5 CCC (2019) Net Zero – The UK’s contribution to stopping global warming. 237 Sixth Carbon Budget – The path to Net Zero Investment, costs and benefits of 1. Background to assessing economic implications 241 2. Capital investment and operational savings 243 3. Annualised resource costs during the transition 254 5. Co-impacts along the path to Net Zero 271

239 Sixth Carbon Budget – The path to Net Zero As the world increasingly embraces a trajectory towards Net Zero emissions around mid-century (see Chapter 7), the costs for any country of following that trajectory are likely to fall, while the risks of following an alternative path increase. Our scenarios reflect that, by transitioning as fast as possible within constraints such as for stock turnover and supply chain capacity. Our proposed budget would send a clear signal that the UK welcomes low-carbon investment. The transition to Net Zero emissions will be capital-intensive, with increased upfront spending that in turn yields ongoing savings in fuel costs. Much of these investments and savings will come from and go to the private sector, both businesses and individuals. Overall, we find that the net costs of the transition (including upfront investment, ongoing running costs and costs of financing) will be less than 1% of GDP over the entirety of 2020-2050, lower than we concluded in our In the near-term, against the backdrop of the economic damage from the COVID- 19 crisis, the required investment can support the UK’s recovery. Longer term, it provides benefits in reduced operating costs, lower emissions and benefits to health and the environment, and possible intangible benefits for the UK Our conclusions reflect analysis of the pathways set out in Chapters 2-4, new research on the macroeconomic impact of those pathways, and advice from expert groups convened for this and our previous reports. Our key conclusions in this chapter • UK low-carbon investment each year will have to increase from around £10 billion in 2020 to around £50 billion by 2030, continuing at around that level through to 2050. That compares to total investment in the UK of around £390 billion in 2019. Similar scale-ups to this have been seen in the past in the key sectors of power, transport and buildings. The increase is deliverable, primarily by private companies and individuals, alongside other investment, provided effective policy is put in place. A key focus must be to continue effective low-risk policy for the power sector and extend it to other sectors, especially residential heating and energy efficiency. • Much of the investment spending can be recouped through lower operating costs. These savings, many of which relate to reduced reliance on imported fossil fuels, will rise to around £35 billion by 2035 and £60 billion • Our estimates of annualised resource costs have fallen to less than 1% of GDP for the entirety of the period 2020 to 2050. That is lower than our 2019 estimate for the cost of reaching Net Zero emissions (we previously expected cost to rise to 1-2% of GDP by 2050). • UK GDP may well be boosted. In the near-term, especially as the economy rebuilds after the COVID-19 crisis, increased investment can provide a multiplier effect to stimulate activity (and employment) in the rest of the economy. Although investments will have to be repaid in later years, there will be offsetting operating cost savings. Modelling commissioned for this report indicates a potential boost to GDP of around 2% by 2035. At worst the economy would return to similar levels to those expected without The net annualised cost will be less than 1% of GDP through to

Chapter 5: Investment, costs and benefits of the Sixth Carbon Budget 240 • There may be further economic benefits from innovation or industrial opportunities. Our analysis is based on reasonably conservative assumptions over development of low-carbon technologies. Particularly with the recent strengthening apparent in global climate action, technology costs could fall very much faster (e.g. as witnessed previously for offshore wind), implying greater economic benefit. We have also not assumed any boost to GDP from UK firms capturing valuable parts of the growing global value chain for low-carbon products (the size of the UK manufacturing sector remains relatively constant in our pathways). • Health, well-being and the environment will also benefit. Our pathways to meet the Sixth Carbon Budget involve several changes with wider benefits. Increased walking and cycling and healthier diets would, if achieved, improve health, as will improved air quality as fossil fuel use is reduced and more comfortable homes as energy efficiency is improved. Transformations in our land to restore peatland and to plant trees and hedges provide opportunities to deliver environmental and well-being benefits, as well as improving our resilience to the impacts of climate change. This chapter focuses on the aggregate economic impact. While costs are small overall, they could be large for particular people, sectors or areas. The risk of localised impacts should be a key focus for the Government. The next chapter considers these related issues of how the costs are spread within the economy, including jobs and the just transition, energy bills, public finances and This chapter is in five 1. Background to assessing the economic implications 2. Capital investment and operational savings 3. Annualised resource costs during the transition 5. Co-impacts along the path to Net Zero benefits and ben efits to health

241 Sixth Carbon Budget – The path to Net Zero 1. Background to assessing economic implications When the Committee recommended the UK’s Net Zero target for 2050 we demonstrated that the overall economic impact was likely to be small and could turn out to be positive. Action is clearly preferable to inaction given the large risks and costs from unchecked climate change. The COVID-19 crisis has sharply changed the economic backdrop in the UK and globally.
The has UK lost almost 800,000 payroll jobs since the beginning of the pandemic as of October 2020,1 with several million additional citizens receiving in- work support from the Job Retention Scheme. Relative to August 2019, GDP was 9% lower in August 2020.2 Business investment also fell by around a quarter.
These effects bring their own challenges but imply considerable spare capacity in the economy and therefore that increasing investment could support the UK’s In our 2020 Progress Report to Parliament we outlined the opportunity for a ‘green’ recovery - many climate investments can be delivered quickly, have high economic multipliers (i.e. they in turn stimulate further boosts to economic activity), create high numbers of jobs, and boost spending in the UK (rather than overseas). They can also bring a range of wider benefits, including for health and well-being.3 b) Our approach i n this report Our analysis in this report builds on our 2050 analysis in our 2019 Net Zero report by evaluating the path for costs and benefits from 2020 to 2050. We have updated our assumptions to reflect new evidence (e.g. the latest offshore wind auctions and new research) and our wider range of pathways allows us further to explore uncertainty. We continue to draw on the advice from our expert advisory group on costs and benefits4 and have also drawn on new advisory groups on finance and health (see sections 2 and 5). Cost estimates are made relative to a hypothetical counterfactual of no-further- the costs and benefits are those of additional action relative to today. However, we note that such a ‘no-further-action’ world would increasingly bring its own costs and risks that we have not attempted to characterise. These would include costs from the impacts of climate change and increased risk and disruption by pursuing a direction that runs strongly counter to that adopted by and expected by businesses across the economy.5 Therefore our approach is likely to overstate the costs - which nevertheless are relatively small. The chapter first presents cost estimates for capital and operating costs (in section 2), before grouping them together to look at the overall annualised cost of the transition with borrowing costs included (in section 3). We then consider the potential effect on GDP (in section 4), as well as the co-benefits of climate action Even with lower or positive economic impacts overall, we continue to emphasise the importance of a more granular analysis, particularly focussed on regional, sectoral and distributional impacts. We discuss these issues in Chapter 5. There is a clear opportunity for relative to a baseline of ‘no-

Chapter 5: Investment, costs and benefits of the Sixth Carbon Budget 242 Different metrics in this chapter This chapter discusses many different measures of cost, which have different • Change in capital investment. Additional capital investment reflects the in -year spending required to deploy a given measure of abatement (excluding cost of capital). Much of the costs of this investment will be annualised through financial products and services, meaning that end payers (e.g. electricity users) will likely spread payments ov er longer time periods and also incur an additional cost of capital. However, the initial spending, and therefore stimulus, will occur in the years of • Change in operational costs. Additional operating costs refer to the difference in in - year running costs between an abatement measure and the technology it replaces. For example, the difference in cost between buying gas for a boiler and electricity for a heat pump that replaces it. In most cases operating costs fall. • Annualised resource costs . Annual ised resource costs are estimated by adding up costs and savings from carb on abatement measures and comparing them to costs in an alternative scenario of no -further-climate-action. Capital investments are annualised and include costs of capital so that capital-intense and fuel-intense technologies are more easily compared. Broad ly, annualised resource costs measure the extra amount that needs to be spent each year to deliver the same services without emissions. This has been our headline measure for reporting economy-wide costs in previous reports, such as our 2019 Net Zero repor t and our 2015 advice on the – For example, installing energy efficiency measures (e.g. loft insulations, cavity wall insulations) in homes has an upfront cost but reduces demand – There is an investment cost from installing the measures (e.g. labour costs, costs of building materials) followed by an ongoing stream of fuel and cost savings as well as costs of capital. The annualised resource cos t measures its annualised investment costs less its cost savings. – This exercise is applied to all abatement measures in the economy to estimate total annualised resource costs. We treat demand -side measures (e.g. changes in travel choices and diets) as hav ing zero cost – they would generally have operating cost savings but could also im ply welfare losses (though we note that the changes in our scenarios, such as a shift to walking and cycling, could well be welfare enhancing). • GDP impacts. As resource costs do not consider the structural changes implied by different costs (for example, t he effect of shifting resources from imported fossil fuels to UK investment), we consider also the wider macroeconomic impact through economic modelling. Further impacts coul d result from increasing business confidence to invest and through capturing some of the value of growing global markets for low -carbon goods and services. • Co-impacts. The changes in our scenarios imply important additional impacts, which are generally pos itive, such as for health and the environment. Although it is possible to monetise these, the evidence is incomplete and they generally do not map clearly to the economic measures above. As with the impacts of climate change that we are seeking to mitigate, they a re often better understood in terms of their actual impact (e.g. as the nu mber of lives potentially saved), so we present them separately

243 Sixth Carbon Budget – The path to Net Zero 2. Capital investment and operational savings The Net Zero transition will be capital intensive as many low-carbon technologies have high upfront investment cost, in return for low ongoing operational costs. This represents a change from the technologies they are replacing, which tend to have higher ongoing costs but lower upfront costs.
This section considers those two components of cost in required investment upfront and then savings in operational costs. Section 3 then combines these elements to show a holistic view of annualised resource costs on the path to Net a) Investment required for the Net Zero transition b) Operating costs and savings a) Investment required for the Net Zero transition i) What our ‘investment’ estimates measure This section sets out estimates for the additional in-year gross capital investment of building a low-carbon economy. • The investment estimates represent the additional cost of purchasing or installing low-carbon technologies and providing the associated infrastructure for a low-carbon system, compared to a high-carbon system. We do not deduct reduced downstream investment, for example in fossil fuel extraction (but the reduced costs of purchasing fossil fuels are included in our operating cost savings below). • They are ‘money out the door’ in a given year, recognising that some assets take multiple years to build (e.g. a wind farm), and are presented in real £2019 values. We do not attempt to split out supply chain investments or development spending that may occur earlier in reality and may or may • The investment estimates do not include the costs of borrowing (we cover cost of capital in the section 3). As an example, transport sector ‘investment’ includes the additional upfront cost (not the finance payments) in each year of electric vehicle purchases compared to if fossil-fuelled vehicles had been bought instead, to which we add costs of additional charging infrastructure. We do not include investment in factories to produce electric vehicles or their batteries, nor do we reflect lower investment in fossil fuel extraction, refining or distribution. This avoids double-counting costs that are components of the costs of vehicles and their fuels. In our Balanced Net Zero Pathway, this in-year capital investment ramps up significantly during the 2020s and early 2030s from around £10 billion in 2020 to

Chapter 5: Investment, costs and benefits of the Sixth Carbon Budget 244 comparison, Gross Fixed Capital Formation in the UK in 2019 was approximately We have not explicitly modelled in-year capital investment post-2050, but it is likely that it will decrease as costs of low-carbon technologies continue to fall and as capital replacements can be deployed more cheaply than the projects they While all sectors considered require additional capital investment relative to the no-action counterfactual, the main drivers of additional capital expenditure (on average £15 billion over the Sixth Carbon Budget period) reflects the upfront cost of building capital-intensive low-carbon capacity such as wind farms, as well as the need to at least double the size of the electricity sector by 2050. The investment is considerably larger than for gas-fired power plants and confers later savings in fuel use. The additional investment falls after the 2030s as the required build rate for low-carbon capacity begins to fall and as costs of low-carbon technologies fall. • Fuel supply (grey green) covers the investment to build production and storage facilities for a low-carbon hydrogen supply. • Networks (grey). Networks refer to the infrastructure investment (i.e. ‘pipes and wires’) required to enable our pathways, principally investment in electricity transmission and distribution networks, but also development of Carbon Capture and Storage (CCS) infrastructure. In our scenarios, deployment of electricity network infrastructure tracks the demand and capacity of electricity generation.† It therefore increases over time. Should this deployment be front loaded to ‘future-proof’ the electricity network this investment will occur earlier. • Surface transport (purple). Additional investment in this sector mainly refers to the higher upfront purchase price of zero-emissions vehicles and the costs of the supporting charging/refuelling infrastructure. Although we expect battery costs to fall, we assume that conventional cars would also have become cheaper if they remained mass market, so our estimates reflect a continued upfront premium for electric cars throughout the period – this is likely to be conservative but remains much smaller than the resulting fuel saving. The rise from the 2030s reflects the large-scale roll-out of low- carbon HGVs which have higher upfront costs than fossil-fuelled • Buildings (orange). Investment in energy efficiency measures, such as insulation, are prioritised between 2020 and 2030 in our analysis, explaining the initial ramp up in investment. From 2030 onwards, the primary driver of additional capital investment is the deployment of low-carbon heating, especially heat pumps, in residential and non-residential buildings. Heat pumps are more efficient than gas boilers, but more expensive to install. * Our investment estimates do not directly align with ONS’s GFCF data. Differences in the calculations include transport and retrofitting housing. Whilst investment in transport equipment is included in GFCF, increased upfront spending for pri vate car purchases is not – this is captured under ONS consumer spending. Permanent fixtures installed in residences are captured under GFCF, but boilers and heat pumps would be captured under ONS consumer spending. Nevertheless, GFCF provides a useful comparator for economy-wide investment. † This excludes net work balancing costs (e.g. storage and frequency management). These costs are estimated to be billion each year from 2030 to electricity generati on, energy

245 Sixth Carbon Budget – The path to Net Zero • Land Use, Land-Use Change and Forestry (LULUCF) (green). Our Balanced Pathway involves a change in how the UK uses its land, and significant expansion of tree planting. This drives a significant additional capital analysis. To the extent that these assumptions turn out differently (e.g. if costs for renewable technologies or electric vehicles fall more quickly than we have assumed), the required investment levels would also differ for the same outcomes. It is also likely that investment requirements fall more in later years than we have assumed, for example because replacing low-carbon technologies at the end of their lives is likely to be cheaper than their initial installation costs. Investment programme 2020-2050 investment . LULUCF = Land use, land-use change and forestry.
Capital requirements stabilise

Chapter 5: Investment, costs and benefits of the Sixth Carbon Budget 246 Cost assumptions for our Balanced Net Zero Pathway Some of the key technologies required to achieve Net Zero have proven to be far cheaper than even the mo st opt imistic forecasts. There is also potential for as -yet- unknown technologies to emerge in the next 30 years that further reduce costs. Th is could enable faster, ch eaper progress to be made reducing the UK’s emissions to zero. The Committee discussed in de tail the impacts that innovation has on costs in our 2019 Net Zero report (see Chapter 7).6 The costs and benefits of mass production have continued to become c lear. As in our 2019 report, we have been conservative in our assumptions around falling cost of different technologies. Our Widespread Innovation scenario explores how costs might fall further. Our Balanced Pathway reflects the • Renewable power generation. We have assumed modest reductions in the cost of renewables, incorporating the most recent offshore wind auction prices. There remains scope for costs of these technologies to fall further through learning -by-doing during deployment, which continues to increase globally. • Nuclear power. Nuclear is a mature technolo gy, but we assume cost reductions for future plants after Hinkley Point C from utilising similar plant design and lower -cost financing arrangements (which the Governme nt are currently considering). • Batteries. Batteries, like renewables, are commercialised at scale and have come down in cost significantly in recent years. With significant increases in expected roll -out of electric vehicles globally, cost reductions shou ld continue. • Heat pumps. Heat pumps follow similar assumptions to our Net Zero report. W e assume no major decreases in the cost of the technology, but future cost savings should arise from efficiencies in installation as the UK industry scales up. This ma y be a conservative assumption overall, as equipment costs could also fall, for example i f different heat pump technologies are developed, or reflecting that the air -to-water heat pumps expected in the UK are a much less established technology. • Hydrogen. The hydrogen used in our scenarios is assumed to come mainly from electrolytic productio n of hyd rogen using renewables and gas reformation in the UK with CCS. While reformation currently appears to be the lowest -cost option, we do not expect large cost re ductions. We do expect cost reductions in the capital costs of electrolyser technologies, though the majority of the cost is likely to remain the operating costs of the technology. Towards 2050, as renewables make up a large proportion of the electricity m ix, we see opportunities for low -cost electrolytic hydrogen to be produced by renewable e lectricity that may otherwise be curtailed. • Carbon capture and storage. CCS is still at the technology development and demonstration phase, although 51 large -scale projects are now operating or under development around the world. 7 Commercialisation and wi de scale development of CCS is likely to be needed globally as decarbonisation efforts increase. There is scope for cost reductions in capture plants as the technolog y enters this development stage and less scope for cost reductions in CCS transport and st orage infrastructure. • Bioenergy with CCS (BECCS ). Sustainable harvested biomass or biogenic waste sources used with CCS results in negative emissions. Our scenarios include costs for a range of BECCS applications (e.g. producing electricity, hydrogen, av iation biofuels and industrial combustion) which can provide similar overall net emissions reductions. Though our scenarios are conservative on the cost assumptions f or CCS, we do see some opportunities for retrofitting of CCS plant to existing bioenergy f acilities to reduce overall BECCS costs. Almost all bioenergy facilities install CCS by 2050. • Direct air capture of CO 2 with storage (DACCS ). Direct Air Capture is currently at the pilot stage, with a small number of test facilities in operation globally. Given the early stage of development, costs of DACCS both now and at larger scales in the future are highly uncertain. Our scenarios sugges t that the cost of DACCS could fall by 50 -70% compared to today. The modular nature of DACCS could see faster cost re ductions with mass roll-out, although energy requirements are likely to remain high. Direct Air Capture of CO2 can also be combined with lo w-carbon hydrogen to produce synthetic transport fuels, although costs will be higher than DACCS. 247 Sixth Carbon Budget – The path to Net Zero Cost assumptions behind key technologies Balanced Pathway Widespread innovation wind £45/MWh £43/MWh £40/MWh 11% £23/MWh Solar PV £55/MWh £43/MWh £40/MWh 27% £23/MWh Nuclear £105/MWh £85/MWh £85/MWh 19% - Gas CCS - £80/MWh £80/MWh - £80/MWh £6,415 £4,970 £4,490 30% £3,850 £13,380 £10,365 £9,365 30% £8,025 £121/kWh £46/kWh £42/kWh 65% £42/kWh (for HGVs) £370/kWh £105/kWh £65/kWh 82% £42/kWh (for HGVs) £520/kWh £237/kWh £174/kWh 67% £86/kWh £120/tCO2 £106/tCO2 £98/tCO2 18% £98/tCO2 DACCS £430/tCO2 £240/tCO2 £180/tCO2 60% £120/tCO2 production £78/MWh £37/MWh £37/MWh 52% £31/MWh production £145/MWh £76/MWh £75/MWh 48% £64/MWh production £280/MWh £140/MWh £116/MWh 59% £84/MWh All costs in £2019. Heat pump costs reflect average size in modelling, with the average size of an ASHP being 5.4kW, the average size of a GSHP being 8.1kW, and the average size of air source heat pumps in hydrogen and biofuel hybrids being 4.1 and 8.1kW respectively. GSHP costs include the average costs of groundworks, based on an assumed split of 80%/20% borehole and trench systems. Heat pump costs do not include the additional costs associated with household conversion, such as radiator upgrades and hot water tanks. These costs can be up to around £3,500 for a medium sized home. Costs of electricity generation in 2020 are strike prices for latest Contracts for Difference. Chapter 5: Investment, costs and benefits of the Sixth Carbon Budget 248 Carbon Budget is based.
The other scenarios in this report present a similar picture with investment scaling up rapidly to 2030 before flattening off, while Although the Widespread Innovation and Tailwinds scenario achieve faster reductions in emissions, they do not involve higher investment costs as they assume greater cost reductions are achieved for low-carbon technologies (in part reflecting more opportunity for learning-by-doing in deployment). The Headwinds scenario has lower investment requirements, but also much lower There is unc ertainty around the

