings (appraised and entered into the model) 11.7 232.4 455.4

42 Includes the extension to Climate Change Agreements,

Documents

The Analytical Annex to the UK Low Carbon Transition Plan. Power outages in the offing