Editor’s Pick | The costs of the net zero transition

This article was originally published in Energy Spectrum Issue 705 on 9 March 2020. For recent news and analysis on the energy market, find out more about our weekly publication, Energy Spectrum, here.

As the scale of the net zero challenge becomes clearer, Cornwall Insight Non-Executive Director Sonia Brown considers how the UK is going to pay for it.

I would like to begin, if I may, with a quote.

“The eyes of all future generations are upon you. And if you choose to fail us, I say – we will never forgive you.” – Greta Thunberg UN Climate Summit, New York, 23 September 2019.

For this International Women’s Day, I thought it was only fitting to share the thoughts of one of the world’s youngest female leaders. Whether you agree with her tactics (or not), it is indisputable that Greta’s boldness and leadership has helped pushed the issue of climate change more into the spotlight and put pressure on world leaders to act.

Her message to policymakers is clear – as Greta puts it: “we need to act as if our house is on fire, because it is.”

EU aims for 2050

There are signs that world leaders are beginning to respond. In June 2019, the UK was the first major economy to commit to legally binding target of net zero carbon emissions by 2050. The EU also, just this week, also unveiled proposals to be carbon neutral by 2050. Figure 1 sets out the European Commission’s proposed pathway to the 2050 target.

The scale of the challenge of reconfiguring our modern economies to climate change is vast. To meet our targets, we must first cure our addiction to fossil fuels – something that will require significant investment in new energy infrastructure. HM Treasury has identified almost £200bn of energy sector infrastructure investment for the next 10 years. Other estimates suggest that the total cost for achieving the net zero target in the UK will come to £700bn by 2050.

This is all assuming that we continue to aim for the 2050 targets, which have come under significant criticism from activists for not being ambitious enough. Greta herself has branded the EU’s plans as “surrender”. In her words: “When your house is on fire, you don’t wait a few more years to start putting it out”.

How will we pay for this?

As the public experience the increasingly serious impacts of climate-related events, such as the recent bushfires in Australia, pressure on governments to implement more ambitious policies will no doubt increase, increasing the scale of the investments required.

How will we fund the cost of this? In the UK, currently, much of the burden is picked up by the consumer, through their energy bills. It is estimated that around £10bn a year is being invested to support clean technology, with around £5.5bn being paid for through a levy on bills, equating to around £186 per customer.

However, this way of funding our transition to a low carbon economy is inherently regressive. A levy on energy bills disproportionately puts the burden on the poorest in our society, as poorer households pay a significantly higher proportion of their income on energy bills compared to wealthier customers.

The net zero review

The government is thinking about this. In early November, the Treasury launched the net zero review, to assess how the UK can manage the transition and the Treasury has said that this will include looking at “how costs may be distributed across different groups to create a fair balance of contributions”.

This question is particularly relevant given both the high (and potentially increasing) costs of adapting to climate change and the increasing challenge of poverty in our society. The Child Poverty Action Group has highlighted the increasing proportion of poor children in working families and the increasing proportion of poor children being particularly young. Use of food banks, a service that overwhelmingly serves poorer parts of society, has increased dramatically and consistently in the past decade.

A just transition?

Our challenge is to find a fairer way of managing this transition. One way may be to means test the environmental component of household energy bills. However, this is likely to be complicated and costly to set up.

Instead, the government could consider shifting the burden of funding our transition towards income tax: a ready-made progressive system. HMRC has estimated that a 1p rise in the basic

rate of income tax could raise £4.5bn a year in 2020-21, rising to £5.6 billion in 2022-23. A rise in income tax of around 2p in the pound could therefore more than make up for the contribution energy customers make to the environment.

This view appears to be under consideration as, on 7 February, the BBC reported the government is looking to shift clean energy costs to taxpayers rather than energy consumers.

A government spokesperson told the BBC: “We are definitely considering the way that costs are distributed. The Treasury is looking at the costs of transition to net zero emissions by 2050. “This will include how costs may be distributed across different groups to create a fair balance of contributions.”

Of course, this would not completely alleviate the burden on poorer households, who may have to pay more through taxes. However, the nature of the income tax system means that the money will be raised in a more progressive way, with estimates showing that low income workers could save £100 a year compared to paying through their energy bills.

This is a crucial time for the UK. To not act will both exaggerate the political challenge of levelling up the poorer parts of our society – and put at risk the climate challenge of preventing our house from burning down.

If you have enjoyed reading Sonia’s views and want to read about the latest developments in the energy market, please contact us for a month’s trial of Energy Spectrum.

Energy Spectrum is a weekly publication covering all of the key policy, regulatory, market and transactional developments across the energy sector. It offers a timely, insight-driven overview of the need-to-know news and changes in the energy sector. Contact the Editor, Nick Palmer to request a trial on 01603 604400 or click here.

Related thinking

E-mobility and low carbon

Ending the ICE age: EV Country Attractiveness Index Findings

Over the past decade, electric vehicles (EVs) have become increasingly popular across many of the world’s major economies, with both the eco-conscious and average consumer adding to the rise in sales. This phenomenon has not just appeared from thin air, however, as international climate agreements, national net zero plans, EV...

Net zero corporates and ESG

Help us understand your business decarbonisation challenges

Are you a large business impacted by the challenge of increasing energy costs and decarbonisation targets? If the answer is yes, then we’d love your help to find out more about the challenges you are facing. We recently published an insight paper on the challenging economic climate that businesses are...

Low carbon generation

Understanding the evolution of the Irish electricity markets

The Irish electricity sector has undergone significant change in recent years. The Integrated Single Electricity Market (I-SEM) arrangements introduced in 2018 fundamentally transformed the market framework to maximise competition, facilitate electricity wholesale trading, and incentivise the development of low-carbon generation sources. In parallel the physical system continues to evolve rapidly....

Energy storage and flexibility

Waiting to connect: the problems and solutions for network connection queues (Part 2)

Network connection queues continue to be a notable topic of interest as many generators face significant delays to project development – an issue that is directly conflicting with net zero ambitions and recent focuses on strengthening domestic energy supplies. In Part 1 of our two-part series on connection queues we...

Energy storage and flexibility

Waiting to connect: the problems and solutions for network connection queues

The number of grid applications has risen significantly in recent years, resulting in increased pressure on the electricity networks to facilitate new connections. In its Energy Security Strategy, the UK government set out ambitions for 95% of electricity to be sourced from low carbon generation by 2030, and for the...

Low carbon generation

62% of respondents think there is a 2 in 5 chance the GB electricity system will be decarbonised by 2035

Our latest Net zero transition: Future of electricity markets online training course was held on 15 – 17 November, where we asked delegates for their thoughts on several aspects of the future of the GB electricity market. The polls can be seen in our newest REMA portal - a hub...

Low carbon generation

Energy System Reform: Ofgem shares plans for Britain’s energy system

Against the backdrop of record high and volatile energy prices, Ofgem set out on 8 July its view on key aspects of the GB energy system where it considers significant reform is required to deliver a resilient, low cost, low carbon energy sector. Recent developments in the energy market, such...

Energy Market Design

Can we fix the wholesale energy market this winter to lower prices and should we want to? 

The Review of Electricity Market Arrangements (REMA) is intended to discuss and decide on appropriate market arrangements for 2035 in a Net Zero, low marginal cost, renewables-dominated market. It is unlikely it has the scope or capability to intervene in the market arrangements ahead of this winter. Therefore, some new interventions...