The current position: a policy stocktake and reflection on the role of economic modelling to date

Sarah Hendry,

Department for Environment, Food & Rural Affairs, UK

ABARE workshop, Canberra, May 2003

Our energy future: creating a low carbon economywww.dti.gov.uk/energy/whitepaper

“Our new energy policy will ensure that energy, the environment and economic growth are properly and sustainably integrated”

“The UK should put itself on a path towards a reduction in carbon dioxide emissions of some 60% from current levels by 2050”

The new goals of UK energy policy

• Putting ourselves on a path to 60% cuts in carbon emissions by 2050

• Maintaining reliability of energy supplies• Promoting competitive markets in the UK and

beyond• Ensuring that every home is adequately and

affordably heatedAim is to achieve these together

Political/policy context

RCEP recommendation: • UK target to cut

carbon emissions by 60% by 2050

• Based on framework of Contraction and Convergence model

UK Government position:• UK/Annex 1 countries have to make

deep long term emissions cuts to achieve UNFCCC objective

• No preconception about framework for future action

• Uncertainty of science and scenarios

• But 60% by 2050 is a reasonable approximation of what UK needs to do

Role of modelling…

• To test feasibility of desired policy approach• Commissioned analysis from Future Energy

Solutions using UK version of the MARKAL energy model (bottom-up technology model)

• Objective to consider options and costs for achieving long term reduction in carbon emissions

MARKAL energy model

M e n u o f e n e r g y t e c h n o l o g i e s

p r o d u c t i o n

c o n v e r s i o n

t r a n s m i s s i o n

u t i l i s a t i o n

O p t i m a l l e a s t c o s t m i x o ft e c h n o l o g i e s

U s e f u l e n e r g yd e m a n d

P r i m a r yf u e l p r i c e s

E m i s s i o n sc o n s t r a i n t s

Costs of 60% CO2 reduction

Key conclusion of 1st tranche of analysis: provided wider international engagement, costs of order of ½ - 2 % of GDP in 2050

…ie between £10-50bn against forecast GDP in 2050 of £2500bn

… approximately 0.01-0.02 percentage points reduction on assumed GDP growth rate of 2.25% a year

Further modelling…to clarify drivers behind results

Wide range of sensitivity analyses to determine what circumstances would increase costs:

What happens if …..• energy efficiency doesn’t deliver

• if level of low carbon innovation is constrained

• if gas use is limited

• if costs assumptions for new nuclear build are varied

• if options like new nuclear build and CO2 sequestration are excluded from consideration.

Key results…

• range of technology options become available to cut CO2

• energy efficiency improvement and innovation very important to reduced costs

• options in transport sector relatively high cost

• fuel/generation mix of options sensitive to assumed technology costs

• policy framework should reflect this uncertainty: tools should leave market to find lowest cost routes

Limitations of results?

• only as good as input data and assumptions

• lack of feedbacks eg from cost of technologies to level of energy demand

• UK only

• bottom –up model tends to assume availability of low cost technology and may underestimate hidden or transaction costs

Response to limitations

• Care in use and interpretation of results• explore assumptions and sensitivities• Test out various visions for future, not create a

single forecast• Care in policy conclusions – seek those that are

robust across the range and use insights into key drivers for low cost

• Seek expert input and peer review

Personal conclusions…

• Satisfactory approach for a [relatively] simple question

• Process as important as product: transparency & consultation were critical – both internally and externally

How can we deal satisfactorily with complex issues around further international action?

Suspicion that you commission modelling to tell you what you want to hear?