Appendix - Government response
I am grateful to you and to your Committee for your
considered report, published on 30 July, into the review of the
Climate Change Programme and the draft Climate Change Bill.
Phil Woolas wrote to inform you that the
Government response to the Committee's recommendations on the
Climate Change Bill will be handled by means of a Command Paper,
due to be published this autumn, which will also contain our response
to the EFRA and Joint Committee Reports. I am pleased to attach
the Government response to the rest of the recommendations (numbers
1 - 15).
Introduction
(i) The Government welcomes the Environmental Audit
Committee's comprehensive report into the emissions projections
and cost-effectiveness analysis for the 2006 Climate Change Programme,
and the draft Climate Change Bill.
(ii) The Government also welcomes the Committee's
recognition of the importance of the Climate Change Bill, and
agrees that it will significantly strengthen the UK's efforts
to tackle climate change.
(iii) The Government welcomes the Committee's support
for the main elements of the Climate Change Bill, in particular:
o pushing
emissions cuts in the short, medium and long-term, through establishing
emissions targets for 2020 and 2050 as well as a system of five-year
carbon budgets to control emissions;
o creating
the new independent Committee on Climate Change to advise Government
on the optimum trajectory towards our 2050 target; and
o increasing
accountability and transparency, through annual reports by the
Committee on Climate Change to Parliament on progress.
(iv) The draft Bill has been subject to consultation
and pre-legislative scrutiny. We are carefully considering the
results of the responses to the consultation, the pre-legislative
scrutiny report of the Joint Committee published on 3 August,
the report of the EFRA Select Committee published on 4 July, and
the relevant sections of this Report. We will publish a formal
response to each of these, as well as a summary of the public
consultation, ahead of introduction of a revised Bill to Parliament
later in the autumn.
(v) The Government also welcomes the Committee's
recognition of the valuable work being done by the Office of Climate
Change in helping to improve the quality of climate change policy.
To date the Office of Climate Change has completed a number of
important projects, including development of the Draft Climate
Change Bill, an analytical audit of issues and priorities in
climate change and a review of governance structures that drive
climate change policy making in government.
(vi) The Government's responses to the specific
conclusions and recommendations of the Environmental Audit Committee's
Report numbered 1 to 15 are set out below. The rest of the recommendations
and conclusions will be addressed in the response to the Parliamentary
reviews of the Climate Change Bill, noted above, expected to be
published in late October.
Conclusions and recommendations
INTRODUCTION
1. Climate change is on a different scale from
any other political challenge. Its potential effects could be
both physically and economically devastating. It is not just the
size but the timing of these effects that poses such a challenge.
The lag between emitting CO2 and experiencing the resulting rise
in temperatures means we must take bold action today in the hope
of preventing dangerous climate change occurring in the future,
the impacts of which could be irreversible. Timing is also an
issue given the long term planning and investments required to
roll out new technologies and infrastructure, and thereby decarbonise
the economy. (Paragraph 9)
The Government agrees with the need to take action
now to reduce future risks associated with climate change, as
set out most recently by the Intergovernmental Panel on Climate
Change in its 4th Assessment Report. We agree that
action taken now must take account of the potential irreversibility
of climate change impacts and the potential magnitude of the losses
involved, both human and economic, for biodiversity and physical
impacts. The Government accepts the need for long term planning
in the development of low emitting technologies. This is why the
Government has adopted an emissions reduction target for 2050
that is already ambitious, and we anticipate, through the draft
Climate Change Bill, possible amendment of the long-term target
to take account of developments in climate change science or international
law. It is also why the UK, via the United Nations Framework Convention
on Climate Change, the G8 and bilateral contacts, plays a leading
role in the international negotiations to secure the widest possible
participation in international climate change agreements since
without this participation, whatever action the UK takes will
have little effect on the level of greenhouse gases in the atmosphere.
2. These challenges underline the vital importance
of getting the structures and systems which support UK climate
change policy right. The UK's carbon reduction framework must
be firmly embedded in the structures of government and the economy,
so as to provide long term certainty and continuity. This necessitates
policy-making which seeks to establish and draws on political
consensus, which is based and updated on the best available science,
and which draws on a detailed understanding of the impacts of
policies on emissions, the economy, and everyday behaviour. (Paragraph
10)
The Government agrees with the points that the Committee
makes. Political consensus and sound policy development can only
be based on the best scientific and economic information available,
which is why the UK has been one of the strongest supporters of
the Intergovernmental Panel on Climate Change since its inception,
and why in 2005 we initiated the comprehensive Stern Review of
the Economics of Climate Change. The 2006 UK Climate Change Programme
was developed following extensive consultation, is based on detailed
analysis and covers all significant sectors of the economy. In
2002, the UK pioneered the world's first economy-wide greenhouse
gas emissions trading scheme in order to gain experience with
the institutions and infrastructure necessary for emissions trading,
and we strongly support development of the EU Emissions Trading
Scheme as a broadly based framework to facilitate emissions reduction
nationally and internationally.
