Memorandum submitted by the Energy Saving
1. In the light of the issues raised by the
NAO briefing on emissions projections, is the Government's current
approach to forecasting "fit for purpose"? If not, what
steps should it take to ensure that future forecasts are robust?
The UK Government's approach to forecasting
emissions has evolved largely from DTI's energy model, the primary
purpose of which is to project energy supply and demand. From
this, it is relatively straightforward to compute carbon emissions,
and add in non-energy sources of greenhouse gases (GHGs) from
other models. Over the last few years, there have been a large
number of updates and refinements that will have helped improving
modelling expertise as a result.
However, given the importance of climate change
as, to quote the Prime Minister, "...probably the
greatest long-term challenge facing the human race", we suggest
that Government should consider whether a "next generation"
bespoke single model, with a primary focus on the vitally important
task of forecasting future greenhouse gas emissions, is required.
In this respect we note that the DTI energy model was not designed
to undertake the long term forecasting that is required for GHGs.
Any such model will need to interface closely with the existing
historic emissions database led by Defra and required for IPCC
2. In developing its approach, how should
the Government deal with the following issues
Whether There can be a Greater Role for Independent
There is a clear need for greater independent
assurance. The detailed workings of the model are known by a small
handful of officials. We believe it would be an appropriate role
for the Carbon Committee to make available the assumptions and
calculation methodology, and to host periodic (eg annual) gatherings
of renowned experts and other interested parties for expert scrutiny.
In our view, we believe that the information should also be available
on the internet, in a format that would allow a wide variety of
interested parties to examine the forecasts, both for the whole
economy and for specific sectors/end uses that may be of interest
How the Government Should Respond to the Unavoidable
Uncertainties in Forecasting
It is recognised that forecasting is an imprecise
discipline, and good practice dictates that a range of scenarios
is produced. However, the tendency is to use a "central"
estimate of the outcomewhich is again understandable as
it provides a single figure to work with. However, the recent
track record in forecasts has shown they tend to err towards an
optimistic outcome. Until such a time as modelling improves to
the extent of providing more accurate forecasts of the future,
we advocate that it would be prudent to take a more cautious view
(ie a higher carbon forecast) as the basis for policy making.
It is also important to distinguish between uncertainties external
to the Government (eg world prices) and those under Government
control eg taxes and regulations.
Whether or not Future Domestic Targets and Forecasts
should include International Aviation and Shipping?
Aviation in particular is an important, and
rapidly growing, sector of emissions which contribute to global
CO2 and other greenhouse gas emissions. It is particularly
important to take full account of radiative forcing. However,
we accept that reporting against the Kyoto Protocol targets requires
aviation and shipping emissions to be excluded.
3. As projections against the 2020 and 2050
targets are less well developed than those for 2010 but are becoming
increasingly important, what improvements are needed in their
production and use?
As noted above, the existing DTI model was not
designed with the kind of timeframes in mind that need to be considered
for climate change purposes. This reinforces the argument of the
need for a bespoke greenhouse gas projection model.
4. Given the uncertainties associated with
the social cost of carbon, is it an appropriate basis for future
policy appraisal? What should the Government's policy on its use
now be, particularly in the significant increase in its value
which Stern recommends?
We believe that there is an urgent need for
Government to reappraise the social cost of carbon (SCC), in the
light of Stern, the latest IPCC report and other evidence. The
current dual system (Stern/Government) is unhelpful as it results
in uncertainty and provides an excuse for inaction.
SCC reflects the externalities associated with
the emission of greenhouse gas pollutants. As such, it sets a
benchmark cost against which to consider emission abatement options.
Put simply, policies that have negative cost effectiveness, but
which are above the SCC, should be pursued, along with all policies
with positive cost effectiveness.
While there is inevitable uncertainty about
the level of SCC, the prudent approach, noted earlier, dictates
that the more pessimistic end of the range of SCCs should be used
as the benchmark. This is because, as the Stern review points
out, the SCC is only low if the worst outcomes of climate change
are avoided, which will only be likely if there is concerted international
5. Has the government's approach to evaluating
cost-effectiveness in the context of the Climate Change Programme
Review been too short-term in focussing on the 2010 target? Has
this adversely affected the assessment of new policy ideas which
might only be more cost-effective in the long-term?
