Climate Change: Climate Change Bill and Policy Overview Robin Mortimer Office of Climate Change June 2007

2 Context and background Rationale for climate change legislation Key elements of the Bill Next steps on Bill Analytical basis of wider Government strategy

3 Global temperatures have been rising – particularly over the last few decades Global average surface temperature increased over the last hundred years ( ) by 0.74  C with particularly strong warming since the 1970s

4 The effects are shown by glaciers retreating… There was a widespread retreat of mountain glaciers in non-polar regions during the 20 th Century Figure from Oerlemans, J., Extracting a climate signal from 169 glacier records, Science, 29, 308, , Photo credit: Lonnie Thompson, OSU For example, Qori Kalis, Peru

5 … and sea levels rising Global mean sea level has risen by 12-22cm during the 20 th Century Figure taken from IPCC Fourth Assessment Report (2007)

6 1°C2°C5°C4°C3°C Sea level rise threatens major cities Falling crop yields in many areas, particularly developing regions Food Water Ecosystems Risk of Abrupt and Major Irreversible Changes Global temperature change (relative to pre-industrial) 0°C Falling yields in many developed regions Rising number of species face extinction Increasing risk of dangerous feedbacks and abrupt, large-scale shifts in the climate system Significant decreases in water availability in many areas, including Mediterranean and Southern Africa Small glaciers disappear – water supplies threatened in several areas Extensive Damage to Coral Reefs Extreme Weather Rising intensity of storms, forest fires, droughts, flooding and heat waves Possible rising yields in some high latitude regions The effects could transform the physical and human geography of the planet… The risk of serious irreversible impacts increases strongly as temperatures increase Stern Review (2006)

7 …and will hit the poorest hardest Graphic: IPCC Fourth Assessment Report (2006). Examples: Stern Review (2006) – these are illustrative impacts only, drawn from a range of studies – there are unavoidable uncertainties about the exact impacts. A 2 o C rise: crop yields will fall by 5–10% in Africa A 2 o C rise: million more malaria cases in Africa A 3 o C rise: 1–3 million more die from malnutrition A 3 o C rise: 20-50% of species will face extinction Impact on our development goals:

8 Climate models demonstrate that natural factors alone are not sufficient to explain the pattern of global temperatures observed over the last 150 years Climate models can only reproduce the global mean temperature record over the last 150 years by including both natural and man-made factors Natural factors only Natural and man-made factors Figures taken from the IPCC TAR The figure shows a comparison between observed (red) and modelled (green) global mean surface temperature. On the left, only natural factors (volcanoes, solar variations) are included in the model. On the right, both natural and man- made factors are included.

9 Stern Review (2006); ‘ppm’ = parts per million concentrations in the atmosphere. The global challenge is to stabilise global emissions at levels which avoid the risk of dangerous climate change

10 Low carbon electricity is already possible – and new technologies will be key to our longer term success Current Emerging Future Renewables & Nuclear Nuclear fusion Carbon capture and storage (CCS) ‘Even with very strong expansion of the use of renewable energy …extensive carbon capture and storage will be necessary’* * Stern Review (2006). This is not an exhaustive list of current or future technologies.

11 For heating, decentralised power generation and energy efficiency will drive decarbonisation Traditional insulation Zero carbon buildings Community Combined Heat and Power (CHP) Demand and supply of win-win energy efficiency measures could be improved through regulation and better take-up incentives Current Emerging Future This is not an exhaustive list of current or future technologies.

12 In transport, we will need a transition to technologies that are just emerging now Petrol hybrids & bio-fuels Decarbonised fuel supply? Electric/ hydrogen ? Innovation is required to deliver low-carbon alternatives – especially in aviation where global emissions are estimated to grow three-fold in absolute terms by 2050* < 2050: Hybrids, bio-fuels, fuel efficiency of conventional vehicles and some electric/hydrogen > 2050: Totally decarbonised through electric/hydrogen? * Stern Review (2006). This is not an exhaustive list of current or future technologies. Current Emerging Future

13 The costs of stabilising the climate are manageable – delay would be dangerous and much more costly Delay is dangerous because damages from climate change rise disproportionately with temperature. Adaptation is crucial to respond to unavoidable climate change There are limits to how much it is possible to adapt to the worst effects. 5% GDP Income losses if we do nothing: market impacts only 20% GDP Income loss including non-market impacts, risk and equity 1% GDP Costs of mitigation to stabilise emissions at 550ppm by 2050 vs Stern Review (2006)

14 Context and background Rationale for climate change legislation Key elements of the Bill Next steps on Bill Analytical basis for wider Government Strategy

15 Rationale for the UK Climate Change Bill To strengthen the international and domestic policy framework through: maximising the UK’s leverage internationally; creating a framework to improve carbon management in the UK.