249 Sixth Carbon Budget – The path to Net Zero b) Operating costs and savings i) What our ‘operating cost’ estimates measure This section sets out estimates for the additional operating costs or savings that occur in-year through operating a low-carbon system. As the low-carbon system is typically more energy efficient, operational costs are generally cost saving and represent a pay back on the investments outlined • The operating cost estimates represent additional costs or saving of running low-carbon solutions once they have been deployed relative to the cost of the high-carbon option they replace. • There are costs or savings each year. For example, the avoided maintenance costs of electric vehicles would be an operational saving, as would the savings in petrol and diesel to run the vehicle. The cost of buying the vehicle would not be included, as we include that in our estimates of • As for all of our cost estimates, we do not include the impacts of taxes or Most of the costs of generating low-carbon electricity are in the upfront costs of building generation capacity (with the exception of generation with carbon capture and storage, where the fuel costs are more important).8 Since those costs are included in our investment figures, we do not ‘double count’ the costs of using that electricity to power electric vehicles or heat pumps. We also allocate the small remaining operational cost for operating a low-carbon electricity system to ii) The operating cost implications of the Balanced Pathway Many - though not all - of the technologies deployed in our Balanced Net Zero Pathway have considerably lower running costs than the alternatives they replace. The transport sector has by far the largest opportunity to save costs, with some further savings available for buildings and electricity supply. • Electric vehicles and HGVs. Electrified surface transport is far more efficient than high-carbon alternatives and has significantly lower maintenance costs. Overall, this can deliver annual operating cost savings of over £30 billion by 2050. The majority of this (over £20 billion) is from eliminating the need for petrol and diesel in road vehicles (noting that the costs of electrification are largely reflected in the increased investment cost in vehicles and generating capacity). A further £7 billion is saved in annual maintenance, reflecting the fewer moving parts associated with electric drivetrains. Electrifying and improving efficiency for rail saves a further £4 • Electricity supply. Low-carbon electricity generation is typically capital- intensive. It has high upfront costs and low costs in operation, in particular by avoiding fuel costs. The complete decarbonisation of the electricity sector by 2035 in our Balanced Pathway reduces operating costs by around £10 billion per year relative to the high-carbon alternative, even allowing for the operational costs of meeting the extra demand from * Low-carbon generation already makes up around half of UK electricity generation, otherwise savings would be deployed during the transition Electric vehicles are far more powered alternatives and their

Chapter 5: Investment, costs and benefits of the Sixth Carbon Budget 250 • Low-carbon buildings. Energy efficiency improvements and switches to low-carbon heating deliver reductions in operating costs for buildings. As with the transport sector the costs of electrification are largely captured in the upfront costs of installing heat pumps and low-carbon generating capacity. Total operational savings are around £8 billion per year by 2050. • Other. In other sectors, where electrification and the switch to renewable generation plays a less dominant role, operational cost increases and savings largely offset. Switching to hydrogen tends to increase costs, as does the slight increase in bioenergy use from today (so, for example, operating costs are expected to increase for shipping). However, these are offset by improved efficiency and some electrification. By 2050, aggregate operating cost savings will be similar to the annual investment over time as low-carbon technologies are rolled out across the entire stock of vehicles, buildings and other capital stock. We note that operating cost savings could also imply reduced demand for some UK economic activity. Although much of the saving reflects reduced demand of fossil fuels, the savings above point to important implications for sectors such as refining and vehicle maintenance. We consider these issues in Chapter 6. operating cost savings in the Balanced Net Zero Costs of electricity are included in the energy supply sector, whereas costs of other low-carbon fuels such as hydrogen and bioenergy are included in the sectors that use these fuels. M&C is manufacturing and construction. Other category includes aviation, shipping, land use, land-use change and forestry, agriculture, removals, waste cost savings will be similar to requir ements for the Net Zero investment from the mid-2040s. 251 Sixth Carbon Budget – The path to Net Zero iii) Financing the Net Zero investment programme Now is an ideal time for the UK to invest. There are historically low interest rates and a potential demand shortage for that cheap capital. Economic recovery from the COVID-19 pandemic necessitates stimulus and many of the measures detailed in this report have been shown to have high economic multipliers. The challenge for Government is to make sure sufficient investment comes forward and to design policies to ensure that is done at the lowest possible cost. The Committee convened an expert advisory group to explore how the investment programme required to deliver the Sixth Carbon Budget could be financed, and what mechanisms could help to do this at lowest cost (Box 5.3).
Our advisory group concluded that the ‘depth of the UK’s capital markets along with its growing expertise in sustainable finance means that this significant ramp-up in the scale of investment is eminently deliverable.’ Key to scaling up financing will be implementing real-economy policies to ensure enough demand for finance (for example, stimulating the demand in the residential buildings sector to retrofit homes with low-carbon heating). The group’s policy recommendations, including for a National Investment Bank, are summarised in Box 5.3 and set out in more detail in the Committee’s accompanying Policy Report and in the group’s own report. 9 While the aggregate investment programme is clearly large and would materially affect the economy, the scale of change is not dissimilar to those observed over • UK aggregate investment has fluctuated since 1970 between 15% and 28% of GDP and was near the bottom of that range in 2019 at 17%.10 Delivering the additional capital investment outlined would raise UK investment to around 20% of GDP (if other investments remain the same). • The UK power sector has already scaled up annual investment since 2004 from around £4 billion to around £18 billion in the late 2010s as renewable deployment increased, driven by effective policy support.11 Contracts have already been awarded through Government auctions to increase that further into the mid-2020s in line with our Pathway. • The £10 billion increase in annual spending on vehicles can be compared to a (real terms) increased spend on cars of around £4 billion over the last decade and £10 billion in the previous decade.12 More recently, increased costs reflect a trend towards larger cars, especially SUVs. That shift would have increased motoring costs, whereas the extra £10 billion required largely to shift to electric vehicles will bring large cost savings. • Between 2010 and 2019, yearly investments in renovating residential buildings increased from £27 billion to £32 billion. The 2013 homes energy efficiency programme resulted in approximately £1.4 billion of additional investment per year. Larger increases also occurred in new buildings. 13 It is therefore reasonable to expect that the required increase in investment will be deliverable by private firms and individuals provided effective policy is used to ensure that these investments can be profitable. Now is an ideal time to invest, with historically low interest deliver the investment required to achieve Net Zero, so long as

Chapter 5: Investment, costs and benefits of the Sixth Carbon Budget 252 Expert Ad visory Group on financing Net Zero In March 2020, the CCC convened an expert advisory group on Net Zero finance to advise on the What is the role for finance in delivering the Sixth Carbon Budget and how can Government supp ort it at least cost? The group was chaired by Professor Nick Robins of the London School of Economics supported by Roberta Pierfederici, and consisted of Andy Howard (Schroders), Dr Ben Caldecott (Oxford University), Daniel Klier (HSBC), Ingrid Holmes (F ederated Hermes), Rishi Madlani (RBS), Dr Rhian -Mari Thomas (Green Finance Institute) and Steve Waygood The group were convened for four meetings between March and September 2020. During these meetings the group mapped the financial system’s cur rent ability to delive r a Net Zero target, analysed the investment requirements to deliver the CCC’s Balanced Pathway, identified potential barriers to delivery, and discussed issues relating to fairness and just transition. An additional meeting was sched uled to specifically a nalyse the impacts of COVID-19 on the UK’s ability to achieve Net Zero. The report made many observations and conclusions about the current state of the UK financial sector and its future ability to deliver Net Zero and the Sixth Ca rbon Budget. The key outputs of the report were 15 specific recommendations as well as guiding principles for Government and the sector. Headline conclusions of the • Deliverability of investment programme. The depth of the UK’s capital markets and its globally leading position in sustai nable finance mean that the significant ramp up of capital investment needed is wholly achievable, providing that key barriers are • COVID-19 has deepened rather than deflected financial sector commitment to climate action. Th e way that the UK exi ts the economic crisis associated with the pandemic will profoundly shape its ability to meet climate targets, whilst also being an opportunity to achieve broader economic and equity goals. • Systemic interventions. Delivering the invest ment programme will r equire the UK financial system to adapt so that it is fit for the Net Zero age. This will require all aspects of the system to undergo shifts including public finance at all levels of Government and institutions, private finance, regul ators and end -users. Recommendations of the • Strategic recommendations. The UK should commit to be the world’s first Net Zero financial system, focus on making Net Zero projects and plans investable and design all Net Zero policies so that investme nts are resilient, fair and enable local action. • Private finance recommendations. The UK should publish both sector -specific strategies and system-wide instruments to enable market innovation. Climate skills and knowledge of the UK’s financial practitioner s should be deepened. The literacy, expertise and confidence of the end users of financial services should be built to increase demand for climate -aligned products. • Financial regulation recommendations. The UK should fully integrate c limate risk and Net Zero into financial regulation and monetary policy. Net Zero targets should be made mandatory for financial institutions. Investor stewardship should be extended to incorporate achievement of Net Zero. Clear metrics are needed for the N et Zero transition at an institutional and investment level. • Public finance recommendations. The post-COVID-19 recovery plan should be used to fast track climate investment, reset fiscal investment and connect public debt with climate goals. Net Zero and sustainability goals s hould be set for existing public financial institutions. A National Investment Bank with a clear green mandate should • International recommendations.
The UK should build the international frameworks needed that can acce lerate the financing o f Net Zero, resilience and just transition. 253 Sixth Carbon Budget – The path to Net Zero • Tracking recommendations. The UK should establish a regular assessment of investment needs and financial flows for climate action in the UK. Principles outlined in the • The investment requirement to achieve Net Zero can be met if effective policies and market frameworks are in place. • The mindset needs to shift from measuring the risks of climate change on finance to the alignment of finance with Net Zero, resilience and just transiti on. • Real-economy p olicies need to be investable to attract increased amounts of • Financial policy and regulations need to be designed with Net Zero in mind and institutional gaps filled to increase the efficiency of capital intermediati on. • Successful Net Zero financing depends on an effective financial architecture. The group highlighted the importance of increased tracking of capital into different areas of the UK’s economy. To enable this, the UK financial sect or will need to be capable of classifying ‘green’, ‘brown’ and ‘grey’ investments. • Green investments. Investments into low -carbon technologies or sectors (e.g. a company that exclusively builds wind turbines). • Brown investments. Investments into high -carbon, non-transitioning technologies or sectors (e.g. a company specialised in building coal fired power plants with no CCS). • Grey investments. These investments are more difficult to classify, and refer to technologies or sectors that may be transitioning, or capable of tran sitioning (e.g. a utilities company with high current emissions but a robust Net Zero target). The Government should work with the financial sector to create clear guidance as to what composes a green, brown and grey investment, and how they should be treated in ESG portfolios. The recent announcements by HMT are positive first steps ( Box 5.5). Tracking these flows will require a new or expanded institution, distinct from Government, with analytical capability and expertise in the financi al sector. The Road to Net Zero Finance, CCC Advisory Group on Finance. Professor Nick Robins, Roberta Pierfederici, Dr Ben Caldecott, Ingrid Holmes, Andy Howard, Daniel Klier, Rishi Madlani, Dr Rhian-Mari Thomas and

Chapter 5: Investment, costs and benefits of the Sixth Carbon Budget 254 3. Annualised resource costs during the transition Section 2 presented the large investment programme for our Net Zero pathways and the significant operational savings that it yields over time. Investment costs were allocated to the years in which the investments occurred, not spread over the lifetimes of those investments based on an assumed cost of capital. This section annualises the investment costs to present the annualised resource costs for our scenarios, which is the basis on which we have presented costs in previous reports, including our 2019 Net Zero report. We find annualised resource costs that are expected to peak at less than 1% of GDP during the Sixth Carbon Budget period, remain relatively constant through the 2030s and early 2040s. This section is in four a) Annualised resource cost estimates b) Average abatement cost estimates c) Uncertainties and sensitivities on annualised resource cost estimates d) Risks of higher costs and unintended consequences a) Annualised resource costs to achiev e the Sixth Carbon Budg et To calculate annualised resource costs we annualise the capital investment costs over their lifetimes using a suitable cost of capital (Box 5.4) and subtract in-year operating cost savings. The result indicates the extra spend required each year to provide the same goods and services but in a low-carbon way. We aim to include all relevant costs (for example, for electric vehicles we include the cost of buying, running and maintaining the vehicle, the charging infrastructure including network reinforcements, and ancillary costs such as insurance). We report these annualised resource costs for comparability with our previous estimates, but they should not be taken to imply an overall economic effect given the important stimulus benefits that the investment programme can bring during the recovery from the impact of the pandemic (section 4) as well as other co- impacts (section 5), nor the avoided costs of additional climate change. Our analysis indicates that the annualised resource cost of reducing GHG emissions to Net Zero would rise towards 0.6% of GDP by the early 2030s, remain at approximately this level through the 2030s and early 2040s, before falling to approximately 0.5% by 2050. Our scenarios demonstrate the potential for slightly This is lower than the estimates in our Net Zero report for the costs of meeting the Net Zero 2050 target (1-2% of GDP), which themselves were in line with the cost deemed acceptable by Parliament when the Climate Change Act was passed for Annualised r esource costs are investments (including cost of

255 Sixth Carbon Budget – The path to Net Zero The change reflects new evidence and new * • Cheaper electricity. Our latest technology costs for low-carbon electricity are lower than assumed previously. This reduces costs for the electricity sector and for sectors where electrification is an important option. This is based upon more recent costs of key renewable energy technologies reducing dramatically. In 2019 we assumed that the cost of offshore wind would be £50/MWh by 2050. In early 2020, the Government awarded contracts at just over £45/MWh for projects commissioned in 2023-25. • Increased deployment of lower-cost technologies. Some sectors see reduced costs because of more extensive roll-out of lower-cost low-carbon technologies, which our updated analysis suggests is feasible. For example, in the electricity supply sector we assume a higher percentage of renewables by 2050 than we did in our Net Zero report, and expect these to be cheaper than CCS plants or nuclear power. In manufacturing and construction, our detailed new research has indicated more scope for • Lower engineered removals.
Our 2019 estimates included high estimates for the cost of the final 4% of emissions reductions – we described the various options as ‘Speculative’ and assumed a cost based on an estimate for the cost of CO2 removal of up to £300/tCO2. Our detailed bottom-up assessments for this report have identified and included more low-cost options, including for changed behaviours, reducing the need for We continue to expect the highest annualised resource costs to occur in the buildings and manufacturing and construction sectors and, in later years, from CO2 the transport sector and in the longer-term from the electricity supply sector, with relatively similar costs as in the no-action world for agriculture, aviation and waste. These findings reflect the latest understanding of the costs of the most important options, set out in subsection (d) below. The balance of annualised resource costs across Scotland, Wales and Northern Ireland is broadly in line with their shares of emissions. * A small part of the impact is a result of our using a different baseline in this analysis. In 2019, we used a counterfactual world where no action on climate had occurred. As discussed in section 1, the analysis in this report uses a baseline of no-further-action. This means that a degree of the investment is already in the baseline in this analysis rather than included in future costs. It also means some of the cost reductions from existing climate policy (e.g. vehicle and building efficiency improvements that have already occurred) are not included. However, these changes are offsetting and do not materially affect 2050 estimates, by when most investment cycles will have completed. resource costs are expected in

Chapter 5: Investment, costs and benefits of the Sixth Carbon Budget 256 Cost of capital and the importance of good policy To calculate annualised resource costs we use a cost of capital of 3.5% for any investments by Government or by households (e.g. purchase of electric cars and installation of energy efficiency in ho mes) and a range of hi gher costs of capital for investments by private companies (e.g. 6% -10% in the electricity supply sector depending upon the technology used). Given current record -low interest rates, this is arguably a conservative approach. Good policy can ensure that th e cost of capital is reduced significantly, bringing material cost savings. Ensuring competition will also help cut costs and prices. • To illustrate the impact that cost of capital could have upon the cost of the transition the Finance advisory group propo sed a best possible Weighted Average Cost of Capital (WACC) as well as an illustrative high WACC – 1.5% and 7.5% respectively. • The difference between a 1.5% and 7.5 % WACC for the investment programme in illustrative 7.5 year payback period). • While there is high uncertainty around the likely future costs of capital this analysis indicates the importance of keeping costs of capital low through good policy. The Finance advisory group (Box 5.3) pointed to the UK’s Electricity Market Reform as an example of a well -designed, coherent and effective package of policies to encourage • A clear direction. Since the Climate Change Act was passed , it has been widely understood that the power sector would have to decarbonise heavily given its high emissions and to support electrification in other sectors. • A stable, predictable carbon price. The UK introduced a carbon price floor in 2013 to underpin the price in the EU E missions Trading System. • Investable market instruments. Following initial progress under the Renewables Obligation, long-term contracts for low -carbon power generation were announced in 2011, to be awarded by competitive auction. Emer ging technologies (e.g . offshore wind) were explicitly supported in addition to more mature options. • Product standards. European efficiency standards for lights and household appliances drove down electricity use as products were replaced over time with • Enabling measures. Potential blocks on progress were addressed, guided by public - private collaboration, for example, through the Green Investment Bank. A recent report indicated that the average Weighted Average Cost of Capital (WACC) of UK offshore wind fa rms has decreased from over 10% in 2010 to below 7% in 2020. 14 This has contributed nearly 20% of the cost reductions over the same period. 257 Sixth Carbon Budget – The path to Net Zero Percentage of GDP compares absolute annualised resource costs to OBR projections of GDP in that year. to peak in the early 2030s and

