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20 | 10th - 16th OctOber 2014 | UtILItY WeeK Finance & Investment Market view A report published last month by Cam- bridge Econometrics sought to iden- tify the macroeconomic implications of the measures required to cut greenhouse gas emissions to the levels proposed by the Committee on Climate Change in the legally binding fourth carbon budget. While many previous analyses have identified the cost of investment required to deliver a low-carbon energy system, this study used a macroeconomic approach to consider both the cost of climate change mitigation policies (in the form of higher electricity and product prices for consum- ers) and the benefits. For example, increased investment leading to an expansion of the low-carbon supply chain and associated out- put, employment and incomes. The report is based on an econometric- based simulation model called "MDM-E3". This was used to model three scenarios: • all climate change mitigation policies since the Low Carbon Transition Plan are abandoned and all future carbon budgets are not met; • the fourth carbon budget is met; • emissions cuts exceed the targets set out in the fourth carbon budget, due to addi- tional low-carbon measures in the build- ings and transport sectors. The analysis does not assess the specific policies that would be required to bring about the low-carbon transition, but instead considers the macroeconomic impact if this transition did occur. Specifically, the report considers the impact on households, businesses and the wider economy if the structure of the energy system included a highly decarbonised elec- tricity sector in addition to efficiency meas- ures in buildings, industry, transport and agriculture. The analysis shows that overall, the measures and changes required to meet the fourth carbon budget will lead to a small positive impact on the UK economy, with a net increase in GDP of 1.1 per cent by 2030. However, it is important to note that despite net positive benefits overall, different sec- tors of the economy will be affected in dif- ferent ways, with some benefiting more than others. To consider the impact on the electricity supply sector, it is important to note Cam- bridge Econometrics' assumptions about the structure of the power sector. In the low-carbon scenarios, the carbon intensity of electricity generation reaches 50gCO2/KWh by 2030. In this scenario, onshore and offshore wind together account for around 40 per cent of total generation by 2030, and most of the remaining generation is from other renewables and low-carbon sources (see graph, The generation mix). Cambridge Econometrics' analysis shows that over the period 2014-30 there would be an additional £181 billion cumulative invest- ment in the power sector, compared with the reference scenario in which current cli- mate policies are abandoned. This increase in investment creates jobs in the electricity supply sector – both in the construction and installation and operation and maintenance of the additional low-carbon generation. However, the investment must be paid for, and in this case the investment is assumed to be financed by an increase in electricity prices. In addition, there is a higher carbon price in this scenario, and together this leads to a 30 per cent increase in industrial elec- tricity prices and a 14 per cent increase in domestic electricity prices by 2030, relative to the scenario in which climate policies are abandoned. Despite a substantial reduction in total energy demand, the net impact on electricity demand for the economy as a whole is mini- mal. This is because reductions in electricity demand due to more efficient appliances are almost entirely offset by increases in electric- ity demand because of fuel-switching (pre- dominantly more electric vehicles and the transfer from gas to low-carbon heat pumps for heating). The analysis also shows that low-carbon policies in the power sector and house- holds will lead to a 55 per cent reduction in gas demand. This is partially due to fuel- switching (from gas to electricity in heating and from gas to renewables in the power sector) and partially due to reduced demand (because of energy efficiency measures in households and industry). Reduced reliance on gas leads to energy security benefits and reduced expenditure on imports. However, it also leads to a con- traction of the domestic gas supply sector. Implications for consumers The analysis also considers the impact that meeting the fourth carbon budget would have on households. The net impact of meet- ing the fourth carbon budget on households' energy-related expenditure is broken down in the report as follows. If no energy efficiency measures were installed, there would be an increase in energy bills because of the higher electricity price (£127 a year). There is also the addi- tional cost of the energy efficiency instal- lations (£155 a year). However, the energy savings due to efficiency improvements would offset the upfront cost of the meas- ures, and almost offset the effect of higher electricity prices (£260 a year) Carbon budget goes fourth What would be the economic implications of meeting the fourth carbon budget as set out by the Committee on Climate Change? Sophie Billington analyses some scenarios. electricity generation mix (tWh) Coal Oil Gas Nuclear Coal and gas CCS Hydro Onshore wind Offshore wind Solar PV Bioenergy other 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 500 450 400 350 300 250 200 150 100 50 0