16 Maximising international leadership Experience shows that there is no realistic prospect of getting developing countries on board unless developed countries set credible targets and take action to meet them – demonstrating how this can be consistent with economic and social objectives Proposals in the Bill are consistent with new European emissions reduction targets of 20% by 2020 (and 30% if there is a new global agreement), and at least 60% by 2050.

17 Improving carbon management in the UK UK greenhouse gas emissions (MtCO 2 e) UK GDP per capita, (US$) Source: OECD

18 Improving carbon management in the UK (cont) There is a strong case for unilateral UK action: – To provide business certainty in how carbon will be constrained so they can plan and invest with more confidence; – to reduce the risk of “locking-in” high carbon technologies, resulting in greater long-run costs; – to incentivise energy efficiency savings (with potential economic and social benefits). But equally there needs to be flexibility within the system to ensure the UK can respond to the significant changes internationally or domestically; and avoid risk to competitiveness.

19 Context and background Rationale for climate change legislation Key elements of the Bill – Targets and Budgets – Committee on Climate Change – Enabling Powers – Reporting Next steps on Bill Analytical basis of wider Government strategy

20 Key elements of the Bill (1) Targets and budgets Enabling Powers Committee on Climate Change Reporting Long and medium term targets: CO 2 emission reductions of 60% by 2050 and 26-32% by 2020, through action in the UK and abroad. Five-year carbon budgets to set out our trajectory. An independent body to advise Government on its carbon budgets and where least cost savings could be made. To introduce emissions trading schemes more quickly and easily. The Committee on Climate Change to report annually on progress towards targets and budgets. Government to report at least every 5 years on adaptation.

21 Carbon budgets explained 2 nd budget period 3 rd budget period 1 st budget period See below for detail Average annual emissions during: -2 nd budget period -3 rd budget period -1st budget period Average annual emissions required during budget period

22 Key elements of the Bill (2) Targets and budgets Enabling Powers Committee on Climate Change Reporting Long and medium term targets: CO 2 emission reductions of 60% by 2050 and 26-32% by 2020, through action in the UK and abroad. Five-year carbon budgets to set out our trajectory. An independent body to advise Government on its carbon budgets and where least cost savings could be made. To introduce emissions trading schemes more quickly and easily. The Committee on Climate Change to report annually on progress towards targets and budgets. Government to report at least every 5 years on adaptation.

23 Key elements of the Bill (3) Targets and budgets Enabling Powers Committee on Climate Change Reporting Long and medium term targets: CO 2 emission reductions of 60% by 2050 and 26-32% by 2020, through action in the UK and abroad. Five-year carbon budgets to set out our trajectory. An independent body to advise Government on its carbon budgets and where least cost savings could be made. To introduce emissions trading schemes more quickly and easily. The Committee on Climate Change to report annually on progress towards targets and budgets. Government to report at least every 5 years on adaptation.

24 Key elements of the Bill (4) Targets and budgets Enabling Powers Committee on Climate Change Reporting Long and medium term targets: CO 2 emission reductions of 60% by 2050 and 26-32% by 2020, through action in the UK and abroad. Five-year carbon budgets to set out our trajectory. An independent body to advise Government on its carbon budgets and where least cost savings could be made. To introduce emissions trading schemes more quickly and easily. The Committee on Climate Change to report annually on progress towards targets and budgets. Government to report at least every five years on adaptation.

25 Context and background Rationale for legislation Key elements of the Bill Next steps on Bill Analytical basis of wider Government strategy

26 Next steps Draft Bill was published for consultation and pre-legislative scrutiny on 13 March PLS will be via a joint Committee of both Houses, EAC and Efra Select Committee – all likely to report in June/July. Government will respond and Bill will be introduced in Autumn 2007; expecting Royal Assent by around April/May The Committee on Climate Change will be set up in shadow form in Summer 2007 so that it can produce recommendations on the first three carbon budgets by mid-2008.