The Climate Change Programme Review
FORECASTING FUTURE EMISSIONS
3. Forecasting the future rate of an economy's
carbon emissions is a complex business, fraught with inescapable
uncertainties. As the review by the National Audit Office shows,
the UK's forecasting processes have received approval from reviewers
acting on behalf of the UN, and have been in line with assumptions
and projections made by external bodies. However, while the NAO
explains that a degree of change in projections is to be expected,
it also notes that in this case the extent of change was greater
than the Government modelling teams had expected. Naturally, there
should be continual efforts to improve the models on which projections
rely. But it also underlines the need for the Government to treat
forecasts for future years with caution, and ensure they are not
presented—either to decision-makers within the Government,
or to the public—with undue certainty, as though they were
concrete descriptions of the future. This applies especially to
emissions forecasts which project many years into the future,
such as to 2050. (Paragraph 32)
The Government is conscious of the need to present
projections with a degree of uncertainty and has in the past always
published emissions projections based on a range of price assumptions
to reflect fuel price uncertainty and include a section specifically
on overall uncertainty. Published projections also explore other
sensitivities to key assumptions. Longer term projections to
2050 are based on scenarios, which assume a much wider range of
assumptions, to reflect the greater level of uncertainty over
the longer time horizon. However, the Government will consider
how to demonstrate and raise awareness of the levels of uncertainty
associated with UK emissions projections, and consider the range
of fossil fuel prices assumed for the next set of updated projections,
which the Government aims to publish in the summer of 2008 as
the first in its annual exercise to update the projections on
a regular basis.
4. We consider it unacceptable that it took so
long after 2000 for Government projections to catch up with reality.
As late as the 2003 Energy White Paper, the Government was still
projecting that the 2010 target would be met in full. The delay
in producing more accurate forecasts severely retarded and impaired
the ability of the Climate Change Programme Review to come up
with policies that would get the 2010 target back on track. The
Government should perform much more frequent revisions to emissions
forecasts. (Paragraph 33)
The NAO review concluded that the delay in publishing
revised projections did not severely impair consideration of possible
policies and measures for the revised Climate Change Programme.
Revised projections, while not published at the time, had been
produced internally and were available to inform decision making.
Although information was emerging at the time that some policies
may not have been delivering the carbon savings estimated at the
time they were introduced, the main reason that emissions projections
tended to drift upwards was because changes in trends of fossil
fuel prices tended to favour much more coal use in electricity
generation. The Government has now put in place plans to revise
and publish projections annually.
5. Even if many of the Government's key forecasting
assumptions were broadly in line with those made by external organisations,
the fact that the movement of oil and gas prices in recent years
has repeatedly been higher than forecast demonstrates that the
consensus view may sometimes be wrong. The Government's forecasting
model should consider a wider range of assumptions and scenarios,
especially regarding fossil fuel prices. (Paragraph 34)
The recent higher degree of uncertainty associated
with projected fossil fuel prices has presented difficulties for
all organisations providing emissions projections. The Government
will in future consider a wider range of assumptions and scenarios
to reflect this greater uncertainty.
6. The Government does open up the assumptions
it uses in its forecasting model to consultation and review. However,
while there may be external input into this modelling, its inner
workings remain opaque to the outside world. The Government should
make its forecasting models publicly available as open source
software. This would allow external analysts to test the Government's
forecasts by inputting their own projected values for fuel prices,
economic growth, energy demand from households, and so on. (Paragraph
35)
Officials are currently engaged in developing a new
version that will be more transparent, with a view eventually
to making it available as open source software. However, officials
continue to provide detailed model background to external enquirers
and academics, and work with a panel of external experts (Projections
Advisory Group). The model is also open to inspection by formal
bodies including the United Nations Framework Convention on Climate
Change. The Government continues to review ways to improve transparency
of the projections.
7. The Energy Saving Trust has called for the
Government to develop a new and bespoke model to forecast carbon
emissions, rather than simply adapt the DTI's energy demand model.