Chapter 5: Investment, costs and benefits of the Sixth Carbon Budget 258 2050 in Balanced Net Zero Pathway When costs are presented as percentage of GDP, this is relative to OBR projections of GDP in the given year. b) Average abatement cost estimates The previous sections have considered the economy-wide picture for costs. However, it is also useful to consider the costs of individual measures or action in abatement) of key low-carbon options in 2035 and 2050. Average abatement costs are calculated by dividing the total amount of abatement in each sector by the annualised resource cost required to achieve it. It highlights that there are many actions with low costs and some actions that are more expensive. • Some sectors are cost saving by 2050. Implementation of measures outlined in Chapter 3 result in annualised resource cost savings for surface transport, electricity supply, fuel supply, agriculture and aviation. • Some sectors have neutral or low costs. Measures to decarbonise the waste, LULUCF sources and F-gases sectors can be implemented at little or • Some sectors will be more expensive. Decarbonising manufacturing and construction, buildings and shipping incurs annualised resource cost of £80/tCO2e or more by 2050. Enhancing land-use sinks, and developing the removals sector will also incur greater costs. Annualised resource costs (£b/yr) 2035 2050 % of GDP 2035 % of GDP 2050 Net Zero 2050 Electricity supply and surface transport yield significant costs Reducing emissions is expected to save money in transport and electricity supply in the long- term.
Higher costs are expected

259 Sixth Carbon Budget – The path to Net Zero Given this mix of costs and savings, our conclusion is that overall costs are likely to be smaller than predicted in 2019, and manageable. Our Balanced Net Zero Pathway indicates that net annualised resource costs are on average £17 billion per year during the Sixth Carbon Budget period, and decrease to £12 billion per year by 2050. This is a significant reduction from our previous estimate of £50 billion in 2050 in our Net Zero report. Average abatement costs in 2035 by s ector and subsector Sector or measure Abatement cost (£/tCO 2e) Sector or measure Abatement cost (£/tCO 2e) 65 Rail and public transport -710* 105 Efficiency, hybridisation -530* * Some efficiency measures (e.g. for soils, aviation) save money and yield small emissions savings; this implies a large negative £/tonne. Not all sub-sectors shown, see databook for full breakdown. Overall costs are likely to be smaller than predicted in 2019, low as a proportion of overall

Chapter 5: Investment, costs and benefits of the Sixth Carbon Budget 260 Average abatement costs in 20 50 by sector and subsector Sector or measure Abatement cost (£/tCO 2e) Sector or measure Abatement cost (£/tCO 2e) 60 Rail and public transport -625* 100 Efficiency, hybridisation -275* * Some efficiency measures (e.g. for soils, aviation) save money and yield small emissions savings; this implies a large negative £/tonne. Not all sub-sectors shown, see databook for full breakdown. 261 Sixth Carbon Budget – The path to Net Zero which compares the average cost of abatement of key subsectors to the abatement achieved by those subsectors. We emphasise that the order these taking advantage of cost-saving measures like switching to electric vehicles, it will be important to make progress in areas that are more expensive now to drive down their costs for the future (e.g. as has been seen for offshore wind) and to make progress in areas like buildings, where progress is needed now to stay on track to reach Net Zero emissions in 2050. All these measures need to be delivered to meet our proposed Sixth Carbon Budget and the 2050 Net Zero target. Full datasets can be downloaded in the Sixth Carbon Budget dataset at M&C stands for manufacturing and construction. LULUCF = Land use, land-use change and forestry. 1 – Demand management and behaviour change c) Uncertainties and sensitivities on resource cost estimates There is significant uncertainty when making estimates of this type far into the future (as changes from past cost estimates suggest) and several factors could result in lower or higher costs. Our exploratory scenarios for the pathway to Net Zero illustrate some of the alternative abatement options (e.g. energy efficiency has a larger role in our Engagement scenario) and different assumptions (e.g. our Innovation scenario assumes hydrogen electrolysers fall rapidly in cost). Around half of the measures to

Chapter 5: Investment, costs and benefits of the Sixth Carbon Budget 262 They also reflect somewhat different levels of effort (e.g. the Tailwinds scenario, which benefits from widespread innovation and engagement, reduces emissions to Net Zero by 2042 rather than 2050). Broader uncertainties imply a similar range • Long-term GDP growth. We use the Office for Budget Responsibility's (OBR) baseline GDP growth assumption to estimate GDP our to 2050, which assumes annual GDP growth of 1.6% from 2027 to 2050. If GDP growth were lower out to 2050 (e.g. if growth were just 1% per annum in the longer term) the annual costs of achieving the Net Zero target would be 0.6% rather than 0.5% of GDP in 2050. This estimate does not allow for any reduction in the absolute abatement cost that could follow from lower energy demand under a lower GDP growth rate. • Lower fossil fuel prices. The central cost estimates above use BEIS's central values for future gas and oil prices. If fossil fuel prices were at the lower end of the BEIS estimate then the relative costs of low-carbon technologies would be higher. For our 2019 Net Zero report we calculated sensitivities for the BEIS low and high fossil fuel price scenarios that increased or reduced overall costs in 2050 by around 0.5% of GDP. * • Technology costs. Innovation could bring technology costs down faster than expected. We note that the signs of strengthening climate action internationally (e.g. Net Zero targets announced for China, the EU, Japan and South Korea) imply a possibility of more rapid technology development – Electricity price sensitivity. A 10% reduction in the electricity price we assumed for our analysis in 2050 would further reduce annualised resource costs for end use sectors by up to £6 billion per year in 2050 – Hydrogen price sensitivity. A 10% reduction in the price of low-carbon hydrogen assumed for 2050 would further reduce annualised resource cost for end use sectors by up to £1.5 billion per year in 2050 (0.05% of • Costs of capital and discounting. Interest rates are at record lows (e.g. 0.1% for most of 2020) and the economy needs attractive investment opportunities. However, for the purposes of this analysis we have continued to use Green Book guidance based on a social discount rate of 3.5% and increased costs of capital for business investments. As set out in Box 5.4, a lower cost of capital would reduce annual borrowing costs by billions of These uncertainties mean it is not sensible to be overly precise in reporting cost estimates. We emphasise our estimate of less than 1% of GDP, rather than our central estimates of 0.6% for the Sixth Carbon Budget period and 0.5% for 2050. Other studies have found similarly small overall costs (Box 5.5). * We note that fossil fuel sensitivities are potentially mis-leading as they are endogenous to climate action – as the world has more success in reducing fossil fuel use, so fossil fuels are likely to become cheaper.
That is a benefit of global climate action, but appears to increase cost in this characterisation. Broader sensitivities imply costs

263 Sixth Carbon Budget – The path to Net Zero d) Risks of higher costs and unintended consequences The uncertainties on costs in the previous section do not change the conclusion that aggregate costs are likely to be relatively small compared to GDP. In this section we consider more qualitative and systemic risks, in particular the risks of poor policy leading to escalating costs. However, the Committee’s view is that these are risks best managed through careful policy design, rather than by adopting less ambitious targets. That view is reinforced by considering the implications of a slower transition, and the risks that it would also entail. The risk of localised negative impacts should have particular attention – as we discuss further The Net Zero transition will be a policy-led transition across the economy. That brings risks that poorly implemented policy leads to much greater than expected • A failure to allow suitably for competitiveness risks could lead to loss of viable installations or deep damage to particular sectors. This could lead to localised impacts that are not easily compensated by increased activity elsewhere in the economy. The Government has previously recognised that by introducing exemptions and compensations for energy-intensive industries from climate policy costs. • A failure to develop electricity market arrangements, such as the capacity market and balancing markets, to ensure security of supply as the share of intermittent renewables increases could cause wider economic damage if confidence in the reliability of UK energy supplies is affected. • Poor policies leading to poor implementation could result in extra costs that are not considered here. For example, poorly installed insulation that leads to damp, over-heating or safety issues may need to be removed and replaced, leading to unnecessary costs. External estimates of the costs of reducing emissions to Net Zero also support the conclusion that costs are unlikely to be more than a very small fraction of GDP (and there • European Union. The European Commission’s 2050 long-term strategy estimated that a Net Zero GHG scenario for 2050 could be achieved at an annual GDP impact to the European Union of between a 1% GDP cost and a 0.6% GDP boost in 2050, relative to an 80% reduction scenario. The impact relative to a current policies baseline ranged from a cost of 1.3% to a boost of 2.2% of GDP in 2050. • G20. The OECD’s modelling also suggests a small impact to GDP from climate change mitigation. It estimated an average annual GDP cost across G20 countries of 0.3% in 2050 for a scenario with 66% probability of limiting temperature rise to 2°C, relative to a scenario with 50% probability, and benefit of 2.5% of GDP in 2050 relative to a baseline. These estimates assume a 'decisive transition', where structural reform, fiscal initiatives and green innovation accompany carbon abatement policies. • The Energy Transitions Commission estimates that decarbonising the 'hard-t o-treat' sectors (heavy industry and heavy transport) would cost less than 0.5% of global GDP While these analyses suggest a range of uncertainty, they all point to a small overall effect and suggest that it is possible that GDP could end up higher under scenarios with strong action to cut emissions. Uncertainties on cost will not

Chapter 5: Investment, costs and benefits of the Sixth Carbon Budget 264 • Administrative costs could be high or implementation could prove more difficult than expected - for example, the roll-out of smart meters has been • A failure to provide a stable direction and policy certainty could introduce a risk premium and significantly increase costs of capital. Electricity market reform has been successful in this regard (Box 5.4). • More generally, any large transition brings risks of unexpected or unintended consequences not yet identified. It is important to consider these sorts of risks, particularly in policy design, but we do not consider them reasons to adopt a less ambitious carbon • We have designed our scenarios to allow time for effective policy to be implemented and for markets and supply chains to respond. There is time to deliver provided decisive progress begins immediately. • The required changes are well understood and research continues across all areas, including in policy design. The history of, for example, electricity market reform demonstrates that the UK has the capacity to develop and implement effective policies to deliver changes, and at lower costs than often assumed in predictive scenarios like the ones in this report. • Even if costs did increase materially above our projections, their aggregate would remain relatively small. For example, if we add an arbitrary £100/tonne premium to half of the abatement required to 2035, the aggregate cost would increase by around 0.6% of GDP. Given our assessment in the next section that the wider economic impact of our scenarios could be a boost of around 2% to GDP, this could still imply a programme that was economically beneficial overall. • There are also potential unknown or unintended upsides, for example from spill-overs arising from innovations driven by the Net Zero transition. For example, historical reductions in costs of solar panels driven by global deployment have enabled greater energy access globally. Spill-overs from battery development for electric vehicles could bring new benefits for A slower path to Net Zero would also bring its own large-scale risks that would also • As COP26 president the UK is uniquely placed to lead a more rapid global transition. A less ambitious UK transition could lead to a slower global programme and higher levels of climate change. • Our proposed budget implies a decisive and clear pathway supported by policies that can give businesses confidence that their investments will be future-proofed. A slower path could introduce more uncertainty and more room for indecision that will increase costs of capital and lead to more capital scrappage as high-carbon investments continue unnecessarily.
• Slow progress can also lead to unnecessary costs. For example, the historical failure to ensure that new homes are built to high zero-carbon standards has meant that over a million homes have been built that will require more expensive retrofit in later years and that have higher than necessary energy bills for their occupants. • A slower path would miss opportunities for increased investment to provide a boost to the recovery and to use under-utilised resources in the economy. 265 Sixth Carbon Budget – The path to Net Zero • The recent increase in climate commitments in other countries also emphasises there are risks attached to moving too slowly. For example, the EU are considering introducing border tariffs targeted at high-carbon imports and has signalled raising its 2030 emissions reduction target to 55%. These conclusions align to those of our Net Zero expert advisory group on costs and benefits. Their report emphasised that the benefits (including decreased climate risk) of Net Zero outweigh the costs, that good policy design is vital to keep costs low and maximise benefits and that clarity around the decarbonisation pathway is a key enabler of innovation. They also echo the Bank of England’s assessment, which identified the material risk that ‘transition risk’ poses to financial and economic stability in the UK. They highlight the importance of disclosure and forward planning to smooth out this risk. concluded that the benefits of good policy design is vital and clarity will enable innovation. Chapter 5: Investment, costs and benefits of the Sixth Carbon Budget 266 While they are a useful indicator, estimates of annualised resource costs such as those set out in section 3, are not the same as macroeconomic impacts. In particular, the shift in spending from imported fossil fuels to UK investment is likely to affect the economy. Against the current backdrop of low investment, low interest rates and high unemployment the impact is likely to be positive. When we reconvened our costs and benefits advisory group in May 2020, they reinforced this message, concluding that the economic recovery from ‘gives the UK a chance to grow back in a way that is fit for the low-carbon future to which it aspires, and that can benefit from the industrial and economic developments that In this section we summarise the Committee’s conclusions on the need for a green recovery and set out the results of modelling we commissioned on the economic impacts of our recommended pathway. We also consider potential industrial While this section focuses on the aggregate effect on the economy, there will also be important effects, both positive and negative, within the economy – for particular sectors, regions and groups of people. Those are considered in Chapter The pandemic and the measures introduced to respond to it have had huge effects on the economy that have not yet had their full • Unemployment increased from 3.9% over April-June 2019 to 4.5% over the same period for 2020. An additional 9.6 million jobs (over 20% of the workforce) were on temporary furlough under the Government’s Job Retention Scheme.15 It remains to be seen how many of those jobs return as • The impact on production output has remained significant. In August 2020 production output was 6% below February 2020, the last full month of ‘normal’ operating conditions. • In the wake of the initial pandemic, the Bank of England cut its interest rate The Committee previously identified opportunities to use the investment programme needed for Net Zero to help support the • Green stimulus policies can be economically advantageous in the short-run when compared to traditional fiscal stimulus. They have been shown to create more jobs and have higher short-run multipliers. • In the long run, investments in low-carbon and adaptation technologies create a ‘virtuous reinforcing cycle’ as initial investments lower costs and help to accelerate deployment and innovation. This has been seen most dramatically in the wind, solar and battery technology industries. Given the opportunity for investments to help stimulate the UK’s economic recovery, it is more important than ever to assess the potential economic effects beyond annualised resource costs. support the UK’s recovery from

267 Sixth Carbon Budget – The path to Net Zero To identify the potential effect of our recommended pathway for the Sixth Carbon Budget we commissioned Cambridge Econometrics (CE) to use their macro- econometric model. Their analysis suggests a boost to GDP growing to around 2% of GDP by 2030, with an accompanying boost to employment of around 1%: • Box 5.6 summarises the CE work. It demonstrates that despite the added costs involved the transition is expected to boost GDP. This reflects that the stimulus impact of the increased investment brings more resources into the economy and economic multipliers are increased as less UK spending goes • The conclusions of this analysis are consistent with the findings of other The CE analysis indicates an ongoing benefit throughout the period considered (to 2050). It may be that over time the relative boost is eroded as spare capacity in the economy drops, although there are also likely to be longer-term benefits for productivity and innovation from shifting resources to low-carbon • The CE analysis expects the GDP boost to continue growing after 2030 before levelling off at around a 3% boost by 2050. This largely reflects the impact of reducing imports of oil and gas and directing spend instead to the UK economy. It also reflects an assumption of ongoing spare capacity in the economy, which could prove hard to sustain – the CE analysis assumes that employment will be 1% higher than it would have been across • If in the long run there is less spare capacity in the economy than assumed by CE, then the GDP boost could be lower, but still positive.
The resource cost of up to around 1% of GDP provides a worst-case estimate for the economic impact, but appears unlikely given the various economic • The low-carbon technologies deployed in our Sixth Carbon Budget pathways are likely to have more scope for innovation and productivity improvements than continued imports of fossil fuels. The markets for oil and gas are mature, meaning that significant productivity and cost improvements are unlikely to occur. By comparison we are seeing rapid improvements in the cost and productivity of low-carbon technologies (e.g. renewable energy and batteries for electric cars). • Our budget advice comes against a background of increasing numbers of businesses committing to their own Net Zero targets and trajectories. An ambitious Sixth Carbon Budget that ensures policy follows the same direction can help support business confidence and certainty in what to We conclude that the investment programme set out in section 2 can provide a significant economic boost in the coming years and support the UK’s economic These benefits may well persist into the longer-term and could grow if the new technologies continue to develop rapidly and provide spill-overs to other sectors. At worst the economy would return to something similar to what would have been expected without climate action, but with lower risks from the impacts of climate change and valuable co-benefits as set out in section 5. Chapter 5: Investment, costs and benefits of the Sixth Carbon Budget 268 Cambridge Econometrics analysis of the economic impacts of the Sixth Carbon Budget This chapter so far has outlined the investment requirements, operating cost savings and financing costs associated with the deployment of low -carbon technologies and behaviours in our scenarios. Although this implies a net cost (of less than 1% of GDP) th is does not give a comprehensive view of the wider implications for the UK economy of the programme of decarbonisation envisaged for the Sixth Carbon Budget. Therefore, alongside our work for the Sixth Carbon Budget we commissioned Cambridge Econometrics to run their E3ME model, which replicated activity across the whole economy using our Balanced Pathway, and compared this to a world with no further climate action. In order to simplify assumptions this modelling assumed that the majority of increased costs incurred t o pay for decarbonisation were paid through increased taxation, and no impacts of COVID -19 (e.g. higher unemployment) were considered. The results show that despite there being an overall cost in bringing about the technologies to reduce ca rbon emissions, the re is an increase in economic prosperity, in terms of an aggregate increase in GDP, jobs and real disposable incomes. In particular, • Investment in capital. The transition to a low -carbon economy requires that investment is brought forward into relatively capital -intensive technologies. The private and public investment stimulus makes use of spare capacity in the economy (i.e. unemployed resources, assumed to be available throughout the period to 2050 in the modelling) an d therefore increases the level of output (GDP). • Reduction in oil and gas imports. A particular feature of the UK economy is the high proportion of imports in the supply of oil and gas. As the economy transitions from ongoing spending on imported oil and g as in favour of low-carbon domestic investments, leakage from the UK economy is reduced and the implied economic multiplier increases, leading to increases in GDP and employment. • Falling electricity prices , from switching to a low -cost, renewables -led system. Overall, the increased level of economic output, as measured by GDP, creates demand for additional employment both in low -carbon jobs, and in the wider economy, as a result of increased GDP. Over the projection period employment is around 1% higher, equivalent to a round 300,000 jobs. * As increased costs are assumed to be paid through increased taxation, the transition is progressive, and leads to increased income across all income brackets (including through paying less for electricity). The study presents a simplistic illustration of what a transition to Net Zero could look like for the UK, and key limitations include not having assessed multiple alternative pathways, not considering the near -term impacts of COVID -19 (which would likely reinforce the results, drive n by increased spare capacity in the economy), and major uncertainties such as fossil fuel prices, and different levels of climate action in other countries were not sectors, such as refining, and an increase in others such as manufacturing and construction. 269 Sixth Carbon Budget – The path to Net Zero Sourc Cambridge Econometrics (2020) Economic impact of the Sixth Carbon Budget. The Committee’s 2019 Net Zero Report identified some of the areas where decarbonisation could provide industrial opportunities to the UK (see Net Zero Report Chapter 7). These highlighted industries remain • Finance and insurance. The UK is already a world leader in green finance and insurance, and is well positioned to consolidate its position. The Government has already signalled its intention to make green finance one of the major themes of COP26, and backed this up with strong commitments such as establishing the Green Finance Institute as well as more recent announcement (Box 5.7). • Low-carbon power and vehicles. The roll-out of electric vehicles globally will create significant industrial opportunities. There is potential for the UK to play a significant role in the electric vehicle supply chain, for example low- carbon finance, insurance and consulting, membranes and catalysts. There have also been announcements of ‘giga-factories’ being built in the UK. 17 • Greenhouse gas removal and storage. Greenhouse gas removals (GGR) are an important feature of most global scenarios that meet the Paris Agreement's temperature goals and will be crucial for the UK if it is to achieve Net Zero emissions. The UK has a potential advantage in these areas due to its existing supply chains, infrastructure, and geological The Net Zero transition provides opportunities for UK industries,