Although at the time the Review was announced,
it was probably appropriate to focus on meeting the 2010 CO2
goal, as this was, and still is, a stated government objective.
It is also worth noting that the Kyoto targets also imply a short-term
approach. However, given the length of time taken to undertake
the review, the growing recognition that the 2010 goal was unattainable,
and the increasingly strong evidence base of the damage that climate
change will cause, there is now an urgent need to establish a
structured approach to policy appraisal, implementation, evaluation
and review, with a view to meeting 2020, 2050 and all interim
Inevitably this resulted in a more short-term
approach rather than the longer policy review that is ultimately
required for instance it does not allow for the incorporation
of new technologies. However, the Energy Review has provided indications
that a longer-term approach is now being considered. Clearly long-term
post Kyoto targets are also required.
6. The NAO briefing has also raised a number
of other issues, including: the failure to explore sufficiently
different scales of policy intervention; the balance between expanding
existing measures and introducing new ones; the range of policy
options considered and the criteria for appraising them; and the
timing and scope of future cost-effectiveness evaluations. In
the light of such concerns, how should the Government improve
its approach to the use of cost-effectiveness evaluation?
The Interdepartmental Analysts Group (IAG) undertook
what can only be described as a mammoth task in evaluating and
appraising the range of existing and potential new policies. Inevitably,
though, officials operated under existing constraints.
To our knowledge, no additional resources of
note were made available to undertake the additional work. As
a result, most input was on the basis of existing or planned policies,
for which, at least within individual departments, there was already
a set of working assumptions, given existing budgetary and other
constraints, about the size, scope and timing of policies, including
whether they would be rolled out/extended. The mindset and resources
of the group, while open to challenges and suggestions on policies,
was therefore not one where vastly different scales of activity
or of approach could readily be contemplated. This inevitably
served as a major constraint on policy development.
Specific mention must be made of fiscal options.
As noted in the NAO report, these were not subject to the same
level of scrutiny as other policies. The Energy Saving Trust firmly
believes that the absence of discussion and challenge on fiscal
measures was one of the most significant failings of the Climate
Change Programme review process. Put simply, it is not possible
to take a holistic UK-wide perspective of how to tackle the problem
of climate change without due consideration of all potential fiscal
measures, including taxation. This is clearly evident as the most
efficient response to the known externalities of GHG pollution
is to reflect this in the price of the commodity.
Clearly, taxation alone cannot be relied upon
to solve a problem on the scale of that posed by climate change.
However, it can and should work in conjunction with other policy
initiatives, including emissions trading and direct subsidy schemes.
A shift towards a higher proportion of environmental tax, while
at the same time reducing taxes elsewhere, will send the right
signals throughout the economy as to the direction in which the
UK needs focus its priorities.
The consumer cost of a full "carbon tax",
while significant, is not prohibitive. Assuming a SCC of £100/tC
(within the range of both Stern and Government estimates) equates
to 1.2p/kWh on the price of electricity and 0.5 p/kWh on the price
of gas. Although measures will be required to mitigate social
impact, these levels are within the range of increases that consumers
have witnessed in response to changes in world energy prices within
the last two years and which have begun to fall again. Of course,
the resulting revenue raised can then be at least partially recycled
into climate change mitigation policies.
The benefit of setting this as a baseline "carbon
price" is that it gives all players a clear signal and benchmark
against which to plan long term. By incorporating the full SCC
a cost/benefit analysis emerges which provides a fuller picture
of the outcome of a particular policy. Alternative pricing signals,
notably from emissions trading schemes, may be subject to high
levels of volatility and reflect an abatement cost, not necessarily
a social cost. In addition, at times like the present, the price
can be artificially low reflecting the short-term economics of
supply and demand, rather than any fundamental considerations.
7. What additional reporting and monitoring
arrangements are required to support the aim of a transparent
framework for emissions reduction?