We recommend that the Government should now do so. (Paragraph
36)
The Government will consider the suggestion made
by the Energy Saving Trust (EST). In response to the specific
points made by the EST in its evidence we note that the existing
modelling approach is already consistent with the historical inventory
data prepared in accordance with IPCC Guidelines and required
for international reporting to the United Nations Framework Convention
on Climate Change. We note also that the detailed understanding
provided by the DTI model of the energy supply system, and of
energy demand by economic sector, would be essential features
in any projections model. The fundamental question (which the
Government will consider) is whether we are using the most appropriate
modelling approaches, rather than whether we develop a new model.
The EST suggests that a new model might focus more on emissions
reductions rather than demand projections. In the Government's
view both are essential, and there is a danger that focussing
more on reductions could increase optimism bias.
8. We recommend that the Government should admit
the uncertainty range of its emissions projections. It should
also regularly publish a review of its previous projections, comparing
them against outturn data and latest projections, and analyse
what it got right, what it got wrong, why it did so, and what
lessons it has learned. These reviews should be consistent in
format and categories of data they present, so that it is easy
to compare one year with another. (Paragraph 37)
The more recent projections exercises have included
formal analysis of projections uncertainty and considerable effort
has also been made to describe the reasons for changes from previous
baseline projections. The key focus of past projections exercises
has been to inform longer term policy impact and results were
usually presented in five yearly increments The presentation of
results was generally designed with the specific policy in mind
making comparison of "forecast performance" sometimes
difficult. However, the Government will consider what further
enhanced analysis of projections performance may be possible.
Needless to say, in moving to a regular annual publication of
updated projections, comparisons of projections will become easier.
9. The downward revision, by some 16-26%, of the
expected impact of carbon reduction policies in the 2000 Climate
Change Programme shows, first of all, that the Government must
eliminate "optimism bias" from its initial design of
climate change policies. Secondly, it highlights the risks inherent
in the Government's current approach, whereby it seeks to implement
policies which will deliver only just enough carbon savings to
span the gap between a "Business As Usual" projection
of where emissions are going to be in a certain year and a target
level of emissions for that year. Government forecasts of "BAU"
emissions have so far consistently been too low, while its forecasts
of the impact of carbon reduction policies have consistently been
too high. The moral is that the Government should err on the side
of caution, and aim to overachieve its targets. (Paragraph 38)
The guidelines on evaluation and appraisal produced
by the Inter-departmental analysts group (IAG) in April 2006 noted
the risk of optimism bias and directs analysts to the guidance
in HM Treasury's Green Book on how to handle this. The peer review
of the appraisal of new measures introduced in the 2006 Climate
Change Programme and the 2007 Energy White Paper, which was overseen
by the IAG, should have reduced the risk of over-estimating benefits
or under-estimating costs.
The extent of optimism bias from past appraisals
became clear during the review of the Climate Change Programme
as the majority of existing policies were evaluated. As a result,
analysts are more alert than previously to the potential for such
bias and the need to take it into account in fresh appraisals.
Furthermore, detailed study about specific measures, such as
the performance of loft and cavity wall insulation in situ, allowed
for more accurate appraisals than were previously possible.
The IAG guidelines also suggest that, when considering
a package of policies, risk analysis is done to construct a confidence
interval to help understand the worst and best possible outcomes
if all policies perform well or badly against expectations. Given
a large number of policies are now in place, some are likely to
over perform and some under perform so the central case still
provides the most likely outcome. A continuous process of evaluation,
for significant policies at key stages in their implementation,
will give Government an understanding over time if a disproportionate
number of policies are over or under achieving carbon savings
compared to initial appraisals.
COST-EFFECTIVENESS ANALYSIS
10. Many of the technical aspects of the cost-effectiveness
analysis (CEA) used in the Climate Change Programme Review were
done well. As the NAO noted, CEA was appropriate to be used to
help decide among different policy options, its use was more consistent
and comprehensive than in the original CCP 2000, the assumptions
used in it were in line with the analysis of external organisations
and their uncertainties recognised, and in the Review it produced
evaluations which were reliable enough for different policies
to be compared with each other. (Paragraph 46)
The Government welcomes the Committee's recognition
that the analysis was done consistently and comprehensively, and
the approach chosen for evaluation and appraisal was appropriate.
We will continue to use cost-effectiveness analysis to inform
decisions on policy choices.
11. At the same time, there were some weaknesses
in the way CEA was used. Because the Review was focused on meeting
the short term target of 2010, it did not consider policies which
would have a bigger but longer term impact. This represents a
missed opportunity to advance UK climate change policy, and, to
some extent, a waste of the Review teams and their resources.
