Building a Low-Carbon Economy – The UK's Contribution to Tackling Climate Change

Structure of the presentation 1.The 2050 target 2.The first three budgets 3.Wider social and economic impacts of budgets

1. The 2050 target (i)Required global emissions reduction (ii)Appropriate UK contribution (iii)Technologies for meeting required reductions

(i) Required global emissions reduction Required global emissions reduction of 50% GtCO 2 e emissions in GtCO 2 e in 2100 Required global emissions reduction of 50% GtCO 2 e emissions in GtCO 2 e in 2100 What’s changed? Advances in science Actual emissions higher than forecast What’s changed? Advances in science Actual emissions higher than forecast Assessment of damage Decision rule keep temperature change close to 2°C and probability of 4°C increase at very low level (less than 1%) Assessment of damage Decision rule keep temperature change close to 2°C and probability of 4°C increase at very low level (less than 1%) Global trajectories considered Early or later peak (2015 vs. 2030) 3%/4% annual emissions reduction Global trajectories considered Early or later peak (2015 vs. 2030) 3%/4% annual emissions reduction

(ii) Appropriate UK contribution 50% global reduction Burden share Alternative methodologies (contract and converge, intensity convergence, triptych etc.) Equal per capita emissions: ̶ GtCO 2 e total at global level in 2050 ̶ Implies tCO 2 e per capita Burden share Alternative methodologies (contract and converge, intensity convergence, triptych etc.) Equal per capita emissions: ̶ GtCO 2 e total at global level in 2050 ̶ Implies tCO 2 e per capita All GHGs Aviation and shipping included CO 2 e per capita gives a UK reduction of at least 80% in 2050

2006 emissions International aviation & shipping* UK non-CO 2 GHGs Other CO 2 Industry (heat & industrial processes) Residential & Commercial heat Domestic transport Electricity Generation * bunker fuels basis 2050 objective 159 Mt CO 2 e 695 Mt CO 2 e 77% cut (= 80% vs. 1990) (ii) Appropriate UK contribution (cont.): the scale of the challenge

(iii) Meeting required reductions Reducing power sector emissions: Renewables (wind, marine, biomass, solar), nuclear, CCS Reducing power sector emissions: Renewables (wind, marine, biomass, solar), nuclear, CCS Reducing heat emissions: Electric heat (e.g. heat pumps, storage heating) Reducing heat emissions: Electric heat (e.g. heat pumps, storage heating) Reducing transport emissions: Electric/plug-in hybrids Reducing transport emissions: Electric/plug-in hybrids Application of power to transport and heat

Power generation to 2050 (iii)Meeting required reductions (cont.): power sector evolution Emissions intensity to 2050

(iii) Meeting required reductions (cont): UK path to an 80% or more reduction in Wind and nuclear Energy efficiency improvement Renewable heat Electric heat Electric cars/plug in hybrids % of GDP in 2050 Other renewable and CCS

2. The first three budgets (i)Level of budget (factors we have considered, CCC proposals) (ii)Use of credits to meet budget (iii)Feasible emissions reductions

(i) Level of budget: factors considered PROPOSED BUDGETS The path to ambition needed to make path to 2050 technically feasible Early action needed as contribution to global emission containment European Union strategies 30% reduction in GHG by 2020 versus 1990 if global deal at Copenhagen 20% unilateral cut Bottom up sector by sector analysis Technical feasibility Costs of achieving reductions Policies in place or needed to drive emissions reductions

(i) Level of budget (cont.): CCC proposals Intended budget To apply once a global deal has been agreed Interim budget To apply before there is a global deal Should prepare for the Intended budget Intended budget To apply once a global deal has been agreed Interim budget To apply before there is a global deal Should prepare for the Intended budget Intended: 42% below 1990 in 2020 (31% % below 2005) Interim: 34% below 1990 in 2020 (21% below 2005) Intended: 42% below 1990 in 2020 (31% % below 2005) Interim: 34% below 1990 in 2020 (21% below 2005)

(i) Level of budget (cont.): Indicative emissions reductions to 2020 and Average annual reductions of 2.8% from 2007 – 2020 => 42% below 1990 in 2020 Average annual reductions of 3.5% from 2020 => 80% below 1990 in

(i) Level of budget (cont.): scenarios for global aviation emissions 2050 emissions of up to 2.4 GtCO 2 could account for around 10-12% of total allowed GHG emissions and 20% of total CO 2 emissions