Chapter 5: Investment, costs and benefits of the Sixth Carbon Budget 270 • Low-carbon hydrogen.
Our Balanced Pathway contains significant amounts of hydrogen. The Government’s hydrogen strategy, due early 2021, should explore further opportunities for the UK to become a world • Low-carbon products. Deeper decarbonisation of industries like steel and cement will be needed in the UK to achieve Net Zero emissions. Greater international demand for low-carbon industrial products could be an opportunity for UK firms, if they start to decarbonise their manufacturing processes sooner. The Government’s announcement of low-carbon and zero-carbon clusters are welcome. Recent announcements relating to finance and disclosures There were several high -profile financial sector announcements relating to Net Zero in • The UK has announced its intention to make Task Force on Climate -related Financial Disclosures (TCFD) aligned disclosures mandatory across the economy by 2025, with a significant portion of mandatory requirements in place by 2023. The Taskforce’s Interim Report, and accompanying roadmap, sets out an in dicative pathway to • The UK Government announced a sovereign green bond. The Gree n Finance Institute said this ‘delivers on plans to move towards a resilient, Net Zero carbon economy that will bring a range of positive social benefits such a s creating green collar jobs, skills and regional revitalisation, ’ and will ‘provide finance for green infrastructure, … create green jobs and catalyse the sterling green bond market. ’ • The Bank of England confirmed the date of publication for its Stress Te st, after postponement due to the pandemic, as June 2021. • The Financial Reporting Council plans to raise the bar on climate change reporting. It ‘supports the introduction of global standards on non -financial reporting and will engage with organisations wo rking to achieve that goal. In the meantime, the FRC encourages UK public interest entities to r eport against the Task Force on Climate - related Financial Disclosures’ (TCFD) 11 recommended disclosures and, with reference to their sector, using the Sustaina bility Accounting Standards Board (SASB) • Mark Carney in his role as Prime Minister’s F inance Adviser for COP26 announced a Private Finance Strategy for climate change ahead of COP26. Climate change is increasingly

271 Sixth Carbon Budget – The path to Net Zero 5. Co-impacts along the path to Net Zero The main motivation for Net Zero is limiting the impact of climate change. Through the UK acting on its own emissions, it contributes and accelerates the global effort and therefore reaps the rewards of a world with a lower amount of warming. Alongside this primary driver, and the potential economic benefits set out above, there are additional benefits on the path to Net Zero, namely significant, tangible improvements to public health and environment and biodiversity benefits. There are also potential negative impacts, and these risks must be planned for and mitigated. For example, switching to electric vehicles will not resolve congestion or air pollution caused by wear on tyres (as fossil fuel power vehicles do). Bioenergy too brings the risk of negative air quality impacts. Our scenarios are designed to limit the negative impacts while increasing the positive co-impacts. For example, walking, cycling and public transport replace a significant proportion of car-miles in the Balanced Pathway, and decarbonising buildings is primarily through efficiency and electrification and/or hydrogen rather than deploying domestic biomass boilers. The positive co-impacts of reaching Net Zero overwhelmingly outweigh the negatives, especially if supported by the right policy decisions from the Government to maximise societal benefits and minimise the risks. Avoiding warming will result in significant benefits for the UK. The climate impacts the UK experiences will ultimately be driven by the global decarbonisation pathway. However, by the Government pursuing an emissions pathway aligned with the Paris Agreement, it can better influence the global emissions trajectory. compared to a path to 4°C of warming. 1.5-2°C of warming will still require the UK to adapt, however the risks at 3-4°C warming, and hence the costs of adaptation, are significantly higher. Our third Climate Change Risk Assessment will be published in 2021, and will review the current state of adaptation in the UK. of climate change, there are a social, health and bio-diversity UK of 3-4°C will be substantially

Chapter 5: Investment, costs and benefits of the Sixth Carbon Budget 272 Range of climate risks for the UK 2°C warming by 2100 4°C warming by 2100 Variable Present day 2050s 2080s 2050s 2080s temperature (°C) 8.8 +0.3 to + 2.2 +0.3 to +2.6 +0.6 to +2.9 +1.9 to +6.3 1.4 million 2.1 million 2.6 million 2.8 million 3.7 million 2,000 5,000 No data 5,000 10,700 UK Climate Change Risk Assessment (2017). b) Health and well-being benefits There is clear evidence for the health benefits of the Net Zero transition. Some of these come directly from changes required to achieve Net Zero (e.g. more active travel and dietary changes) and some indirectly from the implications of those changes (e.g. better air quality from reduced burning of fossil fuels and more liveable buildings as insulation is improved). These benefits are difficult to quantify, but unquestionably offset some, if not all, of the overall resource costs of achieving The Committee appointed an expert advisory group on Health to support our advice on the Sixth Carbon Budget (Box 5.8). The group concurred strongly with the Committee’s previous assessment that climate action could bring significant liveable buildings, active travel

273 Sixth Carbon Budget – The path to Net Zero They emphasised the importance of health inequalities and identified areas for prioritising climate actions that would bring benefits to public health and climate change, and made a set of related recommendations. The health benefits are generally higher on demand-side measures of abatement, such as diets and active travel. • Shift toward active travel. Our scenarios include higher rates of walking and cycling, with a shift away from car trips. Active travel brings with it a host of • Healthier diets. Our scenarios explore different degrees of diet shift away from meat products. Shifting meat consumption more in line with Government guidance would have significant health impacts.
A 2013 report that the Committee commissioned from Ricardo indicated that the health impacts of reducing red meat consumption by 50% amounted to an annual monetised benefit of 0.5% of GDP.18 • Air quality. Poor air quality causes significant harm to health. It is associated with heart disease and stroke, and particulates cause up to 40,000 deaths per year in the UK.19 Many sources of air pollution are decreased by reducing GHG emissions. Ricardo's 2013 estimates suggest that air quality and noise impacts of a low-carbon scenario result in annual monetised benefits of close to 0.1% of GDP in 2030. • More liveable homes. The health cost to the NHS due to poor housing exacerbating existing conditions is estimated to be £1.4-2 billion per year. 20 Thermally comfortable housing has the potential to reduce the risk of heat and cold related illness and death. • Mental health improvements. There are a host of benefits to mental health that are also promised by a Net Zero UK. The improved physical health resulting from and contributing to decarbonisation has knock on impacts on mental health. Some of the changes in our scenarios, for example the expansion of mixed woodlands, have also been shown to have positive effects on mental health. Further to this, ‘climate anxiety’ is a growing phenomenon, and action contributes to alleviating this burden. While noting the potential the above benefits will bring to public health, our advisory group noted that the biggest driver of health outcomes in the UK remains economic inequality. A just transition is therefore an essential part of a successful climate policy and health policy. It is vital for both acceptance and efficacy that policies that reduce emissions do not place burdens on those least able to pay. The transition to Net Zero must not place additional financial

Chapter 5: Investment, costs and benefits of the Sixth Carbon Budget 274 The Health Expert Advisory Group was convened by the Committee in 2020 to advise on assessing the health impacts of setting the Sixth Carbon Budget and ensuring the Committee’s recommendations are aligned with improving public health in the UK. T he Group wa s chaired by Professor Sir Michael Marmot, UCL Institute of Health Equity, and its members were drawn primarily from the academic community with expertise in a variety of fields, plus representation from the NHS Sustainable Development Unit. The central message of the Chair's report is that a strategy to achieve Net Zero emissions should have health equity - the fair distribution of health - as an explicit policy goal, and that a health- equity-in-all-policies approach be adopted. Action to imp rove health equity can be consistent with measures to reduce greenhouse gas emissions and adapt to climate change, but it is evident that this requires careful consideration of who benefits from and who pays for different policy measures. The clear positive co-impacts of health outcomes and Net Zero The Group found that the near -term benefits to health of taking action on climate The group identified five key areas in which action would bring benefits to public health and reduction of health inequalities while contributing to the mitigation of - and adaptation to - climate • Improved air quality delivered by a move to a cleaner energy system and moving away from fossil fuel combustion in most sectors of the UK. • Healthier modes of trans port, particularly due to the health benefits of walking and cycling and reducing air pollution from road vehicles. • More comfortable and efficient homes that are low-carbon, energy-efficient and designed for a changing climate. • Better diets with a focus on healthy and sustainable alternatives to the highest - • Sustainable economic and employment models that better support health and well - Achieving the UK’s target of reaching Net Zero by 2050 will necessitate transformational changes that have potential to generate significant health benefits in the near term, including via improved air quality, better diets, increased levels of physical activity, improved building standards and better work -life balance. Health the fair distribution of health The health benefits of mitigation and adaptation measures will be maximised if they are designed to reach the people facing the greatest disadvantage . However, this is not inevitable. Decisions made in all Government departments ha ve implications for health, health equity , and climate change. Action to improve health equity can be consistent with measures to reduce GHG emissions, but this requires careful consideration of who benefits and who pays for different policy th e costs should not be unfairly borne by people on low incomes, who bear least responsibility for the emissions that cause climate change. A failure to deliver a just transition would risk exacerbating the health inequality that Meanwhile, policy measures that widen inequalities should be mitigated via greater redistribution of benefits. Minimising health inequalities will require systemic changes to enable and support all of the UK population to benefit from uptake of active trave l, sustainable diets and energy efficiency measures, among others. 275 Sixth Carbon Budget – The path to Net Zero Factoring health equity effects into policies requires a more nuanced approach to both mitigation and for example, home energy efficiency measures must also benefit indoor air quality and temperature, and reach those most exposed to temperature extremes and indoor air pollution; reducing meat and dairy consumption needs to involve substitution with healthy, low -carbon alternatives that are affordable and accessible; and decarbon isation of transport must involve low pollution and safe forms of transport that are preferably active and, at the very least, accessible to all. Recommendations for Government The Group’s headline recommendations for the UK Government to max imise the he alth impacts of meeting the Sixth Carbon Budget and Net Zero target • Health-equity-in-all-policies approach.
The UK Government should avoid increasing health and economic inequalities by ensuring the costs of measures to mitigate climate change are di stributed progressively and that the benefits reach those who have the potential to be most positively impacted. The aim should be to reduce health inequalities and to advance health equity, for example by applying a health equity impact assessment to legi slation, including the Sixth Carbon Budget. • Support a just energy transition that minimises air pollution from all sources. Continue to reduce dependence on fossil fuels and accelerate the transition to clean energy sources with decarbonisation of power generation and industrial, commercial and • Design and retrofit homes to be energy efficient, climate resilient and healthy. The dual need to reduce domestic CO 2 emissions whilst building and retrofitting healthy and climate-resilient homes re quires a fine balance of interventions that will depend on the age, design and location of homes. New building standards should be revised to become near -zero or zero-carbon with flexibility to adapt to local environmental • Build a sustai nable and healthy food system. Enable a wider range of national and local powers to shape food systems, and combine these with the resources and statutory duties to support the transition to healthier and more sustainable diets . • Develop a transport system that promotes active travel and road safety, and which minimises pollution. A transport system that is accessible to all and which maximises the physical and mental health benefits of active and decarbonised transport will require a range of policy interve ntions to encourage walking and cycling, more local journeys, the use of public transport and ride -sharing, and to reduce traffic. Electrification of transport will also play a necessary role in reducing transport -related CO2 emissions, but continued priva te vehicle dependence does not constitute behaviour change towards more active and inclusive forms of travel, and will continue to be a significant source of harmful particulate matter. • Develop healthy and sustainable models of work . Prioritise the health and well-being of citizens and environmental sustainability in economic recovery/growth policies. Shift from measuring economic success in terms of GDP to prioritising a well -being approach. Support more inclusive local economic growth and shift towards ci rcular CCC Advisory Group on Health (2020) Sustainable Health Achieving a Net Zero UK. Chapter 5: Investment, costs and benefits of the Sixth Carbon Budget 276 c) Environment and biodiversity benefits Natural capital is difficult to quantify, but economists and citizens are clear that it has a value. The pathways outlined in this report contribute to greater biodiversity, water quality and air quality. Reducing emissions from land use and agriculture could deliver annual co-benefits of £0.6 billion in 2050 in our Balanced Pathway, covering recreational benefits of creating new woodland, improved air quality, improved health from increased physical activity and flood alleviation. These will Other benefits such as improved soil health and water quality and greater biodiversity could also be important but are not included as there is insufficient evidence to quantify their impact.18 • Restoration of peatlands. Peatland restoration increases the likelihood that upland peat biodiversity could withstand shifts to the hotter, drier conditions we can expect over the rest of this century. It also brings benefits for air and water quality, biodiversity and habitat creation and further climate change adaptation benefits (flood alleviation and water quality). • Increased woodland and hedgerow planting. Increasing woodland and hedgerows results in benefits to biodiversity through habitat creation (so long as mixed planting is followed) and can help towards flood alleviation. Many trees can also bring air quality benefits. More woodland close to populated areas would also bring recreational benefits, while increased tree cover in agricultural land could improve animal welfare (providing shade for livestock on hot days). • Changes to farming practices. Practices that optimise the efficient use of nitrogen on cropland and grassland can reduce N2O emissions on agricultural soils. There are also air quality improvements to be gained from a reduction in ammonia. If farms are located near water courses, these measures can help reduce water pollution with benefits for water quality, biodiversity, habitat condition, and resilience to climate change. • Increasing adaptation to climate change. The changes to land use proposed in this report can also help the UK adapt to impacts of climate change. Greater forest cover has been shown to protect from severe Chapter 6 sets out the international basis for our recommended Sixth Carbon Budget. As we demonstrate in that chapter, the UK is well-placed to be a global leader on climate change as it becomes an increasingly important geopolitical issue and as the UK seeks to re-define its position outside the European Union. The UK was the first country to pass over-arching climate legislation (the Climate Change Act), it was the first member of the G20 to adopt a Net Zero target and it has the most rapid historical reductions in emissions in the G20. Reinforcing that leadership position with a strong Sixth Carbon Budget and accompanying nationally-determined contribution to the Paris Agreement as part of an ambitious package as host of the next UN climate talks and President of the G7, can help the UK to unlock potential economic, reputational and diplomatic of £0.6 billion from recreational

277 Sixth Carbon Budget – The path to Net Zero 1 Financial Times (2020) Record surge in redundancies pushes UK unemployment to 4.8% 3 CCC (2020) 2020 Progress Report to Parliament 4 CCC expert advisory group on costs and benefits (2019, 2020) Net Zero – The UK’s contribution to stopping climate change, 2020 Progress Report to Parliament 6 CCC (2020) Net Zero – The UK’s contribution to stopping climate change 7 Global CCS institute (2019) New wave of CCS Ten large-scale projects announced 8 For simplicity, our calculations classify all costs of renewable electricity as investment costs.
9 CCC expert advisory group on Net Zero finance (2020) The Road to Net Zero Finance 10 The World Bank (2020) United Kingdom capital investment, percent of GDP 11 Energy UK (2019) Energy in the UK 12 Based on a comparison of 2017-19 to 2007-09 and 1997-99 to strip out year-to-year fluctuations and the effects of the financial crisis (which led to a sharp drop in spending from 2010). 14 UCL, Carbon Trust (2020) Policy, innovation and cost reduction in UK offshore wind 15 HMRC (2020) COVID-19 statistics 16 CCC (2020) 2020 Progress Report to Parliament 17 Guardian (2020) UK’s first car battery ‘gigafactory’ to be built by two startups 18 CCC (2020) Land-use policies for a Net Zero UK 19 CCC expert advisory group on health (2020) Sustainable health achieving a Net Zero UK 20 CCC (2019) UK Fit for the future? Chapter 6: A just transition to the Sixth Carbon Budget and Net Zero 278 A just transition to the Sixth 1. Jobs and the Just Transition 282 3. Fuel poverty, energy bills and other household costs 295

