Committee on Climate Change

Impacts of the 2009 recession

Analysis in the Committee’s 2010 progress report suggests that the economic recession was the main cause for the large fall in CO₂ emissions in 2009. The June 2010 Budget projections from the Office of Budget Responsibility (OBR) suggest that by 2015 GDP will be around 10% lower than projected prior to the recession.

The impacts of the recession were considered in relation to: 

• Emissions in the non-traded sector
• The carbon price and investments in the traded sector
• Implications for carbon budgets

Impact of the recession on emissions in the non-traded sector

The non-traded sector includes direct emissions from buildings (i.e. non-electricity) including residential and most of the commercial sector, and transport. It also includes non-energy intensive industry not included within the EU Emissions Trading Scheme (EU ETS) and most non-CO₂ emissions (e.g. from agriculture and waste).

Emissions in the non-traded sector are linked to economic growth as well as energy prices and other drivers (such as population). As part of its work for the 2009 progress report, the Committee used the DECC Energy Model and the Cambridge Econometrics model (MDM-E3) to explore the impact on emissions in the event of recession, as well as taking into account updated assumptions about other drivers (for example, outlook for fuel prices and policy impacts).

The analysis showed that emissions will fall as a result of the recession, although there is uncertainty around the magnitude of impact. For example, in the Cambridge model, cumulative emissions over the first budget period fell by around 75 MtCO₂ compared to the pre-recession projection, whereas in the DECC model the overall impact is a 40 MtCO2 reduction. Our assessment based on outturn emissions in 2009 is within the range of these projections.


In our 2011 progress report we show that non-traded sector emissions rose by 3% in 2010, but given the significant recession impact in 2009 remain below the legislated level of the first carbon budget. Given uncertainties around the incorporation of recession impacts in the DECC Energy Model we commissioned Cambridge Econometrics to assess the DECC Model and to provide alternative emission projections. These projections suggest that the impact of updated inputs (e.g. to take account of most recent outturn data) could mean that economy-wide emissions in 2020 could be up to 40 MtCO₂ lower than the DECC Model projects.

Impact of the recession on the carbon price and investments in the traded sector

The traded sector covers power generators and those energy-intensive firms included in the EU Emissions Trading Scheme (EU ETS).  The EU ETS is the EU’s carbon trading system. It works by capping the carbon emissions of energy-intensive firms, who can then reduce emissions and sell allowances, or emit beyond their cap and purchase allowances in the market. 

Output in energy-intensive sectors has fallen as a result of the recession (actual emissions from firms in the EU ETS fell by 12% in 2009, both in the UK and at the EU-level). In 2010 gross UK traded sector emissions rose by 2%, with gross EU emissions up 3%. Emissions remain below the UK budget level and EU cap given the 2009 recession impact. This has had an impact on the strength of the EU ETS price signal. 

In December 2008 we projected a 2020 carbon price of €56/tCO₂. However, prices fell during the recession, and prices in 2010 averaged around €14/tCO₂. Many market commentators now project a 2020 price around €30, in line with the European Commission projected price of €30. 

This low (and volatile) carbon price could undermine incentives for required investments in low-carbon technologies in the traded sector. The Government has recognised this and announced a carbon price underpin. This could complement wider electricity market reforms, as discussed in our power sector analysis, and could strengthen incentives for low-carbon investment in other sectors, subject to competitiveness and affordability concerns being addressed. The Government has announced a broadly appropriate pathway for the underpin, reaching £30/tCO2 in 2020, rising to £70/tCO2 in 2030.

Implications for carbon budgets

Our analysis indicates that the recession has reduced emissions as a result of the decline in economic activity. This could give a false impression of progress. There is a risk that it may be possible to meet the first budget purely due to lower economic growth; at the expense of not implementing necessary measures required to put the UK on track in the longer-term.

This demonstrates the need to focus on more than just emissions reductions per se as a measure of UK progress against carbon budgets. We also need to maintain our ambitious implementation of measures. Recognising that this may lead to more emissions reductions than we envisaged in our December 2008 report, when we recommended the level of budgets, the UK should aim to outperform the first three carbon budgets.

The new analysis from Cambridge Econometrics reinforces the conclusion that implementation of measures together with the impacts of the recession would lead to outperformance of the first three carbon budgets.

The Committee has further recommended, in its 4th Budget Report, that the Government tightens the second and third carbon budgets in line with the Intended budget for the non-traded sector. As the EU tightens the EU ETS cap, it should move in full to the Intended budget across the traded and non-traded sectors.

The Government has argued that it would be premature to tighten the budget now given envisaged EU negotiations around increasing ambition. In the absence of tightening the aim should be to implement abatement measures in line with our indicator framework.