Some options were not appraised fully or at all because the Review
itself was running short of time and resources. This lack of time
was compounded by the delay in the Government's identification
of how far short of the 2010 target it was projected to fall,
and thus how many more policy options were needed. This highlights
the need for annual reassessments of progress towards short, medium,
and long term emissions forecasts and the carbon reduction policies
that can help us achieve them. (Paragraph 47-48)
It is true the scale of policy intervention, and
hence the cost-effectiveness analysis, was determined by the 2010
domestic goal and Kyoto commitment timeframes - as the focus of
the review of the Climate Change Programme was on policies that
could feasibly be introduced in order to meet these goals. However,
the focus of the Review on the 2010 target did not mean that new
longer-term policy ideas were ignored. The Review did consider
policies and scales of intervention beyond those finally included
in the revised Programme, some of which were taken forward in
the Energy Review and considered further in the 2007 Energy White
Paper.
The Government committed, in the 2006 Climate Change
Programme, to introduce an annual report to Parliament. Subsequently,
the Climate Change and Sustainable Energy Act 2006 also placed
a similar obligation on Government to report to Parliament on
the levels of greenhouse gas emissions in the UK and the steps
the Government has been taking to reduce these emissions. The
first report, published in July[1],
included the latest emissions projections and an assessment of
our progress towards both the 2010 and 2020 targets. The Climate
Change Bill also proposes an annual reporting framework, which
includes a duty on the Secretary of State to lay before Parliament
a response to the annual reports of the Committee on Climate Change.
12. Future use of CEA should ensure that it focuses
on different scales of policy implementation, across different
timescales, thereby enabling policy-makers to better choose different
ways and combinations of implementing certain policies. There
should also be more public scrutiny of and debate about the assumptions
and calculations which result in CEA indicators for each policy.
Most importantly, emissions targets should be determined by climate
science, and CEA only used to help achieve these targets in the
most cost-effective manner; rather than in effect setting targets
itself, through being used to determine what level of emissions
cuts is "affordable". (Paragraph 49)
The Government agrees that CEA should be used within
the framework of climate science. This was the approach for the
2000 and 2006 Climate Change Programmes, where the 2010 target
was a step on the way to a 60% reduction in CO2 by
2050, determined by the scientific data available at the time
the target was set. The Government also, in its previous work,
sought to analyse policies in combination to avoid double counting
and provide the most cost effective approach to emissions reduction.
As mentioned in the response to point 11 above, the Climate Change
Programme Review (CCPR) did consider policies and scales of intervention
beyond those finally included in the revised Programme, some of
which were taken forward in the Energy Review. Longer term assessment
is provided by ongoing policy development and review, for instance,
the policies and measures announced in the Energy White Paper.
This will provide the framework for the Government's future use
of CEA. The Government notes that, once the targets are set, proper
use of CEA takes account of affordability.
As this Report acknowledges, the NAO report was complimentary
on the use of cost-effectiveness analysis during the CCPR. The
UK's use of cost effectiveness analysis is, in international terms,
extensive. The Energy Review and Energy White Paper processes
used a similar approach to cost-effectiveness analysis developed
in the CCPR. The technical guidance will be continuously updated,
e.g. to take account of latest advice and ensure consistency in
evaluation across Government Departments, and, where possible,
better integrate the short-to-medium term and long-term analysis.
13. The overruling of the CEA indicators in the
case of major policies such as the Renewables Obligation and fuel
duty escalator suggests that the CCPR was still significantly
guided by broader political considerations. It is not necessarily
wrong for the Government to overrule the recommendations generated
by a particular methodology such as CEA; Governments must always
take wider political considerations into account. What we recommend
is that the Government is braver about the extent of action on
climate change that is politically possible. We hope the Government
is already moving in this direction, given that having excluded
tighter building regulations from the CCPR, it subsequently introduced
a policy for Zero Carbon Homes in Pre-Budget 2006. In future,
the Government should be bolder about consulting on potential
climate change policy options, to test public opinion on their
acceptability, and encourage public debate on alternative measures.
(Paragraph 50)
The cost-effectiveness analysis framework was developed
to compare how cost effective different polices across Government
are in abating carbon emissions. Thus, it can be used to rank
polices in terms of their economic effectiveness in achieving
their prime objective: carbon abatement. The CEA indicator does
not provide a complete assessment of a policy. It was not designed,
or intended, to be the sole basis for approving or rejecting policies.
Hence, simply because a policy seems relatively expensive on
the CEA does not mean that the CEA indicator has been overruled.
Polices such as the Renewables Obligation and the fuel duty escalator
have additional objectives other than reducing carbon, for example
driving innovation, improving air quality or reducing congestion
- these are also important in determining the value of the policy.