Chapter 6: A just transition to the Sixth Carbon Budget and Net Zero 280 Fairness is fundamental to public support and must be embedded throughout policy. Only a transition that is perceived as fair, and where people, places and communities are well-supported, will succeed. UK Government policy, including on skills and jobs, must join up with local, regional and devolved policy on the just transition. Vulnerable people must be protected from the costs of the transition and benefits should be shared broadly. This chapter considers the aspects of a just transition to Net Zero in the UK. We consider jobs and competitiveness, and we consider the impacts for households, including potential impacts on energy bills and fuel poverty. Costs must be fairly shared in the transition, so this chapter also considers the implications for the public finances. Our analysis is based on the scenarios we set out in Chapters 2 and 3 to meet the Sixth Carbon Budget goal of reducing emissions by 78% by 2035 relative to 1990 on the path to Net Zero by 2050. • A strategy for a just transition is required. Across many areas, including energy bills and regional employment, fairness is already an issue. The transition to Net Zero will require a shift of hundreds of thousands of workers into low-carbon roles, as well as large numbers shifting out of high-carbon roles, which could be in different places and use different skills. Navigating this transition must start now and will require effective plans, widespread public involvement and an embedding of the principle of fairness throughout climate policy. Regional and local considerations are vital. • The transition brings many benefits for UK households. By 2035, in our scenarios, people’s homes will be better insulated, their cars will be cheaper to drive, they will have cleaner air, quieter streets, more access to green spaces and more opportunities to improve their health. Policy should aim to share these benefits broadly across the population. • The transition also brings risks of uneven costs. In the long term, energy costs and energy bills are expected to fall significantly. However, in the coming decade our scenarios involve further increases in electricity costs before these begin to fall. Although improvements to energy efficiency could largely offset these costs they should not be automatically added to energy bills, which is a regressive approach. Continuing to add climate policy costs primarily to electricity prices, but not gas prices, adversely affects particular groups (those with electric heating) and undermines the case for electrification, which plays a major role in meeting the Sixth • Policies must provide a level playing field where competitiveness is a concern. It is clearly possible to deliver the Sixth Carbon Budget and Net Zero without carbon leakage, provided a suitable policy package is in place. Sectors at risk of carbon leakage must be supported through the transition, initially with taxpayer-funded subsidies. Longer term policy should move away from subsidies towards an international level playing field, for example by using product standards or carbon border tariffs. Work should start now on these options, for example by developing better metrics of carbon-intensity and building an international consensus on the need for

281 Sixth Carbon Budget – The path to Net Zero • Up to around £4-7 billion of extra annual Exchequer funding is needed by 2030 for low-carbon solutions. Alongside extension of funding from existing schemes (including the temporary Green Homes Grant scheme), this could provide the initial support required for deep industrial decarbonisation and for retrofitting the UK’s buildings without increasing household energy bills. Additional funding for low-carbon electricity is also likely to be required initially , though this is currently levied on bills. However, the vast majority of the required investment programme will be funded and delivered privately. Offsetting revenues could be raised by greater use of carbon taxes, especially for sectors like aviation that are currently under-taxed and where equity concerns are less present. This chapter is in four 1. Jobs and the Just Transition 3. Fuel poverty, energy bills and other household costs

Chapter 6: A just transition to the Sixth Carbon Budget and Net Zero 282 1. Jobs and the Just Transition The International Labour Organisation (ILO) define a just transition as being a transition towards an environmentally sustainable economy that is well managed and contributes to the goals of decent work for all, social inclusion and the It is often strongly associated with the implications for jobs and employment. As well as jobs (the focus of this section), we consider impacts on energy bills and other impacts on consumers (section 2) and the competitiveness of particular industries (section 3), as required under the Climate Change Act. Where possible we consider regional and localised effects. The transition to Net Zero will need more of some jobs and fewer of others.
There is no reason to think that the total number of jobs should be any lower than in a high- carbon world. In fact the balance of spending identified in Chapter 5, with a shift from expenditure on imported fossil fuels towards higher UK investment if anything points to the potential for higher overall employment, at least in the near term during the economic recovery. But the shift in jobs from some current areas to others brings a significant transition risk. The transition will affect the whole of the UK, with impacts differing across regions, sectors and workers. The risk of negative localised impacts must be a particular focus for policy. A strategy for the just transition is required to ensure no group is left a) Existing low-carbon jobs in the UK and historical changes in energy jobs b) New job opportunities in a low-carbon future c) Pressure on existing jobs in a low-carbon future d) Regional aspects of the just transition e) Support for low-carbon jobs and a just transition a) Existing low-carbon jobs in the UK and historical changes in The Office for National Statistics (ONS) estimates that 225,000 people are currently employed in the UK’s low-carbon technology and renewable energy economy, representing around 0.7% of the total UK workforce, with an additional 5,000-10,000 • Around three quarters of these jobs are in energy efficient products and services, with an additional 14% in the renewable energy sector, electric vehicle production (7%) and nuclear power (6%). • Of these jobs, almost 40% are involved in direct manufacturing of low- carbon technologies, and an additional 37% in constructing infrastructures to support low-carbon technologies. • Additional jobs exist in the supply chains of companies directly involved in these industries, therefore overall employment in low-carbon industries will

283 Sixth Carbon Budget – The path to Net Zero Increasingly jobs in other sectors will have a low-carbon remit. For example, financial services will be required to finance and insure the growing capital investment in the UK’s transition to Net Zero. Others have noted opportunities for data and digital technology to play an important role in a low-carbon future, with associated jobs.3 Separately, as businesses commit to Net Zero targets, purchasing managers will increasingly need to take sustainability into account. Until now, the UK’s transition to Net Zero has been highly concentrated in the electricity sector, with important positive localised impacts. New jobs have been created in the renewables sector, but some jobs have been lost in coal. Separately, jobs have been lost in the oil and gas sector due to global shifts. • Jobs in manufacturing of renewables have led to a boost in employment in certain regions. For example, the Siemens Gamesa and ABP investments in offshore wind manufacturing in Hull have been attributed with reducing unemployment benefit claims by close to 60% and increasing Gross Value • However the UK’s industrial policy has also been criticised for not maximising investment in renewable energy supply chains in the UK, for the renewables that have been installed to date.5 Partly to address this, the UK Government is now, as part of its ‘sector deal’, working with the UK renewables industry to ensure that at least 60% of the money spent on offshore wind farms goes to UK companies and workers.6 • Over the past decade fossil fuel power stations have closed, or reduced in output. The Scottish Just Transition Commission notes the success of a Government initiated taskforce in managing the immediate threat of job losses resulting from the closure of Longannet coal power station, but that more could have been done to bring local community into discussions.7 Further research should be encouraged into similar closures in the rest of • A prolonged downturn in the UK’s oil and gas sector has seen employment drop by 35% between 2013 and 2019.8 This, compounded by regular volatility in the sector including as a result of COVID-19, has led to job insecurity and mandatory pay cuts.9 • The UK’s efforts to transition workers away from coal production, in the 1970s and 1980s have been criticised for providing new, replacement, jobs that were not sufficiently well paid.10 All these scales are also relevant for the future – from the sector-level across the economy through to individual towns and installations. b) New job opportunities in a low -carbon future The opportunities for jobs growth have, to date, largely been focused on deploying renewable electricity. Countries that manufacture wind turbines and solar panels have been able to export these technologies to a growing global market. Jobs in installing and servicing wind and solar have expanded locally. Renewables jobs are likely to continue growing as the world decarbonises and The next phase of decarbonisation will go beyond renewable electricity towards electric vehicles, low-carbon hydrogen, carbon capture usage and storage (CCUS) and, particularly in the UK, buildings decarbonisation. Low-carbon industrial products will be in increasing demand across the world. Jobs will be needed not just in

Chapter 6: A just transition to the Sixth Carbon Budget and Net Zero 284 The scenarios we set out in Chapters 2 and 3, and the profiles in Chapter 5 for investment and operating costs give indications of potential job impacts, but outcomes will depend on the balance of UK provision and imports. For some sectors, like buildings, it is clear that the balance of new jobs must be in the UK. • Buildings. Our scenarios involve an additional annual investment in UK buildings of over £10 billion per year. The Construction Industry Training Board (CITB) modelled the employment requirements to deliver a programme of housing retrofit in line with our Balanced Pathway. Their analysis suggests that the energy efficiency programme in the 2020s and following low-carbon heat programme would require an additional workforce of over 200,000 new full-time equivalent roles from the late 2020s and other supply chains if those are UK based. • Low-carbon energy.
Our scenarios involve additional annual investment in the electricity sector and energy networks growing to around £20 billion by 2030. Work done for National Grid on the energy system employment opportunities in a transition to Net Zero suggest up to 400,000 low-carbon jobs could be needed over the next 30 years, including jobs in buildings retrofit. This is comparable to direct employment in the UK’s energy sector of 144,000 today. 260,000 will be in new roles, while the remainder will be replacing those who have left the workforce. Importantly, they note the opportunity for these jobs to be spread across all regions of the UK.12 • Transport. Our scenarios involve around a £10 billion increase in annual investment in the transport sector, largely from the extra upfront cost we assume for low-carbon vehicles. LSE, in a recent study, note an opportunity for up to 80,000 UK jobs in manufacturing of electric vehicles and batteries. However, without Government action to encourage investment in this sector, they suggest EV manufacturing could move elsewhere.13 • Manufacturing. There may also be employment opportunities for the UK from exports if it becomes a market-leader in the production of low-carbon technologies. The Energy Innovation Needs Assessment (EINAs) recently conducted by BEIS assessed these opportunities and found innovations in low-carbon manufacturing technologies including CCUS could support up to 80,000 jobs in the UK by 2050.14 These jobs would also be high quality, with wages above the UK average. * The EINAs also highlighted sectors where the UK already has a comparative advantage compared to other countries as being offshore wind, smart systems and CCUS, complemented by strength in engineering services that can be applied to CCUS, hydrogen and bioenergy.15 The macroeconomic modelling we set out in Chapter 4 also provides some insights on employment effects. It identifies boosts to the utilities sector and to manufacturing and construction, while fewer jobs may be needed in oil and gas production and aviation. It also identifies potential boosts for employment in the broader economy (e.g. services) resulting from the economic stimulus effect of the major investment programme in our Balanced Net Zero Pathway. * Note that the EINAs only consider the jobs and GVA that could be provided in the production of technologies, rather than in the operation of these technologies (for example jobs/GVA provided in the production of cement kilns, rather than in the cement sector itself). 285 Sixth Carbon Budget – The path to Net Zero and energy efficiency (2020-2050) CITB (2020) Building Skills for Net Zero (draft report); CCC analysi s. We have applied a two-year rolling average to smooth annual variation. c) Pressure on existing jobs in a low -carbon future A transition to Net Zero will also reduce demand for certain high-carbon services and technologies, such as fossil fuel extraction, processing and distribution, aviation, fossil fuel machinery and livestock and dairy. This could see jobs in some key sectors significantly affected, though in each area there will also be new • The UK’s oil and gas sector is likely to be heavily affected in a Net Zero economy by 2050 due to falling international demand for oil and gas. Oil and gas production from the UK Continental Shelf is already projected to reduce over coming decades. Our Balanced Pathway sees an 85% reduction in UK oil demand and a 70% reduction in gas demand. Though some oil and gas will continue to be used, lower production costs internationally may favour imports of these fuels over domestic production. Opportunities in this sector could involve a shift towards offshore renewables, CCUS and hydrogen, with measures to manage the carbon

Chapter 6: A just transition to the Sixth Carbon Budget and Net Zero 286 • The UK’s automotive industry largely produces conventional fossil-fuelled vehicles for export*.16 The sector’s nearly 450,000 workers will need to be engaged in a transition to electric vehicles that is already underway, in the UK and globally. Falling demand for fossil fuelled vehicles, resulting from a transition to electric vehicles, is likely to reduce the number of jobs available in manufacturing and servicing these vehicles in the UK. In our Balanced Pathway we estimate a reduced spend on vehicle maintenance of around £7 billion annually by 2050. The UK already produces electric vehicles, and opportunities exist for the UK to have a large share of future electric vehicle, and potentially battery, production.17 Broader economic circumstances, including the UK’s future trading relationships, will clearly be • Our scenarios suggest growth in flying may need to be limited, or levels decrease, from pre-COVID levels. Therefore jobs in UK aviation and aeronautics sectors could be impacted. • Income to livestock and dairy farms could be affected if meat and dairy consumption falls by the 20-50% envisaged in our scenarios. The UK’s farms and their 450,000 workers will need to be engaged and supported in the transition to low-carbon farming practices.18 The Government’s Environmental Land Management Scheme (ELMS), the UK’s successor to the EU’s Common Agricultural Policy, will be critical. – Multiple opportunities exist, including transitioning to plant- based food (e.g. cereals and legumes), growing bioenergy crops, lower-carbon livestock production and receiving income for low-carbon land management (such as increased tree- planting or peatland restoration, much of which in our scenarios occurs on land released from raising livestock). – For farmers, raising awareness and the provision of training on the adoption of sustainable management practices is crucial. • Demand for manufacturing of some products or materials would likely reduce within the more circular economy represented in our scenarios. This could lead to a shift of some manufacturing towards recycling-based manufacturing and re-use-based services. However, the increased demand for materials for the major investment programme required is likely The transition will also require some industries, such as manufacturing, to change the technologies, fuels or processes they use to costlier ones, while they continue to provide the same type of products or services.
This could impact their competitiveness and affect jobs (while causing ‘carbon leakage’) if Government does not enable companies to operate on a level playing field with their international competitors. Therefore, Government should ensure a level playing field, where required, to maintain and potentially grow low-carbon UK industry * In 2019, 1.3 million cars were built in the UK, 1.1 million of which were exported, LSE (2020) Seizing sustainable growth opportunities from zero emission passenger vehicles in the UK. 287 Sixth Carbon Budget – The path to Net Zero d) Regional aspects of the just transition The jobs opportunities and challenges of the low-carbon transition will vary regionally. Regional changes to manufacturing jobs are particularly important and the jobs often pay more than those in other sectors in these regions. In some regions (e.g. North East Yorkshire), manufacturing provides nearly 20% of all full-time equivalent jobs, and it can be even more important at smaller scales (e.g. one third of all jobs at some local authority levels). 19 Importantly, many of the regions where manufacturing jobs are concentrated are also those where jobs are likely to be required in the low-carbon hydrogen, CCS and renewable energy industries. The UK already has high levels of regional inequality compared to other OECD countries20 and transitions are already occurring in the UK that affect regions in different ways. Unless carefully managed, a transition to Net Zero could exacerbate these inequalities. Besides jobs, the costs and benefits of the transition will also differ across regions. • The deindustrialisation that has occurred in the UK to date has already left some regions disproportionately worse off. 21 For example, IDDRI notes the limited success of efforts to transition former coal mining communities to new jobs, noting that though new jobs have been created, they have often been lower paid than previous jobs in the region and high levels of worklessness still prevail. 22 • The costs of the transition may be higher than average in some regions of the country. For example areas with older, energy inefficient housing could face higher energy bills. Rural areas off the gas grid, who typically pay more for heating fuel, have more to gain from a switch to low-carbon heating. Current and future transport infrastructure can limit the ability of the local population to walk, cycle or use public transport, and may affect the opportunity for and costs of running an electric vehicle. Relative wealth will also be important, including for the ability to fund changes locally. • Many of the benefits of a transition to Net Zero will be felt at the local level. For example, a transition to electric vehicles, alongside an increase in active travel will lead to a decrease in local air pollution, benefitting health. A shift to healthy diets, and improved quality of housing is expected to lead to lower costs for the health service. An increase in tree-planting and urban green spaces will provide more green recreational space. Decarbonisation strategies will need to be tailored to local circumstances and local communities. Maximising the economic and employment opportunities arising from the transition will require targeting new investment towards areas that are likely to be the most impacted. This should be tied to a dialogue between local, regional and national Governments, alongside a public engagement strategy that gives local people a say in how a transition to Net Zero will affect their A just transition will need to

Chapter 6: A just transition to the Sixth Carbon Budget and Net Zero 288 manufacturing and construction ONS (2020) Labour Force Survey and the UK Business Register and Employment Survey. e) Support for low-carbon jobs and a Just Transition A low-carbon economic recovery from the COVID-19 pandemic can provide opportunities for skilled jobs in low-carbon industries such as building retrofits including low-carbon heat installation, tree-planting, peatland restoration and green infrastructure, and low-carbon energy. Once established, a low-carbon recovery can form the basis of a longer-term approach to ensure that low-carbon investment in the UK leads to low-carbon jobs. That approach should • Sector deals in the offshore wind, and nuclear industries have ensured that the industry targets a minimum level of UK content in the production, installation and servicing of offshore wind farms. • Commitment to large future low-carbon markets can encourage investment in UK manufacturing. For example, Siemens cites the UK Government’s support for offshore wind as a key reason behind opening a blade factory in Hull, alongside active Government support and co- investment in upgrading port facilities.23 • Investment in skills, including the learning of science, technology, engineering and maths (STEM) subjects in education. 289 Sixth Carbon Budget – The path to Net Zero • Reskilling and retraining programmes for workers in high carbon industries. Particular skills gaps, such as those identified by the Committee in heat pump and energy efficiency installation, should be identified and action to address these prioritised. The ability of a decarbonised UK manufacturing sector to compete in global markets is dependent on having a labour force with the requisite skills, not only in manufacturing products and materials, but also engineering, procurement and construction • Developing policy to provide favourable investment conditions. Policies that provide businesses with clarity and confidence are vital and can be supplemented by use of other policies, such as business rates, to encourage low-carbon investment. • Investment in research and innovation, and in translating that to effective • Trade-deals can be used to ensure that low-carbon industries in the UK maintain their competitiveness with industries abroad, maintaining opportunities for workers in the UK. In developing its approach to low-carbon jobs, Government should use these tools, work with industry and collaborate with devolved as well as local Government. Scotland’s Just Transition Commission was appointed to advise on a Net Zero economy that is fair for all. It has identified four priorities for achieving a just • 1) Planning ahead –clear transition plans need to be developed down to the sectoral level so that surprises are minimised.
Unplanned transitions tend • 2) Engagement – people need to be brought into the decision-making process and derive a sense of ownership of the Net Zero project. • 3) Bringing equity to the heart of climate change policies. Climate policies need to be systematically screened for their impact on vulnerable and excluded groups and for the opportunity to address existing inequalities. • 4) Start now. The transition is already underway both in the UK and around the world. A strategy that recognises this can put the UK at the forefront of addressing fairness in a transition to Net Zero. For the UK, the Treasury’s Net Zero Review will be the first comprehensive look at elements of the just transition to Net Zero. It will consider how the transition to Net Zero will be funded, and where the costs will fall. It will • The range of choices for how households, businesses and the taxpayer could contribute towards different elements of the transition to Net Zero. • Mechanisms to create an equitable balance of contributions. • Opportunities for economic growth as we transition to a green economy. • The trade-offs between cost, competitiveness, effects on consumers and strategy for a just transition is