27 Media and stakeholder reactions “We are delighted that the Government has recognised the need for a new law to tackle climate change” Friends of the Earth “Climate Change Bill strikes right balance” CBI “A historic moment for British politics” The Independent “The Bill that makes action on global warming a reality” The Independent “Legislation of tremendous potential and ambition” The Guardian “A step in the right direction” The Times

28 Context and background Rationale for climate change legislation Key elements of the Bill Next steps on Bill Analytical basis of wider Government strategy

29 Conceptual framework for Government interventions: addressing three types of market failure (Stern report) Carbon pricing The first of Stern’s market failures: the damage costs imposed on the world by greenhouse gas emissions are an ‘externality’ that needs to be reflected in the prices of goods Technology policy The second of Stern’s market failures: uncertainty and knowledge spill-overs mean that carbon pricing alone will not be enough to induce low carbon technology at the pace and scale needed Removing other barriers The third of Stern’s market failures: imperfections such as information asymmetry and capital constraints mean that abatement will be more costly if you rely on carbon pricing alone Carbon pricing is a necessary but not sufficient tool for a low-cost transition Complemented by action to change attitudes to climate change. International cooperation overcomes risks of free-riding, as the climate is a ‘public good’ Stern Review (2006)

30 On carbon pricing, Stern recommends equalising the carbon price – but we have many different carbon prices, not all of which are apparent Illustrative unit carbon prices for electricity (pence per kWh) EU-ETS Regulations (e.g. RO) CCA kWh For example, for a given carbon-based source of electricity (e.g. coal) a different price results depending on its end-use… CCL Although the ordering of these prices is correct the price ratios between different instruments are illustrative only – they could be higher or lower Notes: EU-ETS = European Union Emissions Trading Scheme; RO = Renewables Obligation; CCA = Climate Change Agreement; CCL = Climate Change Levy; kWh = kilowatt hour (unit of electricity). Carbon prices can be imposed explicitly or implicitly through taxes, trading or regulations - all of which may serve other policy ends (e.g. revenue)

31 On technology policy Stern recommends that global effort should more than double * Deployment support is defined as technology specific interventions - this excludes carbon taxes and emissions trading because these do not target specific technologies. ^ As a proportion of GDP. Output of low-carbon energy must increase 20-fold over the next years to reach 550ppm. To do this… Global annual public energy R&D expenditure must double: $20bn Stern recommendation $bn/yr Global annual support for deployment* of low-carbon technologies must increase 2-5 fold: x 5 x 2

32 On Stern’s other barriers, we have no shortage of policy measures * Building regulations apply to new build and substantial refurbishment only. Energy Efficiency Commitments Reduced VAT for domestic efficiency measures EU Energy Performance of Buildings Directive EST information campaign Better billing and metering Low Carbon Buildings Programme Enhanced Capital Allowances Support for sustainable public sector procurement Carbon Trust Revolving loan fund Code for Sustainable Homes Climate Change Agreements/Levy UK Energy Performance Commitment (proposed) Building regulations* Key Household Business Public sector Combination Stamp duty relief for zero carbon homes Warm Front For example, all of these policies were introduced into the buildings sector with the intention of tackling ‘other barriers’… Some have a carbon pricing effect Some have a technology effect Planning policy Some of these are sticks (regulations) and some are carrots (e.g. grants/loans)

33 Internationally, there are 4 key areas where Stern recommends cooperation Emissions trading Stopping deforestation Adaptation Technology cooperation

34 Stern analysis suggests different market failures require different policy responses… Identify the market failure Identify the nature of the policy intervention required Identify the detail of the policy design Carbon externality Innovation market failures Other market barriers (information asymmetry, capital constraints, etc) Tax, trade or regulation R&D, deployment support, etc. Information provision, grants, loans, regulation, etc. Details of exactly how the policy is designed (e.g. up/downstream; national or international intervention; mandatory or voluntary, etc) should then be decided by the outcome of cost-benefit analysis, fit with existing policies, etc.