Climate change policy in the United Kingdom

Alex B owen and J ames R ydge

P olicy paper

A ugus t 2011

C entre for C limate C hange E c onomic s and P olic y

G rantham R es earc h Ins titute on C limate C hange and the E nvironment

The Centre for Climate Change Economics and Policy (CCCEP) was established in 2008 to advance public and private action on climate change through rigorous, innovative research. The Centre is hosted jointly by the University of Leeds and the London School of Economics and Political Science. It is funded by the UK Economic and Social Research Council and Munich Re. More information about the Centre for Climate Change Economics and Policy can be found at: http://www.cccep.ac.uk The Grantham Research Institute on Climate Change and the Environment was established in 2008 at the London School of Economics and Political Science. The Institute brings together international expertise on economics, as well as finance, geography, the environment, international development and political economy to establish a world-leading centre for policy-relevant research, teaching and training in climate change and the environment. It is funded by the Grantham Foundation for the Protection of the Environment, which also funds the Grantham Institute for Climate Change at Imperial College London. More information about the Grantham Research Institute can be found at: http://www.lse.ac.uk/grantham/ This policy paper is intended to inform decision-makers in the public, private and third sectors. It has been reviewed by at least two internal referees before publication. The views expressed in this paper represent those of the author(s) and do not necessarily represent those of the host institutions or funders.

Unclassified ECO/WKP(2011)000 Organisation de Coopration et de Dveloppement conomiques Organisation for Economic Co-operation and Development ___________________________________________________________________________________________

English - Or. English ECONOMICS DEPARTMENT

CLIMATE-CHANGE POLICY IN THE UNITED KINGDOM ECONOMICS DEPARTMENT WORKING PAPERS No. 886

By Alex Bowen and James Rydge

All Economics Department Working Papers are available through the OECD internet website at www.oecd.org/workingpapers.

Document complet disponible sur OLIS dans son format d'origine Complete document available on OLIS in its original format

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ABSTRACT/RESUM

Climate-change policy in the United Kingdom

The United Kingdom started to pursue policies to reduce greenhouse gas emissions at a relatively early date and now has a comprehensive set of measures in place. It has set clear targets for emission reductions consistent with international goals of limiting global warming and has pioneered statutory underpinning of target-setting. On the international stage, it has been an active protagonist of a global deal to limit human-induced climate change. The new Government has endorsed the direction of previous policies in this area and is introducing further measures, despite heavy fiscal pressures. The United Kingdom is likely to reduce emissions by more than its near-term domestic targets and its target under the Kyoto Protocol, outperforming many OECD countries in the latter respect. But some of the success has been due to one-off factors such as the dash for gas, reductions in non-CO2 greenhouse gases in the 1990s and the recent recession, rather than explicit climate-change policies. The pace of decarbonisation of the power sector has been slow and the spread of renewable energy technologies limited. Implicit carbon prices vary across sectors, and should be harmonized to increase the cost efficiency of policy. The unevenness partly reflects the way in which policies have proliferated and overlap and a simplified structure would be desirable. A stepchange in the pace of emission reductions is required to put the UK on the path towards its ambitious 2050 target. Given the central role of the EU emissions trading scheme, a key element of the UK strategy should be to seek tighter quotas within the EU scheme. Preparations to adapt to climate impacts also need to be stepped up, focusing on the provision of more information, better risk-assessment frameworks and more advanced metrics for monitoring and evaluation of adaptation planning.

This paper relates to the 2011 Economic Survey of the United Kingdom (www.oecd.org/eco/surveys/uk)

JEL classification: Q54, Q27, Q58

Keywords: climate change policy; renewable energy policy; policy interaction; policy overlap; mitigation; adaptation.

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La politique climatique au Royaume-Uni

Le Royaume-Uni, qui a entrepris dadopter des mesures de rduction des missions de gaz effet de serre une date relativement prcoce, met aujourdhui en uvre une panoplie complte de mesures. Il sest fix des objectifs prcis de rduction des missions, cohrents avec les objectifs internationaux de limitation du rchauffement plantaire, et a fait uvre de prcurseur en les adossant un socle rglementaire. Sur la scne internationale, il a jou un rle actif en faveur dun accord mondial visant limiter le changement climatique dorigine anthropique. Le nouveau gouvernement a repris son compte les orientations des politiques antrieures dans ce domaine et il introduit actuellement de nouvelles mesures, malgr la rigueur des contraintes budgtaires. Le Royaume-Uni devrait atteindre un taux de rduction de ses missions suprieur celui de ses objectifs nationaux court terme et de son objectif au titre du Protocole de Kyoto, et mme dpasser nombre de pays de lOCDE quant la ralisation de ce dernier objectif. Mais une partie de ce succs sexplique, non par des mesures explicites de politique climatique, mais par des facteurs ponctuels comme la rue vers le gaz et les rductions des missions dautres gaz effet de serre que le CO2 dans les annes 90 et la rcession rcente. Le rythme de dcarbonisation du secteur de llectricit a t lent et la diffusion des technologies des nergies renouvelables est encore limite. Les prix implicites du carbone varient selon les secteurs et devraient tre harmoniss pour une meilleure efficacit conomique. Ces disparits refltent la prolifration des mesures

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et leur chevauchement et il serait ncessaire den simplifier la structure. Un changement radical dans le rythme de rduction des missions est ncessaire pour engager le Royaume-Uni sur la voie de la ralisation de lobjectif ambitieux quil sest fix lhorizon 2050. tant donn le rle central du systme communautaire dchange de quotas dmission, la stratgie du Royaume-Uni devrait en particulier viser ladoption de quotas plus rigoureux dans le cadre du systme communautaire. Les efforts dadaptation aux impacts climatiques doivent aussi tre renforcs, en sattachant dvelopper linformation, amliorer les cadres dvaluation des risques, et affiner les outils de mesure utiliss pour le suivi et lvaluation de la planification des mesures dadaptation.

Ce document se rapporte ltude conomique du Royaume-Uni 2011 (www.oecd.org/eco/etudes/uk)

Classification JEL: Q54, Q27, Q58

Mots cls : politique du changement climatique; politique des nergies renouvelables ; interactions des politiques; chevauchement des politiques; attnuation ; adaptation.

Copyright OECD, 2011. All rights reserved. Application for permission to reproduce or translate all, o r p art of, t his material s hould b e m ade t o: H ead o f P ublications S ervice, O ECD, 2 rue Andr-Pascal, 75775 PARIS CEDEX 16, France.

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TABLE OF CONTENTS

C L I M AT E -C HANG E POL I CY I N T HE UNI T E D K I NG DOM ........................................................... 6

Rising to the climate challenge ............................................................................................................... 6 Recent progress on emissions has been significant but a step change is needed to achieve ambitious targets.................................................................................................... 6

Emissions have fallen rapidly .............................................................................................................. 6 Emission reduction targets are ambitious ........................................................................................... 10 Renewable and nuclear energy plays a less prominent role in the United Kingdom ............................ 12 Research, development and technological innovation ........................................................................ 14

Major policy instruments ...................................................................................................................... 16 The overall policy framework is complex, encompassing several different instruments and objectives ................................................................................................................ 16 Carbon pricing is complex, with numerous overlapping instruments .................................................. 19 Promoting clean energy..................................................................................................................... 24

The governance and long-term credibility of climate-change policies .................................................... 29 Sector-specific policies ......................................................................................................................... 30

Homes ...........................................................................................