Chapter 6: A just transition to the Sixth Carbon Budget and Net Zero 290 The Treasury’s funding review will be a crucial first step in demonstrating that strong leadership and coordination at the centre of Government can ensure the action to deliver Net Zero is delivered in a fair and equitable way. Its interim report was due to be published around the same time as this report, but had not been at the The Treasury’s final report of their Net Zero Review, due in Spring 2021 • Develop a plan for funding decarbonisation and review the distribution of costs for businesses, households and the Exchequer. This should set out the main areas where action and funding will be required, the principles on which the distribution of costs should be determined and clarity over how • Consider near-term as well as long-term decarbonisation funding needs and policy implications. The Government cannot make funding commitments that bind future Governments, but the review can set out principles to inform the scale and nature of long-term Government funding and make concrete proposals for action and funding over the next five to ten years, or at least be accompanied by a spending review or budget • Give due weight to issues of fairness, including – Where the costs of policies are likely to fall and how they can be mitigated where vulnerable groups or industries are likely to be affected. This should include adverse distributional impacts of current – Impacts on jobs and job quality and how to manage them, including consideration of reskilling and retraining. – Plans to monitor and to report publicly on progress towards achieving a fair transition and protecting vulnerable groups. – The benefits of Net Zero and where they fall, which will have implications for individuals, specific regions and the Exchequer. We will review the Treasury’s final publication as part of our 2020 Progress Report to Parliament. Managing the just transition will be an ongoing process and must continue beyond the report’s publication. A full strategy is needed. The Treasury’s Net Zero review can be the starting point for a Just Transition strategy for the

291 Sixth Carbon Budget – The path to Net Zero For climate action to be effective, it must reduce global emissions, not just UK emissions. Emissions reductions from industry must result from decarbonising the UK’s own manufacturing and wider industrial base, rather than ‘offshoring’ it to other countries (i.e. 'carbon leakage'). It is vital therefore to consider In our scenarios UK industry is decarbonised, not offshored. Our assessment of the policy options (in consultation with researchers and industry representatives) supports a clear conclusion that it is possible to deliver those scenarios without carbon leakage, provided a suitable policy package is in place. This section summarises some of the policy options, with more details in our accompanying The context for action to reduce emissions from industry is shifting, with significantly more climate action emerging internationally than just a year ago, when we recommended that the UK adopt its Net Zero 2050 target. • Policy is developing internationally with a similar objective of decarbonising industry without offshoring. For example, the EU plans to introduce border carbon adjustments (BCAs) from 2023. The European Commission plans to bring forward legislation for BCAs in Q2 2021 as part of its European Green Deal.24 It plans to roll out BCAs from 2023, starting in a few sectors, reported to be cement, steel and electricity.25 The incoming US Biden administration has also committed to a carbon adjustment fee on imported products. • Businesses and sector bodies have also made new commitments. For example, the European Cement Association set a Net Zero target for 2050. • Wider adoption of Net Zero targets internationally, including by countries with large industrial sectors like China and South Korea, is providing a stronger signal that multinational industry will need to decarbonise at some stage, whichever country they are based in. • New projects and demonstrations are emerging. For example, the Hybrit iron & steel project in Sweden is testing the use of hydrogen instead of coking coal to produce low-carbon steel, and the NorCem cement factory in Norway is close to receiving a final investment decision for a full-scale We also have a better understanding of where the opportunities to reduce emissions lie across the emitting industrial sectors, including the roles of resource and energy efficiency, electrification, use of low-carbon hydrogen and application of carbon capture and storage (CCS). • We estimate the annualised cost of decarbonising the manufacturing and fuel supply sectors with these measures to be around £3.5 billion per year by 2035 and £5.5 billion per year by 2050.
• The scenarios we set out in this report, backed up by our new research (as described in Chapter 3, sections 3 and 5, are designed to ensure that industry has time to decarbonise. manufacturing and construction emitting sectors, though still

Chapter 6: A just transition to the Sixth Carbon Budget and Net Zero 292 That includes time to roll out new infrastructure (e.g. a CCS network), for supply chains to scale up and for effective policy to be developed and implemented in consultation with industry. We note that global analyses have also identified the potential to decarbonise global industry at relatively low cost and on similar timescales to our UK • The global pathways we set out in Chapter 7 involve deep decarbonisation of industry by 2050, with significant progress, particularly in developed countries like the UK, in earlier years. • Global analyses have identified potential to reduce industrial emissions to Net Zero. For example, the Energy Transitions Commission set out pathways to reduce emissions from cement, steel, chemicals and aluminium to Net Zero by 2050 in developed countries and by 2060 globally, as part of an overall transition to Net Zero at a cost of less than 0.5% of global GDP.27 The Committee was particularly careful to consider the needs of industries that could be at risk of carbon leakage (based on the EU’s list for industries at risk) and the policy options to support these industries in the Net Zero • We commissioned new work from the Energy Systems Catapult to evaluate carbon policies to mitigate leakage and alleviate competitiveness • We asked the University of Leeds to undertake independent research to evaluate a range of industrial decarbonisation policy options and how these might be combined to deliver the emissions reductions required, while avoiding carbon leakage. • We undertook a deep-dive review of the potential role of product standards to support deep decarbonisation of industry with an • We convened an industry policy steering group that included trade representatives from relevant industrial sectors (e.g. steel, cement, paper, fertiliser), international agencies and policymakers. The group had a series of meetings to guide the ESC and Leeds research projects and have informed the Committee’s conclusions in this section. b) Policy to decarbonise industry and maintain competitiveness Our work has identified various policy options that should be used for reducing industry emissions while maintaining competitiveness of UK industry. These would help enable costlier deep decarbonisation actions, such as electrification, use of hydrogen and application of CCS. We would expect mechanisms to develop over time with a transition away from costs initially being borne by taxpayers. • Free allowance allocation in a UK Emissions Trading System (ETS) would continue to provide competitiveness protection for industry, although planned cuts to free allowances have left some concerned at the level of protection. While free allowances within an ETS can protect competitiveness, an ETS alone is unlikely to provide a sufficient incentive to enable deep decarbonisation of industry as a) costs for early industrial deep decarbonisation deployment will likely come at a premium above expected carbon prices b) the uncertainty of the carbon price level adds a further risk premium to costs. c) upfront capital support is likely to be required by manufacturers that seek very short payback periods (in addition to an ongoing carbon price incentive). It is possible to decarbonise UK scenarios in this report without offshoring of industry, provided a suitable policy package is in

293 Sixth Carbon Budget – The path to Net Zero If a carbon tax combined with rebates or exemptions is implemented from January 2021 instead of a trading system, this is likely further to reduce incentives for deep industrial decarbonisation, without further policy. • Taxpayer funding of industrial deep decarbonisation projects would manage competitiveness and bring down project cost of capital. Government has consulted on a Contract for Difference scheme to support both some capital and operational costs of industrial CCS projects. This, or other funding approaches, should be rolled out across further deep industrial decarbonisation. Given the estimated costs of our scenarios set out in Chapter 5, and that only part of industry is at risk of carbon leakage, the required support to decarbonise manufacturers at risk of carbon leakage would be around £2-3 billion per year, assuming manufacturers do not face additional policy costs on their electricity bills. • Border carbon tariffs* would raise the price of high-carbon imported goods, stopping the need for free allowances and allowing all UK emissions to be subject to carbon pricing without compensation for costs not faced by international competitors. This could enable carbon pricing to support deep decarbonisation in sectors that would otherwise be at risk of carbon leakage. It would also send a signal to other manufacturing countries to decarbonise their production. Under this approach industry would pay for the emissions reductions, which could then be passed through to consumers in higher prices without competitiveness impacts. • Minimum standards applied to imported goods (in line with domestic standards) would also allow domestic production to decarbonise without threat of being undercut by high-carbon imports. Standards could be applied on producers of goods or on purchasers, and applied at the primary, intermediary or tertiary product stage. As with border carbon tariffs, this would lead to a premium price for low-carbon goods so consumers would bear the cost. Standards mandating near-zero-carbon intensity may need to be introduced later than the more flexible border carbon tariffs. Other formulations of standards may have an earlier role, either directly on carbon intensity with partial reductions or indirectly through other requirements, or in particular sub-sectors. Public procurement It will be for Government to decide on the appropriate mix of instruments, in consultation with the affected industrial sectors.
The broad pathway is likely to be a transition from subsidised deployment in the near-term towards an international level playing field that does not require subsidy in the longer-run, although mechanisms such as contracts for difference may still have a role in removing risks Work towards the longer-term solution should begin immediately; the substantial time it will require to develop these solutions means they are on the critical path to decarbonisation. Most pressing is the development of improved metrics for carbon-intensity on which border tariffs or standards can be based, along with international negotiation and consensus building on these measures. Ultimately implementation of standards and tariffs is likely to be product-by-product rather than a single over-arching policy – clearly it will be important to ensure consistency while respecting specific circumstances. * These are typically referred to as border carbon adjustments (BCA); however, some stakeholders also use the term BCAs to encompass the application of standards at the border, which we treat separately. Therefore, we use the Border Carbon Tariff terminology for clarity. Chapter 6: A just transition to the Sixth Carbon Budget and Net Zero 294 We note that some of the policies above are more obviously applied to imports to provide a level playing field for UK producers, but they could also be applied to UK exporters. For example, border tariffs could also involve rebates to exports from UK firms that have reduced emissions without full taxpayer support. While the assessment above focuses on industry, the principles also apply to other trade-exposed sectors like agriculture. Future trade deals should ensure that UK standards are also applied to imported goods, and a level playing field is provided for UK producers operating to high standards. We also note that policies in other parts of the economy also affect trade-exposed sectors – it will be important to continue policies such as the exemptions and compensations for UK carbon price Similarly, for sectors like aviation and shipping, which are inherently international, the focus should be on developing international policy approaches (though as we set out in Chapter 10, UK influence and UK levers have an important role to play). Here, sectoral agreements are already in place (e.g. CORSIA for aviation) or possibly emerging (for shipping), but will need to strengthen significantly. A global shift is beginning, towards low-carbon industrial products. The UK should aim to be part of the manufacturing base for those products, and is well-placed given our access to plentiful low-cost CO2 storage sites under the North Sea and elsewhere, and our history of strong infrastructure provision engineering expertise. Government can maximise the UK’s potential by providing a clear and early low- carbon policy offer to manufacturers. There are challenges in developing policy to drive emissions reductions while maintaining competitiveness, but there are also opportunities and it is increasingly apparent that the low-carbon path is the most likely path to future success for UK industry. 295 Sixth Carbon Budget – The path to Net Zero 3. Fuel poverty, energy bills and other household costs The Climate Change Act requires us to advise on the likely impacts of our recommended budget on fuel poverty. That is part of a wider issue of fairness regarding the impact on energy bills, where any increases tend to be regressive. Our scenarios also imply broader potential costs and benefits for households. Our analysis in Chapter 5 demonstrates that our scenarios imply growing and enduring savings in operating costs, alongside a major investment programme. To 2030 the largest cost increases affecting households are in the electricity sector and for decarbonising buildings. If these are paid fully through energy bills, then bills would rise to 2030 with likely regressive effects. Alternatively, an extension of and modest increase in existing Exchequer funding could be sufficient if backed Large savings are available for household in other areas, most notably in transport from the shift to electric cars, and significant benefits are available for health, well- being and access to the natural environment. However, even in areas where costs are likely to fall relative to today, the distribution of costs and savings could create both ‘winners’ and ‘losers’ during the transition. Effective policy design, and continued monitoring and intervention should aim to limit increases in costs to those that are able to pay, while sharing the benefits a) Current energy bills and fuel poverty b) Future energy bills and fuel poverty c) Wider household costs and benefits a) Energy bills and fuel poverty Ofgem estimate an annual bill for dual-fuel households (using gas for heating and electricity for lights and appliances) of £1,170 in 2019. Around £150 of the bill was attributed to environmental and social costs, including the cost of low-carbon The impact of low-carbon policy costs on energy bills is regressive, making up a larger proportion of the household income of lower-income groups than higher- as most policy costs are currently recovered from use of electricity rather than gas. A household switching from a gas boiler to a heat pump for its heating would face an extra policy cost of over £100 a year on its energy bill, despite reducing its The Committee last published a detailed assessment of energy bills in 2017.30 That assessment concluded that improvements in energy efficiency had more than offset increased costs of funding low-carbon technologies such that overall bills had fallen in real terms since the Climate Change Act was passed in 2008. Chapter 6: A just transition to the Sixth Carbon Budget and Net Zero 296 We expected those offsetting effects to continue in the following years as efficient boilers, lights and appliances roll through the stock and as continued low-carbon investment adds further to low-carbon policy costs. percentage of total household income by Owen & Barrett (2019) Reducing inequality resulting from UK low-carbon policy. A household is considered to be fuel poor if it cannot afford to keep its home adequately warm at a reasonable cost, given its income (though definitions vary across the UK).
* Fuel poverty is caused by a combination of low household income, high energy requirements and high energy costs, with energy-inefficient housing Current policies are insufficient to tackle fuel poverty, despite significant funds nominally targeted at helping people heat their • Around 10% of English households are considered to be in fuel poverty, representing over 2 million households, compared to close to 12% in 2009.31 In Scotland, Wales and Northern Ireland the number of households in fuel poverty are significantly higher at 25%, 12% and 42% respectively, due in part to using oil or electricity, rather than natural gas, for heating in rural areas, as well as differences in regional income.32 • The Energy Company Obligation targets energy efficiency installations towards fuel poor households and installs over 150,000 per year. * In Scotland, Wales and Northern Ireland this is defined as spending more than 10% of income on household fuel use in order to maintain a satisfactory heating regime. England uses different definition. See p49 .theccc.org.uk/wp-content/uploads/2017/03/Energy-Prices-and-Bills-Committee-on-Climate-Change- an issue across the UK. Tackling this will be an essential part of a just transition to Net Zero. 297 Sixth Carbon Budget – The path to Net Zero This year, an additional £1.5 billion of funding for the Green Homes Grant was also introduced, with the scheme available to social landlords, alongside targeted funding for fuel poor homes, via local authorities. • Joint research that we published with the Committee on Fuel Poverty in 2017 identified potential savings on the Winter Fuel Payment (WFP) and Warm Home discount, which are poorly targeted at helping households in fuel poverty. We estimate that less than 10% of the combined £2 billion per year of these budgets for England is received by households in fuel poverty. Nationwide rollouts of energy efficiency and low-carbon heating solutions offer an opportunity to reduce energy bills for the fuel poor while decarbonising their heating, particularly for those off the gas grid. Our scenarios have these homes at the forefront of the required low-carbon heating installation programme. b) Future energy bills and fuel povert y By 2050 we expect the combined operational cost savings from our scenarios for the electricity and buildings sectors to more than offset the extra investment requirement for those sectors. That reflects the significant cost reductions expected for renewable power generation and their increasing share of the UK generation mix. It implies significant potential for lower bills in the long term, particularly compared to the current situation where support for historical low-carbon investments in the power sector is adding significantly to current energy bills. Electricity costs and appliance efficiency However, in the early 2030s, we expect low-carbon electricity investment to continue to add costs to energy bills. Improving energy efficiency can continue largely to offset these increasing costs in aggregate. • Costs of low-carbon electricity. Although we expect electricity costs to fall in the long run, we first expect costs to rise to 2030. • This reflects both the costs of support for low-carbon investment and costs of network reinforcement, which is also recovered through energy bills, albeit spread over a long period as part of the UK’s regulated asset base. Many of the costs have already been committed by existing policies. • Low-carbon investment in the 2020s includes some more expensive options, such as renewables that were contracted several years ago, new nuclear power stations that have either agreed a higher price for their electricity or that we assume will cost more than renewables, and early carbon capture and storage plants that we expect to be relatively expensive. Together, this adds costs of up to £9 billion per year, peaking in 2030 and falling away by 2040. We expect these to add over £100 by 2030 to the average annual energy bill for a typical household, though this will depend on policy design (e.g. the Government has proposed use of a regulated asset base model for • From the late 2020s the costs of supporting legacy low-carbon investments (i.e. renewable generation deployed 15-20 years earlier) will begin to end, reducing the £150 policy costs currently levied on existing fund ing better towards electricity is likely to add costs to 2030, but fall shortly after. Chapter 6: A just transition to the Sixth Carbon Budget and Net Zero 298 • Savings from lights, appliances and boilers. In our 2017 energy bills analysis we estimated that by 2030 households could save around £125 on average each year by replacing appliances, lights and boilers at the end of their lives with the latest equivalent models. * Beginning from 2019 instead of 2016 that implies a potential saving by 2030 of around £100. However, these costs and savings will not be evenly distributed between households. Recovery of the extra costs should be carefully considered – it should not be automatically assumed that they will be added to energy bills, given the regressive effect of such an approach. In particular continuing to recover costs only from electricity bills would adversely affect those with electric heating and undermine the attractiveness of electrification. Paying for low-carbon buildings retrofits requirement in buildings energy efficiency and low-carbon heating of around £9 billion each year from the late 2020s through to 2050 to fully decarbonise the existing housing stock. This averages at under £10,000 investment per existing home. This additional investment delivers an operating cost saving of around £1.5 billion a year, with an additional £1.2 billion from lighting and appliances savings (mentioned above) and on top of savings from improvements to boiler efficiency In our accompanying Policy Report we identify a need for policy costs that are currently charged primarily on electricity bills to be rebalanced. That could involve moving them to Exchequer spend (in which case energy bills would fall substantially, but tax rises may be required), or spreading them more evenly over electricity and gas bills (which would have offsetting increases on gas bills and decreases on electricity bills).
We also identify the importance of standards in driving progress, but for such a policy to be seen as fair it is likely that some Exchequer support will be needed, for example as grant funding towards the costs Such an approach can achieve the major upgrade required to the UK’s homes without large increases in consumers’ energy bills and with a modest increase Exchequer funding. Indeed, policy can be designed to ensure that vulnerable customers benefit from lower energy bills, given the lower operating costs resulting from improvements in energy efficiency of homes and heating systems. • Low-income households. Our scenarios meet the Government fuel poverty target to improve all fuel poor owner-occupied homes to an Energy Performance Certificate rating of ‘C’ by 2030. Investment costs for these homes are around £2 billion a year to 2030. This reduces to £1 billion a year to 2050 once the 2030 target has been met. These investment costs can broadly be covered by existing Government schemes, if current temporary schemes are extended or other budgets increased (Box 6.3). Providing the remaining funding gap is closed, this will deliver ongoing savings in annual energy bills for fuel poor homes of around £70 from 2030 on average. • Other households. Our scenarios involve investment rising to £7 billion a year for non-fuel-poor households by 2030. The Government has already proposed policies to pass some of these through (e.g. to landlords through the private-rented sector minimum standards, though some may then be * These estimates do not include bill reductions from improving the energy efficiency of the building (e.g. insulation). It is possible to achieve this energy bills and with a modest reflected in their energy bills. savings of £1.5 billion per year, with a further £1.2 billion per