As noted earlier, the Carbon Committee should
be given a remit to report and publish monitoring results on a
regular (say, annual) basis, for open and widespread public scrutiny.
It is important to ensure a robust evaluation process of each
implemented policy measure. Regular reviews based on actual observations
from a variety of sources are needed to evaluate whether the policy
is still effective. Such reviews should be transparent; and have
input from all parties affected by the policy.
8. What should be the roles and responsibilities
of the Interdepartmental Analysts Group, the newly created Office
of Climate Change, and the proposed Carbon Committee? In particular,
how should the Carbon Committee be constituted, and what should
be its powers and remit?
The scale of the challenge, and the experience
of the CCPR process, indicates that IAG, in its current form,
is not the right vehicle going forward to provide the analytical
evidence base to underpin Government's climate change objectives.
In our view, the role of the Carbon Committee
is that of a separate, dedicated body, independent of Government
similar to the Bank of England's Monetary Policy Committee (MPC).
It should be responsible for overseeing the analysis, reporting
and forecasting on matters pertaining to meeting a series of carbon
targets (see 10 below) and to help ensure Government remains on
track with its climate change objectives. Consequently, Government
should be obliged to formally respond to any recommendations that
the Committee might make.
The Office of Climate Change, which must be
independent of any individual department or policy area, would
then be a cross-departmental body supporting the work of the Committee
by undertaking the policy analysis, appraisal and forecasting
roles directly, and by interfacing with policy officials in each
department, including HM Treasury and HMRC. The IAG could then
be stood down.
The Energy Saving Trust would welcome the opportunity
of being represented on the Carbon Committee.
9. The Government wishes to "ensure that
the [Carbon] Committee's advice is transparent, equitable and
mindful of sectoral and competitiveness impacts, including the
need to secure energy supplies at competitive prices" [see
Note 3] What use should the Carbon Committee make of cost-effectiveness
analysis and what difficulties might it face in doing so?
Robust cost effectiveness analysis should be
the cornerstone of the Committee's analysis and evidence base
in deciding on the mix of policies needed to meet the CO2
targets. Key to this is having good data. In this context, existing
policies have a clear advantage over new oneswitness the
CCPR process, where a number of policies were rejected either
for timing reasons or because it was not possible to undertake
a full appraisal. It is therefore essential that bold new policies
are not disadvantaged by virtue of a simple lack of data. Likewise,
reaching the key long term targets will require innovation so
short term cost effectiveness is not the sole criterion.
10. What approach should the Government take
towards setting short-term targets as a means of ensuring progress
towards its long-term goal of a 60% reduction in carbon emissions?
The experience of the CCPR has shown that the
focus on a particular timeframe (in this case 2010) results in
a sub-optimal analysis of options, including rejection of policies
that have minimal impact in the given timeframe. The Energy Saving
Trust believes that a regular series of targets needs to be set
from now to 2050 although we do not believe that annual targets
are practical, due to changes in weather or economic activity.
Conversely, targets over a five-year timeframe, or longer, are
too infrequent to assess progress towards the 60% goal.
The Energy Saving Trust therefore proposes a
series of rolling five-year average targets. These would be set
every year, from now to 2050, on the basis of an equal percentage
reduction each year towards the 60% goal. So, while there would
be a nominal target for each year between now and 2050,
actual targets would be set for the end of each rolling
five-year period. The target would be the average of the five
nominal annual targets up to and including the given year. The
annual percentage reduction required to achieve the 60% goal is
This is illustrated in the table below. 2005
emission levels were 656 M tonnes of CO2 equivalent
while a 60% reduction from the 1990 baseline gives a 2050 target
of 310 MtCO2e. The first full five-year target period
would end in 2009, for which the five-year average target would
be as shown in the middle column, ie 635 MtCO2. The
target for 2010 would then be 624 MtCO2, and so on.
The final column shows that greater absolute reductions in emissions
are required in the earlier part of the period than later. We
believe this percentage reduction approach is better than a straight
line approach since the scope for absolute savings now is higher
than it will be once emissions approach the target figure.
Of course, detailed targets need to be informed
by economic analysis of long-term options.