Policy & Economics
The challenges we face are unprecedented. We need strong decisive action now to rewire our economy to ensure that the dual problems of climate change and energy security can be tackled. Fortunately, as detailed, in other chapters of this report in making such a transition there is much potential for creating jobs (Bird, 2009; Jungjohann & Jahnke, 2009; Forrest & Wallace, 2010), increasing energy security and improving livelihoods (Abdallah et al., 2009). A world without fossil fuels can be better in many ways. However, achieving such a transition will not be easy and will require drastic policy interventions at both the international and national level.
International policy frameworks
At the international level, the crucial first step is to sign a global agreement aimed at reducing temperature rise to below 2°C, and setting a cumulative carbon budget that provides us with a sufficiently high chance of meeting this goal. The exact policy mechanism could come later but ensuring that all countries are on board with this overarching target is critical to changing the direction of the global economy. Another key step is achieving global agreements on ending deforestation, and assuring funding for research and development and an adaptation fund for those hardest hit by climate change. Doing so could reduce the risks of climate change significantly.
A key decision then needs to be taken over which of three road maps should be taken.
Road map 1: One-price-for-all
The first road map sees an international agreement as an opportunity to solve the fundamental problem that carbon is not priced properly, and to design a global system which ensures that the true cost of fossil fuels is explicitly included in the pricing mechanism everywhere in the world. It can be seen as a one-price-for-all solution at a global level and could be based on several global scheme proposals such as Cap & Share, Kyoto2 or a globalised, harmonised carbon tax. The existence of a global framework will mean a slightly reduced role for national governments who will no longer have to design a policy mechanism to price carbon. Instead, they will have to design a range of policies to complement the global agreement, balancing the winners and losers from such a scheme and ensuring that the transition to the new agreement is as smooth and as painless as possible.
Road map 2: An international framework with national action initiatives
The second route is far more focused at the national or regional level with an international agreement providing a general framework that allocates the carbon cuts required by each country, but allows national governments to decide which is the best policy solution for pricing carbon and for achieving these cuts. The framework is there to bind countries together and ensure that all are working towards a common purpose, but does not define or impose one particular policy solution. A key decision in such a framework approach is how the cuts required are allocated between countries and across time, with Contraction & Convergence (C&C) the most commonly-known method.
The various global one-price-for-all policies may seem desirable, but appear unlikely to be implemented in the near future. An international agreement based upon an international framework is therefore preferable. Such an agreement would provide flexibility, both between countries and over time, and allows different policies to be tried and tested in different regions and circumstances, while at the same time binding countries together and ensuring that all are working towards a common goal.
Road map 3: Regional carbon pricing schemes
Another possible road map, and one that looks more likely after Copenhagen, is for countries who wish to decarbonise rapidly to forego a global framework – aimed either at an internationally-harmonised carbon pricing mechanism or at determining national carbon budgets – and rather to join together into blocs with other like-minded countries.
These blocs would then set a common cap, reduction targets and rules, and use border adjustment taxes and rebates to prevent unfair competition from countries with laxer carbon reduction targets. Powerful blocs could adopt a particular policy for determining carbon budgets or prices within the bloc, and could also include an international redistribution mechanism to benefit poorer nations. This could create a large trade bloc, incentivising other nations to join so as not to be excluded by the border adjustment tax (Douthwaite, 2009).
National policy frameworks
At the national level, and assuming that no international carbon pricing scheme is implemented, the UK should complement the European Union’s Emissions Trading System (EU ETS) and the CRC Energy Efficiency Scheme by introducing a scheme aimed at reducing emissions further. Cap & Share, TEQs and carbon tax schemes all provide viable proposals and the answer may actually lie in combining a firm cap with a tax scheme to provide a certain environmental outcome with a guaranteed floor price for investors. Over time such a scheme may develop and encapsulate the whole economy with the EU ETS actually feeding into it.
It is also clear that simply internalising the price of carbon will not solve all our problems (Green New Deal Group, 2008; WWF, 2009). We are “locked” into the present technologies and processes and more targeted interventions are required to put the economy on a more sustainable trajectory. A Green New Deal is needed to provide the investment required in large-scale renewable energy technologies and energy efficiency improvements. Public money should be used as a guarantor, and innovative financial arrangements have to be developed, in order to harness the private sector funds necessary to finance such an enormous investment programme.
At the same time, we need to develop new and better policy support mechanisms in the renewable electricity and renewable heat sectors. The electricity sector offers an opportunity for rapid decarbonisation in many areas and, with the right policy support, we could go some way to achieving this goal. The new banding of the renewable obligation and Feed-in Tariff for renewable capacity under 5MW will lead to increased investment in renewable generation. In the heat sector, the innovative Renewable Heat Incentive (RHI) currently out for consultation aims to make Britain world-leading in renewable heat. This is projected to bring 78TWh of renewable heat online by 2020 saving 17Mt of CO2 (NERA Economic Consulting 2009). Combined with policies aimed at tackling skills shortages and non-market barriers, these should provide a fair incentive for the nascent renewable heat industry to develop rapidly.
Furthermore there is significant potential for smart meters to allow variable pricing to drive both, shifts in, and reductions in, the demand profile. Finally, we need to ensure that the most vulnerable elements of society are supported and protected during the transition, in particular that an increase in fossil fuel prices is accompanied with a comprehensive retrofitting campaign to reduce the dangers of fuel poverty.
The challenge rests on the Government to implement change and individuals to demonstrate willingness for change. The policy solutions are there. We can achieve such a transition; such a path is possible. We just have to have the courage to take it.
Abdallah, S. et al. (2009) The Happy Planet Index 2.0: Why good lives don’t have to cost the Earth, London: nef.
Bird, J. (2009) Green jobs: Prospects for creating jobs from offshore wind in the UK, London: Institute for Public Policy Research (ippr).
Douthwaite, R. (2009) “Cap & Share”, presentation given to the zerocarbonbritain2030 Policy, Actions & Economics seminar, 30 September 2009 [unpublished].
Forrest, N & J. Wallace (2010) “The Employment Potential of Scotland’s Hydro Resources”, Nick Forrest Associates, September 2009. Available at: http://www.scotland.gov.uk/Resource/Doc/299322/0093327.pdf [Live: March 2010].
Green New Deal Group (2008) A Green New Deal: Joined up policies to solve the triple crunch of the credit crisis, climate change & high oil prices, London: nef.
Jungjohann, A. & B. Jahnke (2009) "Europe: Creating new jobs with renewable energies", 19 May 2009, Heinrich Böll Stiftung. Available at: http://www.boell.org/downloads/Creating_Green_New_Jobs_with_Renewable_Energies1.pdf [Live: March 2010].
NERA Economic Consulting & AEA (2009) “The UK Supply Curve for Renewable Heat”, Study for the Department of Energy and Climate Change, July 2009, URN 09D/689. Available at: http://www.nera.com/image/PUB_Renewable_Heat_July2009.pdf [Live: March 2010].
WWF (2009) Blueprint Germany: A Strategy for a Climate Safe Germany, Berlin: WWF.