299 Sixth Carbon Budget – The path to Net Zero Funding for current policy programmes could cover remaining investment requirements in the long term but would leave an annual gap in the late 2020s around £3 billion, with offsetting fuel savings of over £1 billion (Box costs, existing homes, Balanced Pathway Element Energy for the CCC (2020) Development of trajectories for residential heat decarbonisation to inform the sixth carbon budget; CCC analysis. Stack columns above the axis show annual additional investment cost. Does not include some operating costs for cooking or household and garden machinery (e.g. lawnmowers). Various options exist for funding the remaining gap of up to £3 billion per year in the late 2020s. It may be possible to pass some, or even all, of it through to homeowners. That would impose a cost, but could increase the value of their homes. It could be funded through further Exchequer support, including extending existing schemes. Or it could be recouped through energy bills, in which case they Good policy design will be vital to ensuring that costs do not escalate beyond these estimates. We set out our recommendations in the accompanying Policy report, including the need for clear signals and standards, skills policy, information, enforcement and local energy planning. We note that the sum of the support required to decarbonise residential heating is considerably lower than that already allocated to decarbonising the power sector, within a programme that was widely considered to have been a success. Chapter 6: A just transition to the Sixth Carbon Budget and Net Zero 300 The overall investment programme in the building stock will deliver important benefits besides reducing emissions – making homes comfortable and healthier places to live in, improving affordability in inefficient stock and tackling fuel poverty, and helping make homes resilient to future climate impacts such as overheating (see Chapter 3 for more details). Existing support schemes and the need for low-carbon funding The Balanced Pathway to Net Zero set out in Chapters 2 and 3 sees the UK invest in a major energy efficiency programme over the next 10 -15 years, in line with Government policy. This prepares the stock for a full -scale transition to low -carbon heating in homes on the gas grid from 2030 -2050. Annual investment costs rise to around £9 billion a year by 2030, with an offsetting saving in annual operating costs of £1.5 billion. Funding for current policy programmes would cover part, but not all, of that gap. Fuel poor homes. There are several Exchequer -funded programmes whic h cover £1-2 billion a year of investment costs between now and 2028, mainly focussed on making fuel • Fuel poverty programmes. The Energy Company Obligation curre ntly funds energy efficiency for the fuel poor, at £0.6 billion a y ear through to 2028. There are further publicly funded schemes in Scotland, Wales and Northern Ireland which add around £0.1 billion a year. An extra £2 billion is earmarked for fuel poor h omes under the Homes Upgrade Grant under the 2019 Conservative part y manifesto. • Government funding for social housing . Government has earmarked a further £3.8 billion of funding for energy efficiency upgrades in the 5 million social homes, at around £0.5 b illion a year. We estimate that around 40% of this would cover home s currently in fuel poverty. It does not cover low -carbon heat investments currently, which would add a further £4 billion to 2030. • Green Homes Grants. As part of its stimulus package, the Exchequer is currently providing £2.0 billion for grants for energy efficiency and low -carbon heating in residential homes through to April 2021 (including the £500 million Local Authority Scheme). These cover the full costs for low income households (capp ed at £10,000 per home), and two -thirds for others (capped at £5,00 0 per home). We assume here that up to 50% covers fuel poor homes – the exact split between fuel poor and other homes will be determined by demand.
Policy proposals to extend private-rented sector minimum standards will affect who pays for these investment s over the next • The UK Government published proposals in September 2020 to require all private - rented homes to get to EPC C by 2028. This would apply to all new lettings from 2025. • Based on our analysis, this suggests that up £2.5 billion a year c ould be passed through to landlords between 2025 -2028. The high end of the range is if the Government takes a ‘dual -metric’ approach targeting both efficiency and carbon emissions, as set o ut in its 2020 consultation. * An approach which includes carbon in tensity is associated with an additional take up of 700,000 heat pumps to 2028 in the Impact Assessment. BEIS has published cost estimates of £4,700 per home, or £6,200 per home for the ‘dua l- metric’ proposal. Pass -through could be higher around 2028, when the total annual investment programme peaks above £9 billion. • Between a quarter to just under half of PRS investments cover fuel poor homes, with the low estimate based on BEIS’ recent Impa ct Assessment. • These investments would increase the value of the l andlord’s asset (i.e. the home). However, it remains possible that some of the costs may get passed on to tenants * ‘Dual-metric’ refers here to the energy efficiency rating (EER) which is the typical cost rating on household energy performance certificates (EPCs). 301 Sixth Carbon Budget – The path to Net Zero Existing Exchequer support through other schemes could also f und some of the required • The domestic RHI subsidises renewable heat technologies such as heat pumps and biomass boilers, with subsidies paid over a seven -year period. Current forecast spend is around £400 million this year against an allocated budget of £1.15 billion budget for • The existing £400 million spending will reduce to zero over the next seven years. • Similarly, the Green Homes Grant could be extended, which would cover an additional £2 billion per year. Implementing these proposals could cover £6 -7.5 billion through to 2028 of the £9 billion investment required annually, and £4 billion from 2030 once the energy efficiency programme has been completed in most homes. The range in the 2020s is a function of policy design, in particular for the PRS standards (e.g. whether they cover the full investment in the Balanced Pathway, including whether they cover low -carbon heat). This leaves a gap of up to £3 billion a year in the late 2020s, rising to £4 billion a year in the c) Wider household costs and benefits While we expect costs to increase to the early 2030s in the electricity sector and for buildings, we expect a large fall in the costs of transport. • When private costs (e.g. tax) are included savings are large for individual consumers. For example, owners of petrol and diesel cars driving 250km (156 miles) in a week currently pay around £17 for their fuel. • Driving the same 250km in a typical electric vehicle could cost around £6, saving the driver £11 each week, equivalent to over £500 each year.33 • Even with tax excluded, savings would be significant, at around £100-200 We have not undertaken a distributional assessment for motoring given the large cost savings expected overall – though as we note below there could still be There are also considerable opportunities to improve people’s health, well-being and access to the natural environment. We set those out in Chapter 5 at an economy-wide level. Delivering these in a fair way and ensuring broad access to the benefits should be a policy focus, alongside avoiding unfair distributions of We also identify various other risks in our scenarios of potentially regressive or unfair effects that can be foreseen and should be planned for. • Savings from electric vehicles may not be equally available. If infrastructure in urban areas is prioritised, rural drivers risk missing some of these benefits. Similarly vehicle charging at home is cheaper than charging in public places, favouring those with off-street parking. All electricity consumers may end up paying for network upgrades that are required for electric vehicles, regardless of whether, or how much they drive. As well as incentivising EV uptake, tax decisions must be seen to be fair to those who cannot afford to • Gas networks. As homes are electrified, the usage of the UK’s gas networks will decline, and the costs of managing this infrastructure could fall on of the risks of the transition, including in areas where costs are likely to rise such as heat in

Chapter 6: A just transition to the Sixth Carbon Budget and Net Zero 302 fewer and fewer billpayers, disproportionately affecting those who remain on the gas grid. This could exacerbate fuel poverty and regional income • Decarbonising the UK’s manufacturing and construction sectors, including sectors like food processing and beverages, will lead to an increase in the costs of some goods. Where these are essential products, passing through these costs to consumers could be regressive. However, even with full pass through impacts on the prices of final goods is likely to be relatively limited. • The costs of aviation could increase, as airlines pay for engineered CO2 removals to offset the emissions of flights, despite fuel cost savings from higher efficiency and lower emissions per flight than currently. For example, paying for CO2 removal could add over £100 to a £500 return flight to New York in 2035. * While generally, people who fly have a higher ability to pay for these costs – 70% of flights are taken by 15% of people,34 added costs could be seen as unfair to families who go abroad infrequently. Frequent flyer levies have been suggested as a means of paying for this and were favoured by the Climate Assembly. • When costs are paid for can raise questions around intergenerational fairness.
Given the length of the transition, and a distribution of costs over 30 years in the CCC’s scenarios, young people will bear a portion of the costs of the transition, and also deal with the impacts of a warming planet. This points against any backloading of costs, which would need to be paid by future generations, and towards the need for a smooth transition to Net These risks emphasise the importance of planning for a just transition and to share costs, and benefits, fairly. They should be considered carefully within the Treasury’s Net Zero Review and in ongoing policy design to drive the transition. Towards 2050, the falling costs of transport and electricity have the scope to offset the costs of * Aviation emissions are not fully offset through emissions removals in our scenarios by 2035, but are by 2050. Paying for emissions removals,

303 Sixth Carbon Budget – The path to Net Zero transport have the scope to offset heating costs Figures are illustrative of costs over a transition to Net Zero. Heating costs are annualised over the period 2020-2050. Costs for power and transport are annualised costs in 2050, and the power costs include savings from paying for legacy renewable electricity projects under the Levy Control Framework. Transport savings are pre-tax and do not relate to the fact that electric vehicles do not pay fuel duty or Vehicle Exercise Duty. Transport costs include costs of cars, vans, HGVs, buses and rail. Chapter 6: A just transition to the Sixth Carbon Budget and Net Zero 304 The Climate Change Act requires that we consider ‘fiscal circumstances, and in particular the likely impact of the decision on taxation, public spending and public borrowing.’ We note that the UK is starting from a position of stretched public finances and high borrowing and debt as a result of the response to the COVID-19 Our scenarios can be delivered without major implications for the public finances. Market mechanisms can be used to ensure that the private sector brings forward the majority of the required investment. The areas we identify as benefiting most from public spending require up to around £4-6 billion extra annual funding by 2030. Greater use of carbon taxes could bring in significantly more revenue to balance this spending. There may also be benefits to general taxation in the near- term to the extent that the low-carbon investment programme supports economy- wide investment and the UK’s economic recovery. A particular priority will be considering how to replace lost annual revenues from fuel duty (£28 billion) and Vehicle Excise Duty (£7 billion), for which a switch to road charging is an option. a) Current environmental taxes and public spending b) Implications of the Net Zero pathway for taxation c) Implications of the Net Zero pathway for public spending a) Current environmental taxes and spending The UK Government already supports decarbonisation programmes, spending an estimated over £5 billion/year (around 0.25% of GDP), via low-carbon energy support paid through direct Exchequer spending (around £1billion per year on the Renewable Heat Incentive, and grants for electric vehicles), and payments for environmental land management under the EU’s Common Agricultural Policy (‘CAP’ – around £0.5 billion/year).35 Additionally the Government supports low-carbon energy via levies on bills, including for renewable electricity (around £10 billion/year forecast in 2020-21) and Further spending also takes place through Government department budgets and research institutions. Similarly, tax reliefs, such as reduced rates of VAT or exemptions, are classed as Government spending, making it hard to build up a comprehensive picture of current low-carbon public spending. The UK spends a significant amount on International Climate Finance (£5.8 billion over 2016-2021, doubling for the following five years). The Government also collects environmental taxes of over £3 billion per year from revenue from carbon pricing (including CRC, CCL and auctioned allowances under the EU ETS)* and around £0.7 billion per year through landfill tax. Receipts from fuel duty are around £28 billion per year from sales of petrol and diesel to road vehicles, and a further £7 billion is raised from Vehicle Excise Duty. * CCL = Climate Change Levy, a levy on the fossil fuel content of fuels. CRC = Carbon Reduction Commitment, a Government energy efficiency scheme. 305 Sixth Carbon Budget – The path to Net Zero Additional support for decarbonisation programmes come from the Governments of Scotland, Wales and Northern Ireland, however this funding is not considered More broadly, across the UK policies with objectives that are not directly related to climate change mitigation indirectly reflect a carbon price and are applied, to varying extents, in the surface transport (e.g. fuel duty, VED) and waste sectors (e.g. landfill tax), and to energy use in commercial and residential buildings (e.g. reduced VAT on energy - see section iii). b) Implications of the Net Zero pathway for taxation Most changes to the Government balance sheet resulting from the transition to Net Zero will be relatively gradual, playing out through to 2050. There is time and scope within annual budgets to make adjustments to the fiscal framework, and develop suitable policy and funding instruments to avoid fundamentally changing Our pathways have two significant implications for receipts from current UK taxes. First, they will have an effect across the economy on growth and investment, with implications for tax receipts. Second, they will affect receipts from particular taxes. We have not attempted to quantify the cross-economy impacts, given the uncertainties set out in Chapter 5 for predicting the impact of the low-carbon investment programme on GDP (e.g. we identify an annualised resource cost in 2035 of less than 1% of GDP, while macroeconomic modelling suggests a potential 2% GDP boost). To the extent that the investment programme supports the UK’s economic recovery it could have a large positive impact on general taxation. The increased spending from the investment programme (i.e. £50 billion annually by 2030, continuing to 2050) could translate to increased tax receipts.
The clearest single measure affecting taxation directly is the shift to low-carbon transport, eliminating petrol and diesel use by 2050. Under current tax treatment, as low-carbon vehicles reach 100% of vehicle sales by 2030, fuel duty receipts, which currently account for £28 billion of Government tax receipts annually (equivalent to 4% of total Government spending, and 1.4% of GDP), would drop to zero. So too would Vehicle Excise Duty (VED) of £7 billion per year. A shift towards road charging could address these impacts (Box 6.8). Much smaller changes would also be seen in other taxes. For example, landfill tax (currently £0.7 billion per year) would fall as waste is reduced and diverted to other means of disposal in our scenarios. Income from carbon taxes and trading schemes will tend to fall as emissions fall (the power sector switches over fully to low-carbon options by 2035 in our scenarios), but that may be offset by rising carbon prices and falling levels of free allocation (and potentially longer term by carbon border tariffs levied on high-carbon imports or by extension of carbon trading/taxes to other sectors). A transition to electric vehicles puts at risk around £35 billion Options exist to address this. Chapter 6: A just transition to the Sixth Carbon Budget and Net Zero 306 To incentivise the transition to Net Zero, relative prices will need to reflect carbon content sufficiently to favour low-carbon options over high-carbon options. That can be achieved through explicit carbon pricing or other levers. In principle, all sectors of the economy can be exposed to carbon pricing. In the UK at present, carbon pricing is applied • Electricity prices currently carry most climate policy costs. That increases electricity prices relative to natural gas and discourages a switch to lower- carbon electric heating. These costs must be a priority area for reform. • Other sectors face less explicit carbon prices but can be judged indirectly to reflect a carbon price. For example, in the surface transport and waste sectors, and energy use in commercial and residential buildings.36 • However, some sectors do not face a carbon price at all, or face reduced tax rates that are judged by some to be, in effect, negative carbon prices • For example, home heating (often using natural gas) faces a reduced rate of VAT. * Red diesel fuel for tractors is another example. These examples demonstrate the importance of wider considerations, including equity and fairness, given the regressive nature of charges on energy bills and the wider policy package to support farmers. • Similarly, aviation fuel faces no taxes at all, meaning that international flights that go beyond EU borders (where they are covered by the EU Emissions Trading System) do not face a carbon price or fuel taxation. Equity arguments are less relevant for this sector, although as set out above, the Climate Assembly favoured a frequent flyer levy on • Energy-from-waste plants also face very little carbon taxation. Greater use of carbon taxes can also support the public finances while strengthening incentives to reduce emissions. They are particularly attractive when global oil prices, and therefore consumers' energy costs, are low, as they are now. The Zero Carbon Commission estimate that carbon pricing could raise up to £27 billion per year by 2030, though this could increase costs to households, raising a further need for an equitable redistribution of costs. †38 Recognising this need, the ZCC suggests that some carbon pricing revenue could be redirected towards the most affected households. We set out further considerations on the role of carbon pricing and options for broadening it in our accompanying Policy Report. * A Green Gas Levy has been proposed, paid through gas bills, that will fund the injection of biomethane into the natural gas grid. It is expected to come into place in 2021. † The Zero Carbon Commission estimate that £27 billion/year could be raised via a £75/tCO2 charge across most domestic sectors, revenue from a Border Carbon Adjustment for industry, energy and agriculture, and removal of the Red Diesel subsidy for agriculture and shipping. This is an increase on carbon revenues of over £2 billion/year

