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Jim Watson

The costs of shifting to a low carbon energy system have become particularly contentious over the past twelve months. Most of the debate has focused on rising energy bills, and the extent to which costs of climate and energy policies are impacting on industrial competitiveness as well as household budgets.

Whilst these costs are undoubtedly real, their impact on consumer bills has often been exaggerated. The main driver of the increases we have seen since the mid-2000s has been rises in wholesale gas prices. Furthermore, analysis by the government and their statutory climate change advisers (the Committee on Climate Change) suggests that future increases in bills to pay for the low carbon transition are likely to modest. Assuming that ambitious energy efficiency goals are met and gas prices remain high, these increases are likely to be much lower by 2020 than they would be in the absence of strong climate policies.

Today’s report by Cambridge Econometrics for WWF UK adds an important and welcome dimension to this debate. It broadens the discussion from energy bills to the impact of low carbon policies on our economy as a whole. It addresses important questions: What will climate change policies mean for growth and jobs? Who will be the winners and losers?

Assessing these economy wide impacts is far from easy. As a forthcoming report on ‘green jobs’ from the UK Energy Research Centre (UKERC) will show, such assessments are fraught with methodological difficulties and uncertainties. Whilst the evidence base is patchy and mixed, the UKERC research has identified some evidence that renewable energy and energy efficiency are more labour intensive that some fossil fuel technologies.

An important argument that is made in the WWF report is that investment in a low carbon energy system makes particular sense for today’s UK economy. Unlike many other assessments, the modelling that underpins the report does not assume that we have full employment. UK unemployment may be falling, but the rates of under-employment (part time working) and job insecurity remain high.

Against this background, the report shows that meeting the UK’s first four carbon budgets, which have now been legislated, could create much-needed jobs and help to rebalance our economy. It concludes that an additional 190,000 jobs could be created by 2030. Although such estimates are always subject to uncertainty, this illustrates why a low carbon transition should not only be discussed in relation to its impact on our emissions. It could also help to bring about a fundamental shift in the goods and services the UK economy produces.

Even if the overall picture is as positive as the WWF report concludes, there will be winners and losers as a result of the UK’s low carbon transition. These ‘distributional impacts’ are often given too little attention in economic assessments. They are crucial since they help to explain why the debate about our energy future has become so contentious and political. Whilst the Cambridge Econometrics analysis is a result of particular assumptions, it suggests that meeting the UK’s carbon budgets will be beneficial for many economic sectors, including direct benefits for those involved in renewable energy and energy efficiency. It also concludes that there will be negative impacts on natural gas suppliers and oil refiners. Interestingly, the report also finds that there will be net benefits for energy intensive sectors because of higher demand for their products from manufacturers of low carbon technologies.

Whilst this may be the case, the report’s positive conclusions tend to underestimate the political challenges of dealing with incumbent interests that have the most to lose from a low carbon transition.

The report rightly emphasises the need to address the needs of those consumers who are least able to pay their energy bills. Rates of fuel poverty in the UK remain very high in comparison with those in other similar countries, partly due to the poor state of our housing stock. Once again, the report finds a broadly positive picture. It concludes that, on average, they will be better off due to higher levels of energy efficiency and gains due to additional employment. But even if these gains are realised, the government will need to redouble efforts to ensure that the fuel poor are targeted first with energy efficiency measures. Ironically, one of the main impacts of the recent controversies over energy bills has been a reduction in the levels of ambition for household energy programmes.

Jim Watson, is Research Director at the UK Energy Research Centre.