Climate change policies have been a controversial area of UK politics for a number of years. Regular headline-grabbing claims on the impacts of these policies on energy bills have played their part in this. But equally problematic is the fact that a lot of the debate to date has centred on the upfront cost of low-carbon policies, with very little attention paid to understanding the broader economic impacts of reducing the UK's emissions.
Earlier this year, the UK Government rightly confirmed its acceptance of the Fourth Carbon Budget recommended by the Committee on Climate Change. This requires the UK to cut its emissions of greenhouse gases by around 60% by 2030 compared to 1990 levels. A new report out today from Cambridge Econometrics, commissioned by WWF-UK, attempts to shed a light on the costs and benefits of meeting these targets.
To do this, Cambridge Econometrics used its well-known "macro-econometric model", which differs from the "equilibrium models" often used by the UK Treasury. As Harvard economist Frank Ackerman explains in an excellent blog for the FT, equilibrium models tend to assume that the economy is always in a perfect state and working at "full capacity". Any unemployment is voluntary. Given these assumptions, equilibrium models often take a negative view of environmental policies because they treat them as a constraint on an otherwise fully efficient economy.
By contrast, the econometric model used by Cambridge Econometrics is based on the observation that the economy goes through highs and lows. There are times when the economy is not working at full capacity and where unemployment is an unfortunate reality. It uses real life data from the past behaviour of businesses and households to predict the likely impact that any new policy could have on the UK economy. This means that the model does not automatically assume that environmental policies are a drag on the economy. What matters is how a proposed policy interacts with the real life data incorporated in the model.
Using this model, Cambridge Econometrics found that meeting the first four carbon budgets would produce net economic benefits for the UK. By 2030, the analysis predicts that the UK's GDP will be 1.1% higher, employment up by 190,000 jobs in net terms and households financially better off compared to a scenario where the UK does little to reduce its emissions. The report also points to other benefits, such as improved energy security due to a significant reduction in fossil fuel imports and improved health due to reduced air pollution.
Critically, the report relies on conservative assumptions. For instance, no assumption was made about the UK exporting low-carbon goods or services. If export opportunities did arise, meeting the carbon budgets could result in greater economic benefits for the UK.
The report found in particular that the increase in electricity and product prices initially required to fund the investment in low-carbon infrastructure would be more than compensated for by a combination of energy savings (in buildings and cars), increased wages and higher levels of employment that this investment would trigger. The net result is that by 2030, the real income of the average household in the UK is predicted to be £565 per year higher compared to a situation where little is done to reduce the country's emissions.
Greater investment in low-carbon infrastructure would of course boost the UK's low-carbon goods and services sector, which recently saw the likes of Siemens (Hull) and Nissan (Sunderland) make significant investment decisions in the UK's offshore wind and electric car industries. But the positive impacts are predicted to go much wider and affect other major parts of the economy such as the services sector.
Even the energy intensive sector, which employs around 2% of the UK's workforce, could have a lot to gain here if Government policy looked at both at the risks and opportunities facing it. The analysis shows that the sector will need support to cope with energy costs that will be initially higher as the UK starts its transition to a low-carbon economy. But importantly, it also predicts that their gross output will be 1.9% higher in 2030 in a scenario where the UK meets its carbon budgets because an increase in low-carbon infrastructure will result in a greater demand for energy intensive goods.
As in any transition, Government policies will be needed to ensure that the costs and benefits of climate change policies are shared fairly across society. Funding the installation of energy efficiency measures in fuel poor households, by for example using the revenues from the auctioning of carbon emission allowances (estimated to be worth between £2bn and £2.5bn/year in government revenues out to 2020), should be a priority for the next Government.
Of course, today's report is based on a model, not a crystal ball. But it is as pragmatic a model as you can get. It shows that if done right, tackling climate change doesn't have to be a drag on the economy. In fact, it could make the economy stronger. Regardless of its political makeup, the next Government should therefore focus on how we can meet our carbon budgets in a way that maximises economic value for the UK and protects the vulnerable in our society.