Muddled and inflated figures about power decarbonisation

It is vitally important that the public debate about the UK’s options for managing the risks of climate change is based on reliable and authoritative information about the costs. Unfortunately, a recent campaign pamphlet by Peter Lilley MP, purporting to offer a revised estimate for the cost of reducing greenhouse gas emissions by 2030 from electricity generation, is an inaccurate and misleading contribution to that public debate.

In July 2016, Parliament passed the Fifth Carbon Budget, as required by the 2008 Climate Change Act, setting a target for the UK’s emissions of greenhouse gases not to exceed a total of 1725 million tonnes between 2028 and 2032. This five-year budget is equivalent to a target of reducing the UK’s annual emissions, on average, by about 57 per cent by 2030 compared with 1990.

Parliament acted on the advice of the expert Committee on Climate Change, which had recommended the target in December 2015. The Committee’s report included, on pages 122 to 123, a full estimate of the expected costs of meeting the recommended target. The central estimate of the total “resource cost” was about 0.5 per cent of annual GDP, almost all of which related to the power sector.

The very careful analysis by the Committee included the publication in October 2015 of scenarios for the power sector. The Committee also examined key uncertainties around the costs, including low or high fossil fuel prices (with a range of overall costs of between 0.1% and 0.8% of GDP), and low or high technology costs (with a range of overall costs of between 0.2% and 0.9% of GDP).

These estimates excluded the benefits of avoided climate change impacts and the quantified costs or co-benefits relating to changes in welfare, such as warmer homes or changes in demand for energy services, or impacts on health due to, for instance, improved air quality. Using government valuation methods, the Committee previously estimated the monetary value of co-benefits to be between 0.1% and 0.6% of GDP in 2030.

These estimates are costs to the whole economy. They do not indicate how those costs will be distributed between households, businesses and the Government. Separately, the Committee also considered how Government policies designed to meet the Fifth Carbon Budget might affect household electricity bills and, therefore, efforts to tackle fuel poverty.

The Committee pointed out that support for low-carbon investment in the power sector, as well as carbon pricing through the Climate Change Levy, the Carbon Price Support Rate and the European Union Emissions Trading System, added around £45, or about 9.6%, to the annual electricity bill of about £470 for an average household in 2014.

It estimated that Government policies to implement the Fourth and Fifth Carbon Budgets will increase this cost to about £105 in 2020, and assuming the current funding approach continues, rising to £120 in 2030. This assumes that the carbon price in 2030 through the European Union Emissions Trading System and the Carbon Price Support Rate is £42 per tonne of carbon-dioxide-equivalent.

In addition, households paid about £35 in 2014 to support energy efficiency measures. The Committee assumed that this sum will increase to about £50 per year in order to meet the 2030 targets, but it would result in further energy saving and lower bills for the households that benefit from the efficiency measures. The analysis of the impact on household bills is updated regularly with new information and the next report is expected in 2017.

The Committee’s analysis is laid out clearly and is both rigorous and robust. One would expect challenges to the analysis to be similarly rigorous and robust. Unfortunately, a recent attempt by Peter Lilley is neither.

Mr Lilley has produced a pamphlet for the Global Warming Policy Foundation, set up by Lord Lawson to campaign against policies to reduce greenhouse gas emissions, which argues that decarbonising the UK power sector in line with the Fifth Carbon Budget will cost the economy £319 billion between 2014 and 2030, rising from about £8.9 billion to £27.6 billion per annum (in 2014 prices).

Unfortunately, Mr Lilley’s calculations are muddled and wrong, based on the fundamental misconception that the total economic costs of decarbonising the UK power sector are “all ultimately borne by households through higher energy bills, increased taxes and a higher cost of living”.

If one divides Mr Lilley’s £319 billion in costs, which he presents as a precise figure without any uncertainties, by the 16 years over which he claims they will accumulate, one ends up with an average annual cost of about £19.9 billion, or roughly 1% of the UK’s annual GDP. Hence, Mr Lilley’s calculated cost is about double the central estimate published by the Committee on Climate Change.

So how does Mr Lilley arrive at his figure and why is it different from the Committee’s? In fact, Mr Lilley confuses the distribution of costs between households, businesses and Government, with the total economic costs.

He divides the costs into three categories, which he describes as “subsidies, taxes and charges”, “general taxation” and “full system costs of renewables”. Of these, the largest is “subsidies, taxes and charges”, which he presents in terms of average cost per household in 2014, 2020 and 2030, equivalent to total costs of £6.3 billion in 2014 rising to £19.3 billion in 2030.

Although he does not provide details of his exact calculation, as an excellent assessment by Carbon Brief points out, he draws upon a number of sources for estimated electricity bills for households and businesses. But this is a fundamental error. Any economics undergraduate could have told him that taxes and charges to electricity bills are not the same as total economic cost. The student would also have told him that the levels of the carbon pricing instruments, such as the Carbon Price Support Rate, are related to the marginal costs of abatement and do not indicate the total cost of abatement as a whole. He then assumes that the taxes and levies applied to electricity bills of businesses should be wholly transferred on to households, and treated as additional costs. The result is that Mr Lilley’s summations are meaningless and not components of the economic costs of decarbonisation.

Besides the fundamental mistakes in his economics, Mr Lilley inflates some of his other figures. He states that “in 2014/5 climate measures financed by general taxes amounted to £1,860 million (including £360 million spent on climate related research and development)”. The 2015 progress report to Parliament by the Committee on Climate Change includes Table 4 on page 37, listing ‘Public sector expenditure on research and development’ in 2013-14. But although this total is £360 million, it states that only £195 million was for the power sector, with the rest on other sectors. Similarly, Table 5 on page 38 lists ‘General taxation funded polices’, which total £1500 million in 2014-15, including just £3 million for the power sector. Hence, in his calculation, Mr Lilley incorrectly attributes all expenditure to the power sector, this inflating his figures. But more importantly, he wrongly treats this Government expenditure as a constant component, amounting to £1860 million every year up to 2030, of the total economic costs.

Finally, Mr Lilley cites figures of £740 million in 2014, £2.8 billion in 2020 and £6 billion in 2030, as the “extra system costs to integrate renewables”, primarily to cope with the intermittency. But Mr Lilley does not reveal exactly how he arrives at these totals, making it impossible to evaluate whether he has made basic mistakes in these calculations as well.

Even if one assumes that Mr Lilley is correct about “extra system costs”, the basic errors in the rest of his calculations render his final totals completely meaningless. Hence there is no credible basis for his claim that the costs of decarbonising the UK power sector to help meet the Fifth Carbon Budget are double the estimate published by the Committee on Climate Change.

Overall, Mr Lilley’s pamphlet shows a failure to grasp basic economics, as is obvious from another recent campaign leaflet he produced for the Global Warming Policy Foundation, which contained inaccurate and misleading criticism of The Stern Review.

Sadly, a number of newspapers chose to publicise Mr Lilley’s new pamphlet without subjecting it to the kind of critical scrutiny that would have exposed its flaws. ‘The Times’ did publish my letter offering a brief rebuttal of the enthusiastic summary of Mr Lilley’s pamphlet in a column by Viscount Ridley. However, my correspondence was edited by the newspaper to remove a reference to the fact that Viscount Ridley had not disclosed that he is an adviser to the Global Warming Policy Foundation, which perhaps explains why he did not question the credibility of erroneous claims made by Mr Lilley, a trustee of the Foundation.

Bob Ward is policy and communications director at the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science.