(i) Level of budget (cont.): treatment of aviation and shipping Aviation Shipping Precise UK or even European share difficult to define Do not include in formal legal ‘budget’ Committee to monitor progress and policies Global sectoral deal ideal way forward Precise UK or even European share difficult to define Do not include in formal legal ‘budget’ Committee to monitor progress and policies Global sectoral deal ideal way forward EU ETS allocation arbitrary, making reconciliation with national budget inclusion problematic Do not include in formal legal ‘budget’ But allow for in budget setting And Committee to monitor progress and policies EU ETS allocation arbitrary, making reconciliation with national budget inclusion problematic Do not include in formal legal ‘budget’ But allow for in budget setting And Committee to monitor progress and policies

(ii) Use of credits to meet targets Pros Minimise costs Promise of finance flow may help in global deal negotiations Finance flow helps achieve low carbon developing economies Pros Minimise costs Promise of finance flow may help in global deal negotiations Finance flow helps achieve low carbon developing economies Cons Essential for developed economies to drive domestic emissions reductions and illustrate feasibility of low carbon economy CDM type credits (versus notional BAU) can never be as robust as allowances within cap and trade system Cons Essential for developed economies to drive domestic emissions reductions and illustrate feasibility of low carbon economy CDM type credits (versus notional BAU) can never be as robust as allowances within cap and trade system Committee distinguishes between: European Union Allowances (EUAs) in EU ETS Offset credits (e.g. CDM) Committee distinguishes between: European Union Allowances (EUAs) in EU ETS Offset credits (e.g. CDM) Committee position No restrictions on use of EUAs to meet budget Restrictions on use of offset credits No purchase by government to meet Interim budget Purchase may be appropriate to transition between Interim and Intended budgets This strategy is consistent with meeting 2050 target

(iii) Feasible emissions reductions - Power Power Renewable and nuclear Preparation for CCS Required policies ­ EU ETS longer term extension ­ CCS demonstration ­ Price/non-price policies to drive renewables Power Renewable and nuclear Preparation for CCS Required policies ­ EU ETS longer term extension ­ CCS demonstration ­ Price/non-price policies to drive renewables Scenarios 40% emission reduction by 2020 ­ 30% of electricity supply renewable, nuclear in 2020s ­ Less renewables (e.g. 25%) and some nuclear by 2020 Costing 0.2% of GDP Average carbon intensity in 2020 around 300g/kWh, from current 500g/kWh Scenarios 40% emission reduction by 2020 ­ 30% of electricity supply renewable, nuclear in 2020s ­ Less renewables (e.g. 25%) and some nuclear by 2020 Costing 0.2% of GDP Average carbon intensity in 2020 around 300g/kWh, from current 500g/kWh

(iii) Feasible emissions reductions – Power (cont.): CCC position on coal generation No role for conventional coal beyond early 2020s CCS not proven at production scale New coal investment only with full expectation of retrofit in early 2020s Policy options: Requirement for retrofit Carbon price underpin Carbon intensity limits (g/kWh) Policy options: Requirement for retrofit Carbon price underpin Carbon intensity limits (g/kWh)

(iii) Feasible emissions reductions – Energy use in buildings and industry Commercial Technical potential over 30 MtCO 2 in energy efficiency and micro-generation Realistic potential 5- 11MtCO 2. 50% covered by caps Need for wider policy coverage Commercial Technical potential over 30 MtCO 2 in energy efficiency and micro-generation Realistic potential 5- 11MtCO 2. 50% covered by caps Need for wider policy coverage Our approach Technical potential Cost effective potential Realistically achievable potential Our approach Technical potential Cost effective potential Realistically achievable potential Residential Technical potential over 100 MtCO 2 Realistic potential ­ Energy efficiency potential 22 MtCO 2 ­ Renewable heat potential 10 MtCO 2 Policy ­ Supplier Obligation ­ EPCs ­ Appliance standards ­ Renewable heat Residential Technical potential over 100 MtCO 2 Realistic potential ­ Energy efficiency potential 22 MtCO 2 ­ Renewable heat potential 10 MtCO 2 Policy ­ Supplier Obligation ­ EPCs ­ Appliance standards ­ Renewable heat Industrial Technical potential 7 MtCO 2 Realistic potential 4-6 MtCO 2 95% covered by caps Industrial Technical potential 7 MtCO 2 Realistic potential 4-6 MtCO 2 95% covered by caps

