Committee on Climate Change

The Cost of Meeting Carbon Budgets

The Committee has estimated the costs of meeting carbon budgets at under 1% of GDP, in its analysis on the first three carbon budgets and on the fourth carbon budget. In December 2008, the Committee estimated that the cost of meeting the 2050 target would be between 1-2% of GDP.  Some of the specific measures to reduce emissions will result in cost savings (e.g. energy efficiency improvements in residential and commercial buildings).

The Committee argues that this is a cost that should be accepted given the costs and consequences associated with dangerous climate change. Delaying action would lead to an increase in costs as it would require a greater reduction in emissions in future, when costs are expected to be higher. Early action also precludes ‘locking in’ to high-carbon assets, which would be stranded in a world of increasingly stringent carbon constraints.

Lord Nicholas Stern’s review into the Economics of Climate Change advised that if climate change was not tackled it could cost 5-10% of GDP by the end of the century.

Investment Requirements of Meeting Carbon Budgets

Investment costs in energy will increase to meet carbon budgets, given the relative capital intensity of low-carbon technologies. In the December 2010 report the Committee estimated investment costs to meet carbon budgets reaching up to £16 billion annually by 2030. These are concentrated in electricity generation (£10 billion annually by 2030), and compare to £7 billion annually in energy (£2 billion in electricity) in the early 2000s. Economy-wide investment was around £200 billion annually prior to the recession.

This order of magnitude of investment costs raises questions about appropriate market arrangements, and the ability of capital markets as currently configured to provide required finance. Given the order of magnitude of required investments, it will be important that new market arrangements reduce risks (through long-term contracts) and that the Green Investment Bank is allowed to borrow money as soon as possible.

Opportunities for providing new ‘green jobs’ and for wider benefits

Meeting carbon budgets and building a low-carbon economy presents the UK with significant economic opportunities as well as challenges.

The global market for environmental goods and services is already worth £3 trillion, and is projected to grow to £4.3 trillion in 2015.  This may be an opportunity to become a leader in the production of low-carbon goods and services such as offshore wind engineering, low-carbon vehicles, CCS, and financial and consulting services. 

There are also likely to be co-benefits from policies to reduce carbon emissions:

• Power and transport decarbonisation will reduce reliance on imported gas and oil from countries where there may be a high degree of geopolitical risk, therefore reducing risks of supply interruption and price volatility or the possibility of sustained high prices.
• Mitigation measures can reduce local air pollution (e.g. through ultra low-carbon vehicles, renewable electricity generation which does not involve combustion, etc). A recent Defra report estimated that climate change policies could yield air pollution benefits worth £15-40 billion (net present value) in the UK by 2050.
• Recent work on Health and Climate Change has also highlighted the air quality benefits on health, and showed that substantial health benefits (including reduced cardiovascular disease, depression, diabetes and dementia) could be gained from more walking and cycling and less motor vehicle use. Read more about the impacts of climate change.