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.

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