Autumn Budget should strengthen carbon pricing and maintain subsidies for renewable power

Philip Hammond, Chancellor of the Exchequer

The Treasury should use the Autumn Budget on 22 November to introduce a stronger carbon price and to extend existing financial support for renewable power, according to a report published today (20 November) by the Grantham Research Institute on Climate Change and the Environment and the ESRC Centre for Climate Change Economics and Policy at the London School of Economics and Political Science, and the Energy Futures Lab and the Grantham Institute – Climate Change and the Environment at Imperial College London.

The report on Some key issues for reviews of the costs of low-carbon electricity generation in the UK states: “The Government should seek to optimise the balance between carbon pricing applied to fossil fuels and direct subsidies for low-carbon alternatives, to ensure that market failures and distortions are addressed while meeting emissions reduction targets as efficiently as possible. This should be an explicit goal of its Clean Growth Strategy, and reinforced by other policies, such as the Industrial Strategy and Budgets.”

The Government has indicated that it will lay out in the Autumn Budget its plans both for replacing the existing cap on total subsidies for low-carbon power and for future levels of carbon pricing.

The report warns that the Treasury’s freeze on the carbon price support rate at £18 per tonne of carbon-dioxide-equivalent means that the carbon price in the UK is inconsistent with the goals of the Paris Agreement.

The report points out that less than 40 per cent of the UK’s annual emissions are covered by an explicit carbon price, through the European Union Emissions Trading System and the carbon price support rate. It recommends that the Government should introduce a uniform carbon price across the economy, as recommended last month by Professor Dieter Helm in his review of energy costs.

The results of new modelling presented in the report show that the most cost-effective way to reduce carbon dioxide emissions from the UK power sector in the UK is through a uniform carbon price initially across the UK’s power sector, and then across the whole economy.

Emissions from the UK’s power sector need to fall by 60-70% if the UK is to meet the Fifth Carbon Budget for the five-year period between 2028 and 2032. The report concludes that “such a reduction will not be possible just by displacing the remaining coal from power generation, which the Government has pledged to achieve by 2025, but will require a major substitution of low-carbon sources for natural gas”. It adds that “the current implicit carbon price applied to the power sector is unlikely to bring about such a change”.

The report also concludes that it would be “premature” to assume renewable technologies no longer need support to overcome the obstacles they face in competing with fossil fuels. It highlights that the auction of contracts for renewable energy make electricity more affordable for business and household consumers.

It calls for the Government to reject the recommendation by the Helm Review to make renewable power generators responsible for providing back-up electricity because this requirement would not be cost-effective.

The report suggests that the Government should seek to correct market failures that distort the power sector, particularly by ensuring that the price of electricity generated by fossil fuels reflects the costs they impose through climate change and air pollution.

It recommends that the Government should focus on helping to limit electricity bills, rather than the prices paid by household and business consumers. This can be achieved through stronger policies to improve energy efficiency and reduce energy waste.

Poorer households tend to spend a larger proportion of their income on energy and are therefore disproportionately burdened by the charges added to electricity bills to support subsidies.

The new report recommends instead that “the Government should consider funding subsidies for new low-carbon power sources through measures that are less regressive than increases to consumers’ electricity bills”.

The report points out that: “the [UK’s] system of subsidies has led to a significant increase in the deployment of renewables” and that “it is widely agreed that renewable power is decreasing one component of electricity prices – the wholesale costs.”

The report uses a model designed by economists at the Grantham Research Institute to analyse the most cost-effective way to cut UK emissions. The model finds that out of seven possible policy instruments, carbon pricing would reduce carbon dioxide emissions in the UK with the least overall welfare cost. An electricity consumption tax would be the most costly.

The report emphasises that “the Government should assess the overall welfare cost to household consumers, taxpayers and businesses, and not just the direct cost to consumers, when assessing the cost-effectiveness of policies to reduce greenhouse gas emissions.” The model shows that minimising consumer electricity prices is not the most cost-effective approach overall and would entail a large cost to the Government.

The report points out that the terms of reference for the Helm Review, published last month, set a target of achieving the lowest electricity costs for UK consumers and businesses compared to the other EU member states.

“In general, electricity prices for households and most businesses in the UK are not the highest in the EU,” states the report, but to “realise its ambition of having the lowest energy costs in the EU for household and business consumers, the Government should focus on bills, not prices”.

It also points out that “energy efficiency improvements have already saved the typical UK household around £290 a year since 2008, according to the Committee on Climate Change, more than offsetting the cost of supporting low-carbon energy sources.”

For more information about this media release of a copy of the report under embargo please contact Victoria Druce on +44 (0) 207 107 5865 or v.druce@lse.ac.uk or Bob Ward on +44 (0) 7811 320346 or r.e.ward@lse.ac.uk

 

NOTES FOR EDITORS

  1. The Grantham Research Institute on Climate Change and the Environment (http://www.lse.ac.uk/grantham) was launched at the London School of Economics and Political Science in October 2008. It is funded by The Grantham Foundation for the Protection of the Environment (http://www.granthamfoundation.org/).

 

  1. The ESRC Centre for Climate Change Economics and Policy (http://www.cccep.ac.uk/) is hosted by the University of Leeds and the London School of Economics and Political Science. It is funded by the UK Economic and Social Research Council (http://www.esrc.ac.uk/). The Centre’s mission is to advance public and private action on climate change through rigorous, innovative research.

 

  1. Energy Futures Lab is an institute of Imperial College London founded in 2005 to develop multidisciplinary, cross-faculty collaborations to tackle the broad range of energy challenges that the world faces. The institute is a small team of dedicated professionals that assists in building connections, coordinating projects and highlighting successes at the College. For more information, see http://imperial.ac.uk/energy-futures-lab

 

  1. Grantham Institute – Climate Change and the Environment, Imperial College London
    The Grantham Institute is Imperial College London’s hub for climate change and the environment. It drives forward discovery, converts innovations into applications, trains future leaders and communicates academic knowledge to businesses, industry and policymakers to help shape their decisions. For more information, see www.imperial.ac.uk/grantham/

 

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