Renewables are emerging technologies, hence there is a rationale
for support where the cost effectiveness of these technologies
is above the SCC/SPC, as this support may be able to leverage
a lowering of the abatement cost of these technologies over time.
As such, while wider political considerations play a role in guiding
climate change policy, there are also wider economic concerns
to consider, as described above.
The Government believes that climate change is one
of the most serious challenges facing the world in the 21st
century. The UK has been at the forefront of developing policies
to mitigate climate change, (for example, the Renewables Obligation,
the EU ETS) and is seeking international agreement on binding
emissions reductions targets. The Government will continue to
develop policies that help the UK achieve its 2050 goal of at
least 60% CO2 reduction and it will seek to do so in
the most cost effective way.
SOCIAL COST OF CARBON
14. We have queried the Government's use of the
Social Cost of Carbon (SCC) in a number of inquiries. We were
interested to learn that, as the NAO put it, the cost-effectiveness
analysis in the CCPR "sensibly excluded the social cost of
carbon", and that one of the main reasons why the Review
opted to use cost-effectiveness analysis in the first place was
"because it is not reliant on a firm valuation of the social
cost of carbon". We conclude from this that the Government
has doubts as to the reliability of the SCC in policy-making.
In the light of this, the Government should explain clearly how
it intends to use SCC in the future. (Paragraph 52)
In cost-effectiveness analysis, the Social Cost of
Carbon (SCC) is necessarily excluded. Cost effectiveness aims
to give an indication of the economic cost incurred in order to
bring about a one tonne reduction in carbon emissions. As such,
the net economic cost of a given option is the numerator, while
the carbon savings of that option is the denominator. It would
not make sense to include the SCC in the net cost of the option
as this would effectively double count carbon benefits (which
would then appear in both the numerator and denominator). Further,
it would not make sense to compare the cost-effectiveness of options
against the SCC if the SCC was already included in the calculation.
Although cost-effectiveness analysis does not include
a valuation of the SCC, the cost-effectiveness of options is often
compared against other options and the SCC in order to determine
the approximate relative/absolute cost-effectiveness.
Government has recently published new interim guidance
for the revised valuation of carbon benefits in appraisal. The
SCC has been replaced by the new Shadow Price of Carbon (SPC),
which is based on modelling done for the Stern Review (2006).
It is intended that the new SPC will be factored into all Government
appraisals. For those policies for which reductions in carbon
emissions are of primary importance, cost-effectiveness analysis
will continue to be used in order to compare the net costs of
carbon savings to the new SPC. For those policies across Government
for which carbon savings are not the primary objective, it does
not make sense to use cost-effectiveness analysis. For such polices
(e.g. the building of hospitals or schools) the new SPC must be
factored into the decision-making process through the cost-benefit
analysis. Appraisals will be expected to determine the expected
carbon emission reductions/increases, which will then be valued
according to the new SPC and included in the CBA. The SPC will
therefore be included in the decision-making process even when
carbon emission reductions are not the primary objective.
Defra will provide the EAC with a full paper on the
new SPC in the next 2-3 weeks. This will also be made available
on the Defra website.
15. The Climate Change Programme Review involved
the joined up work of officials from several different Departments,
as well as key external bodies. But one major failure in this
joined up approach was the exclusion of fiscal policy, consideration
of which remained the preserve of the Treasury. In the future,
there must be an integrated approach to climate change policy-making,
which considers the use of taxes and incentives alongside other
measures. (Paragraph 58)
The Government is committed to taking a coordinated
approach to protecting the environment, and all departments continue
to work closely together to develop an appropriate mix of instruments
- including regulation; emissions trading; voluntary agreement;
spending and fiscal measures - to tackle climate change effectively.
This coordinated approach has seen the introduction of an innovative
range of measures to date that has enabled the UK to make significant
progress on reducing emissions whilst supporting wider economic
and social aims.
Fiscal policy plays an important role in the Government's
overall efforts as seen by the significant contribution being
made by the Climate Change Levy and, in line with its 1997 Statement
of Intent on Environmental Taxation, the Government will continue
to consider ways in which the tax system can support environmental
policy. However, decisions on fiscal measures for environmental
purposes need to be considered as part of overall fiscal policy
to ensure that any such action is consistent with the tax system
as a whole, wider aims to support sustainable economic growth
and maintain sound public finances. As such, it is important that
fiscal measures with environmental purposes are considered within
the Budget process just as all other fiscal measures are.
October 2007
1 http://www.defra.gov.uk/environment/climatechange/uk/ukccp/index.htm
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