(iii) Feasible emissions reductions – Transport Improved carbon efficiency of vehicles Cars: Improved fuel efficiency, electric/plug in hybrids offer potential for 12 MtCO 2 emission reduction by 2020 Vans : Fuel efficiency improvement, electric/plug in hybrids offer potential for at least 3 MtCO 2 in 2020 HGVs: Fuel efficiency improvement offers potential for at least 1 MtCO 2 in 2020 Need ambitious EU targets and domestic implementing mechanisms (information, fiscal levers) Demand side measures: indicative Eco driving: 3 MtCO 2 Enforcing speed limit: 3 MtCO 2 Eco driving: 3 MtCO 2 Enforcing speed limit: 3 MtCO 2 Journey planning and modal shift: 3 MtCO 2 Journey planning and modal shift: 3 MtCO 2 Demand Management: Eddington Review Demand Management: Eddington Review Information and encouragement. Response is inherently uncertain

(iii) Feasible emissions reductions – Agriculture 7% of all UK GHG emissions: 44 MtCO 2 e Preliminary cost curve analysis suggests technical potential of 15 MtCO 2 e: some controversial, some not No policies currently in place to drive emissions reductions; no reductions included in budget calculations Further work needed to: - Identify realistic potential - Design policies

(iii) Feasible emissions reductions - scenarios Criteria: Cost per tonne of carbon saved Measures required on the path to 80% in 2050 Practical given constraints on deliverability Criteria: Cost per tonne of carbon saved Measures required on the path to 80% in 2050 Practical given constraints on deliverability Current detailed policies plus 30% renewable power generation Existing policies plus policy intent Includes measures where there is no current policy or commitment Extended Ambition delivers Interim Budget Intended Budget requires either credit purchase or some Stretch Ambition actions Current Ambition Extended Ambition Stretch Ambition

(iii) Feasible emissions reductions – resource cost of meeting the Intended budget

3. Wider social and economic impacts of budgets Competitiveness Risk in specific sectors accounting for less than 1% of UK GDP and employment Risk can be mitigated by appropriate policy e.g. free allowance allocation, border carbon price adjustments, sectoral agreements Fuel Poverty 1.7 million increase in fuel poverty numbers but mitigation possible at manageable cost Technical: supply intermittency manageable Geopolitical and economic volatility: positive impact of reduced dependence on imported oil and gas Security of supply Fiscal Positive impacts from auctioning (£9 bn p.a.) Negative VED and fuel duty effect (£4 bn p.a.) £500 m p.a. to offset fuel poverty effects Regional Significant difference in pattern of opportunities and challenges: important role for devolved administrations

Abatement opportunities in Wales – Extended Ambition Scenario Sector UK abatement 2020 (MtCO 2 e) Wales abatement 2020 (MtCO 2 e) Wales’s share of UK total Buildings3526% Industry70.45% Road Transport190.95% Agriculture & Forestry* 60.58% Waste*60.36% * Not in Interim budget In achieving required emissions reductions, there will be an important role for devolved policy measures in Wales, for example: Promotion of energy efficiency in buildings and industry Policy framework for microgeneration technologies Develop the policy framework for agriculture and land use In achieving required emissions reductions, there will be an important role for devolved policy measures in Wales, for example: Promotion of energy efficiency in buildings and industry Policy framework for microgeneration technologies Develop the policy framework for agriculture and land use

Wider economic and social impacts in Wales Fuel poverty impacts Economic impacts Potential risk of competitiveness loss resulting in output and employment impacts in Wales of up to 2.5% of GVA and 1.4% of employment Employment impacts may be localised given the concentration of certain sectors in Wales In practice, we do not expect these impacts to ensue as any risk can be mitigated by appropriate policy Opportunities for growth are likely to exist in low-carbon sectors Carbon budgets are likely to increase the number of households in fuel poverty in Wales by around 130,000 in 2022 Energy efficiency measures could reduce this impact by around 30,000 households Mitigation of the impact is possible at a manageable cost Welsh Assembly Government has a role to play

Conclusion 80% cut in GHG emission by 2050 relative to 1990: all GHGs, aviation and shipping included Unilateral 34% cut in GHGs by 2020 relative to 1990 (21% relative to 2005) 42% cut in GHGs by 2020 relative to 1990 (31% relative to 2005) after global deal is achieved 34% cut predominantly through domestic emissions reduction 42% through domestic emissions reduction and credit purchase 2020 cost less than 1% of GDP 80% cut in GHG emission by 2050 relative to 1990: all GHGs, aviation and shipping included Unilateral 34% cut in GHGs by 2020 relative to 1990 (21% relative to 2005) 42% cut in GHGs by 2020 relative to 1990 (31% relative to 2005) after global deal is achieved 34% cut predominantly through domestic emissions reduction 42% through domestic emissions reduction and credit purchase 2020 cost less than 1% of GDP