307 Sixth Carbon Budget – The path to Net Zero Impact of electric vehicle uptake on taxation revenues Electric vehicles (EVs) currently benefit fro m preferential tax treatment to conventional EVs are zero-rated for vehicle excise duty, do not pay fuel duty on the electricity they consume and benefit from capital grants towards purchase costs. In the longer term these will likely not be needed – fewer parts and greater efficiency in energy use mean they will be cheaper to buy and run even without tax advantages. We expect that parity in total co st of ownership for a typical car will be reached in around 2025, and by 2030 EVs will offer consum ers considerable savings over their lifetime. However, the transition to EVs could , without policy changes , raise • Lower tax receipts. Fossil fuel consumption in road transport decrease s by 69% by 2035 in our Balanced Pathway . This will lead to a substantial reduction in revenue from fuel duty of £12 - billion now to zero. Vehicle Excise Duty receipts are curr ently around £7 billion annually, but electric vehicles are exempt. On current treatment revenues would decline towards zero as • Increased congestion. As the marginal c ost of driving a mile will be cheaper with an EV, we would expect to see a rebound effect whereby the average car drives more miles. This could lead to increased congestion. In order to address both, some form of road pricing is likely to be necessary. Roa d pricing involves direct charges levied on drivers for road use, with options to vary charges based on road type, time of day and vehicle type to reflect the impact of individual journeys and help minimise congestion.
Such charges could apply to all vehic le types and be set at a level to fill the gap left by fuel duty. The size of the fuel cost savings means that EVs are expected to be cost-saving for consumers even after use of road pricing. decade and expected under our Balanced OBR and ONS (2019); CCC analysis Future rates of fuel duty are calculated in line with OBR forecasts – from 2020/21 onwards, these are uprated each year in line with growth in the Retail Prices Index (RPI); also shown is a hypothetical scenario in which an escalator of 1p above RPI is applied each year. The lines on the left show actual fuel duty receipts in the period of 2011-2020 (estimated), along with how these could have differed if they had been subject to RPI uprating or an RPI +1 escalator. All figures are in cash terms. Chapter 6: A just transition to the Sixth Carbon Budget and Net Zero 308 c) Implications of the Net Zero pathway for public spending Chapter 5 set out the need for additional investment in low-carbon technologies and infrastructure to increase from around £10 billion per year today to over £50 billion per year by 2030. Most of these investments will be funded and delivered by the private sector. Government borrowing rates are particularly low, but so are those for the private sector. The use of Government policy to de-risk private sector investment is likely to be more important than direct public investment in most areas, and can be used to leverage many multiples of any Government spend. In many areas funding instruments are already in place, and Government can build on these to deliver policy packages that use some public funding, backed by • New renewable electricity projects are now cheaper than high-carbon electricity in the UK. However targeted support will still be required in some areas, such as port infrastructure for offshore wind (e.g. the recently announced £160m funding for ports servicing offshore wind farms). Larger- scale funding (which is currently levied on bills, and therefore covered in our analysis above) is likely to be needed to support nuclear power (e.g. via a regulated asset base – RAB – model), novel renewables (such as wave, floating wind, and tidal) and funding for hydrogen and CCS power • Switching homes to low-carbon heating and improving energy efficiency remains a major challenge. Standards and regulation can incentivise housebuilders and landlords to improve the efficiency and install low- carbon heat in new and existing homes. As set out in Box 6.5 above several schemes exist that draw on Exchequer spending. Continuing that spending (including temporary schemes like the Green Home Grants) and directing funding towards grants could support the majority of the required investment programme without adding to energy bills if extra annual funding of up to £3 billion was provided from the late 2020s. Longer term this could fall as low-carbon heating costs fall and standards pass more of the investment cost onto consumers. Around £1 billion is required annually • Deep decarbonisation measures in manufacturing and construction have a combined capital and operating cost of the order of £2.5 billion a year by 2030, and £5 billion a year by 2050. Some of this could be passed onto industry, however, trade-exposed industries will require a level playing field to ensure that emissions are reduced, not offshored (see section 2). For an interim period, industrial decarbonisation of trade-exposed sectors should be funded by taxpayers, but this can be reduced over time by introducing policy on imports and as other countries take action to meet their commitments under the Paris Agreement. Some early deployment support may also be needed for less trade-exposed sectors. • Farmers and land managers currently receive large subsidies from the EU's Common Agricultural Policy (CAP), but not for reducing GHG emissions. The UK Agriculture Bill intends to redirect subsidies towards public goods and could support the major transition in land use and farming practices required by the Net Zero target and our recommended Sixth Carbon Budget. Realising the changes in UK land use in our scenarios could require funding of at least £1 billion/year, which can be partly provided by the private sector and partly through public funding. 309 Sixth Carbon Budget – The path to Net Zero • The annual costs of removing emissions from the atmosphere are potentially large in our scenarios (e.g. of the order of £6 billion/year by 2050, from an initial scale of around £1 billion/year in 2030). Initial development of these technologies is likely to require some Exchequer funding, however in the long-term costs should be paid for by polluting industries (e.g. aviation). • As electric vehicles continue to fall in costs, current purchase subsidies can be phased out. By 2050, we expect the shift to low-carbon options like electrification to cut the annual costs of UK transport by around £19 billion per year. That can be achieved while maintaining transport's tax contribution and allows for the costs of charge-points and other infrastructure, whilst phasing out the capital subsidies, and lower vehicle and fuel taxation that EVs currently benefit from. • Additional Exchequer support is likely to be required for large scale demonstration projects in low-carbon hydrogen production, CCS infrastructure, HGV trials and local projects such as Net Zero Pathfinder In total these areas imply a need for Exchequer funding rising to at least £9-12 billion per year by 2030, an increase on the £5 billion per year of direct Exchequer to increase, as set out in section 3 on energy bills. Other spending that we have not identified may be appropriate in support of the just transition. Generally, we would expect a move away from Exchequer funding over time – a continued need for subsidies is unlikely to inspire business confidence in low-carbon markets. Standards and regulation complemented by carbon pricing can be used to ensure the low-carbon option is favoured, and where appropriate, the high- carbon option is phased out.
The role of Government then becomes ensuring efficient markets and avoiding inequalities. • Supporting cost reduction. As seen in the power sector over the past decade, initial Government support can enable technology cost reductions, allowing support to be reduced over time. Our scenarios involve increasing roles for other emerging technologies (e.g. emissions removals, low-carbon HGV trials, and floating wind). • Standards and regulation can be used to mandate suppliers of higher- carbon technologies and fuels to provide low-carbon alternatives, driving • Where possible, costs can be passed through, such as in sectors that are not exposed to international trade, or in buildings, where the cost the low- carbon heating could be absorbed into property values for new build and existing homes. Where the costs of decarbonisation are higher, premiums for low-carbon goods may be acceptable, if applied universally. For example, product standards (possibly alongside border carbon tariffs) in the UK could ultimately create a market for low-carbon steel a slightly • Carbon markets and carbon trading can be used instead, or alongside standards and regulation to incentivise an efficient balancing of positive and negative emissions (see next section). • Ongoing Government funding will still be needed, to support innovation, build skills and ensure the equitable distribution of costs. Chapter 1 of the policy report that accompanies our advice has further detail on the role of all actors, including Government, over the transition to Net Zero. Chapter 6: A just transition to the Sixth Carbon Budget and Net Zero 310 Illustrative package of Exchequer funding for the Balanced Pathway in the 2020s Illustrative package of Exchequer funding in the Balanced Pathway additional £0.5bn/year for low- income households; £0.5bn/year for social homes; £1bn/year for public Electric vehicles £0.2bn/year through gr ants Mostly funded through the private support might be required on the rollout of charging infrastructure, and low-carbon buses and HGVs. trade-exposed subsectors and to support. Potential further cost to remove legacy renewable support costs from industry power bills. £1bn/year £1bn/year funded via the ELMS - £1bn/year** £1bn/year could be required to Total £5 billion per year £47 billion per year £9-12 billion per year Additional l evies Electricity £10bn/year today is raised to pay for legacy renewable projects, expected to fall to £9bn/year by 2030 and £3.5bn/year by 2035. Additional levies, peaking at up to £9bn/year in 2030 and falling thereafter, could be required over t his period to fund new nu clear, hydrogen and CCS plant – see section 3b. £0.6bn/year through ECO, Green gas levy (proposed). Other Additional support for research, development, innovation and demonstration projects, as well as funding for policy development and delivery is likely to be required across all sectors. CCC analysis based on OBR (2020) March 2020 Economic and Fiscal outlook, HMT (2020) Budget 2020 and EU (2020) The Common Agricultural *Actual ly levied on electricity bills under the Levy Control Framework, which includes payments through Feed-in-Tariffs, the Renewables Obligation and Contracts for Difference. **Annualised resource costs, not in year capital and operating costs. Buildings numbers are both res and non- res. CAP = Common Agricultural Policy. Payments listed under Pillar II for the UK. IETF = Industrial Energy Transformation Fund. ISCF = Industrial Strategy

311 Sixth Carbon Budget – The path to Net Zero 1 International Labour Organisation (2015) Guidelines for a just transition towards environmentally sustainable economies and societies for all 2 ONS (2020) Low carbon and renewable energy economy, 2018 3 The Royal Society (2019) Digital technologies and the planet 4 UK Parliament (2020) Technological Innovations and Climate Offshore Wind - Written evidence submitted by Mr Nathan Bennett 5 STUC (2019) Broken Promises and Offshored Jobs 6 BEIS (2019) Offshore wind sector deal 7 Scottish Just Transition Commission (2019) Just Transition Commission meeting April 2019 8 House of Commons Library (2020) UK oil and gas industry 9 Greenpeace (2020) Offshore Oil and gas workers’ views on industry conditions and the energy 10 Fothergill (2017) Coal Transition in the United Kingdom 11 IEA (2020) World Energy Outlook 12 National Grid (2020) Building the Net Zero energy workforce 13 LSE (2020) Seizing sustainable growth opportunities from zero emission passenger vehicles in the 14 BEIS (2019) Energy Innovation Needs Assessment 15 BEIS (2019) Energy Innovation Needs Assessment 18 CCC (2020) Land Use Policies for a Net Zero UK 19 ONS (2019) Total wealth in Great April 2016 to March 2018 20 McCann (2018) Perceptions of regional inequality and the geography of insights 21 ONS (2020) Regional gross disposable household income, 1997 to 2018 24 European Commission (2020) Commission Work Programme 2021 25 Reuters (2020) EU eying carbon border fees plan for steel, cement and senior official 26 Norcem (2020) CCS at Norcem Background 27 ETC (2020) Making Mission Possible 28 CCC (2020) The Potential for Product Standards to Address Industrial Emissions 29 Ofgem (2020) Bills, prices and profits 30 CCC (2017) Energy Prices and Bills. 31 BEIS (2020) Annual Fuel Poverty Statistics in England, 2020 (2018 data) 32 Energy Action Scotland (2020) Fuel Poverty Overview; Welsh Government (2019) Fuel poverty estimates for 2018; Northern Department for Communities 33 Assuming fuel costs on average £1.15/l at the pump and the average car today does around 39mpg, which equates to 0.06 l/km. To drive 250km would then require around 15l of petrol, which would cost £17.45. For comparison, the electricity consumption of a typical BEV today is 0.17 kWh/km and electricity prices are around 14p/kWh. 34 Full Fact (2016) Do 15% of people take 70% of flights? Chapter 6: A just transition to the Sixth Carbon Budget and Net Zero 312 35 CCC analysis based on OBR (2020) March 2020 fiscal supplementary tables forecast for 2020-21 and EU (2020) The Common Agricultural Policy in Figures. Note this does not include all payments under CAP, only those for Pillar II. 36 ESC (2019) Rethinking decarbonisation incentives 37 Institute for Fiscal Studies (2013) Energy use policies and carbon pricing in the UK.
Where reduced tax rates are applied to fossil fuels, this is sometimes referred to as fossil fuel subsidies. 38 Zero Carbon Commission (2020) How carbon pricing can help Britain achieve Net Zero by 2050

313 Sixth Carbon Budget – The path to Net Zero 1. Reflecting the Paris Agreement in our scenarios 317 2. Is the Balanced Pathway a fair and ambitious contribution? 322 3. Supporting global efforts to reduce emissions 333 4. Reducing the UK’s carbon footprint 344

315 Sixth Carbon Budget – The path to Net Zero Climate change is a global problem requiring a global response. The 2015 Paris Agreement frames that response by setting a long-term global temperature goal and requiring bottom-up nationally determined contributions from each country that reflect their particular responsibilities and capabilities. Together, these commitments should deliver the long-term temperature goal. The Sixth Carbon Budget recommended in this report – requiring that UK territorial greenhouse emissions (GHG) emissions are reduced 78% by 2035 relative to 1990 – would form part of the UK’s contribution to this global effort. Chapters 2 to 6 set out pathways to deliver the budget, and the impacts that these may have. This chapter sets out why the Committee considers these pathways to be an appropriate contribution from the UK towards the global goals of the Paris This chapter also sets out the implications of the pathways from Chapters 2 and 3 for the UK’s consumption emissions and considers the options available to the UK for supplementing reducing UK territorial emissions to Net Zero with additional support for emissions reductions overseas consistent with its Paris Agreement The key findings of this chapter • The Balanced Net Zero Pathway represents a fair and ambitious contribution to the Paris Agreement. This pathway, which is the basis for our recommended Sixth Carbon Budget, would require the UK to deploy all the actions necessary for the world to keep warming to below 1.5°C at or before when they are required from the world as a whole, consistent with the UK’s obligation as a developed country to take a lead. Pursing the highest feasible ambition for rapid reductions in emissions to 2035 would help minimise the UK’s contribution to global warming between now and reaching Net Zero and would see UK emissions per person in 2035 consistent with the global average in scenarios expected to keep warming to 1.5°C. • The UK’s Nationally Determined Contribution to the Paris Agreement should be set based on the same pathway as the Sixth Carbon Budget. We have considered the required principles for an NDC under the Paris Agreement, particularly the need for ‘highest possible ambition’, in constructing the Balanced Pathway. The UK should also use the opportunity of its role as the host of the international negotiations to reaffirm and strengthen other aspects of its contribution to tackling climate change, in particular the need to strengthen adaptation planning for the inevitable future increases in climate risks, both around the world and in the UK. • Action to develop and deploy deeper decarbonisation options over the 2020s in the Balanced Net Zero Pathway can have significant global benefits in the decades thereafter. Our Balanced Pathway deploys most low-carbon options at scale before they must reach similar scales for the world as a whole, but in line with emerging commitments from other climate leaders. That is particularly important for deeper decarbonisation options including widespread electrification in industry, carbon capture and storage (CCS) and low-carbon hydrogen, some which are currently relatively expensive and need early-stage support before a global scale-up would be credible. The UK is well-placed to help pioneer developments in these areas alongside other developed countries. Chapter 7: The Sixth Carbon Budget as a contribution to the Paris Agreement 316 Slower progress in these areas over the coming decade would risk undermining the rapid global scale-up required in these technologies over the 2030s and beyond to deliver on the Paris Agreement. • The UK can and should do more to support the global effort than just delivering its domestic emissions reduction pathways. Climate risks globally and in the UK will only stop increasing when global emissions decline to close to zero. As a developed country, the UK has a responsibility to do more to support the global decarbonisation effort than just deliver ambitious domestic commitments to reduce emissions. Opportunities exist for the UK to help drive up global ambition across many areas alongside other developed countries. In particular, the UK’s role as host of COP26 and President of the G7 group in 2021 give it an opportunity and a responsibility to coordinate efforts to align the economic responses to COVID-19 with the significant shifts in investment patterns needed over the coming decade to keep the Paris Agreement long-term temperature goal within reach. The UK is an important provider of climate finance for both mitigation and adaptation. And the UK’s role as a global financial hub indicates additional opportunities to do so through financial system reform. • Part of the UK’s effort to support global decarbonisation should involve actions to track and reduce its overseas consumption footprint. A variety of levers are available to the UK to support reductions in the overseas emissions that help meet UK consumption. Under successful efforts to reduce global emissions in line with the Paris Agreement, exploratory modelling indicates that the UK’s consumption emissions footprint could be reduced as much as 90% below 1990 levels. The Government should track these emissions against a target trajectory consistent with global outcomes achieving the Paris Agreement. We set out our analysis in four 1. Reflecting the Paris Agreement in our scenarios 2. Is the Balanced Net Zero Pathway a fair and ambitious contribution? 3. Supporting the global effort to reduce emissions 4. Reducing the UK’s consumption footprint

317 Sixth Carbon Budget – The path to Net Zero 1.
Reflecting the Paris Agreement in our scenarios The Paris Agreement is the globally agreed framework for tackling climate change, created at the 21st Conference of Parties (COP21) to the United Nations Framework Convention on Climate Change (UNFCCC) in 2015 and has been in force since 2016. It has been ratified by 188 countries representing around 80% of current global greenhouse gas emissions. This section summarises the aims of the Paris Agreement and the obligations on the UK to reduce its territorial GHG emissions as a Party to the Agreement and explains how they are reflected in the scenarios developed in this report. It is in two sub- a) National contributions to the Paris Agreement b) How the scenarios in this report reflect the Paris Agreement a) National contributions to the Paris Agreement The Paris Agreement set a long-term temperature target of keeping warming ‘well- below’ 2°C above pre-industrial levels, and ‘pursuing efforts’ to keep it below To achieve that temperature goal, the Agreement identified three high-level milestones for global GHG • Global peaking of greenhouse gas emissions as soon as possible • Achieving a balance between anthropogenic emissions by sources and removals by sinks of greenhouse gases in the second half of this century To achieve these global objectives, the Paris Agreement also created a system requiring countries to produce regular nationally determined contributions (NDCs) to the long-term goals of the Agreement. This system has several important • An obligation to produce an All countries must produce or update NDCs on a regular 5-yearly cycle. Countries are requested to ‘communicate’ or ‘update’ their existing NDCs (for emissions reductions prior to 2030) ‘by 2020’. The UK was previously covered by the EU NDC (currently a 40% reduction in GHG emissions by 2030 against a 1990 baseline) but is required to submit its own NDC having left the European Union. Our advice on the level of the UK’s Fifth Carbon Budget estimated that the UK’s contribution to this EU target would be approximately a 53% reduction in GHG emissions relative to 1990 levels, slightly less than the legislated level of the Fifth Carbon Budget. • Nationally determined emissions reduction NDC targets are determined in a ‘bottom-up’ fashion by the countries themselves. – Parties are encouraged to commit to absolute economy-wide emissions reduction targets for a defined single year, but can currently choose a narrower sectoral coverage, or alternative metrics such as carbon intensity (e.g. India). but set the levels of the targets

Chapter 7: The Sixth Carbon Budget as a contribution to the Paris Agreement 318 – Producing an NDC is a legal obligation under the Paris Agreement, but meeting the emissions reduction targets in the NDC is only legally binding if countries choose to enshrine those – In 2018 the Parties to the Paris Agreement agreed a ‘rulebook’ to help further standardise NDC accounting between countries – although some aspects of this rulebook (such as the rules for the interaction of NDCs with global carbon markets) remain to be agreed. This includes a requirement to use the global warming potential values (at a 100-year time horizon) from the IPCC 5th Assessment Report (IPCC-AR5) to aggregate GHG • Principles for national The Paris Agreement requires that NDCs reflect each party’s highest possible ambition and their common-but- differentiated responsibilities and respective capabilities, while accounting for their national circumstances. – Highest possible ambition. Each Country’s successive NDC should be a ‘progression’ beyond its previous one (the so-called ratchet mechanism) and should reflect its ‘highest possible ambition’ to reduce emissions. – Common-but-differentiated responsibilities and respective capabilities (CBDR-RC) in the light of different national circumstances. This refers to the principle that, while all countries have responsibility to take actions to support the global goal, developed countries (that are generally wealthier and have contributed more to past climate change) should take a lead. Similarly, the capability to reduce emissions depends on wealth, development needs, and the sources of emissions that make up The first NDCs from all parties to the agreement, which mostly extend out to 2030, are required to be updated or recommunicated by the end of 2020 according to a decision of the UNFCCC at the 21st annual Conference of Parties (COP21) in 2015, and reinforced by a decision at COP25 in 2019. The required NDC commitments for the UK are related to, but formally independent of, its obligations for emissions reductions under the domestic carbon extend up to 2030, the mid-point of the Fifth Carbon Budget period. The UK will be required to submit its second NDC by 2025 for emissions reductions after 2030. This should be for 2035, the mid-year of the Sixth Carbon Budget period, or for a later period, depending on future international negotiations on establishing common * The IPCC 5th Assessment report contains two sets of values for the global warming potential to a 100-year time- horizon (GWP100), those including and excluding climate-carbon feedbacks. We use the set of values with climate- carbon feedbacks reflecting the IPCC-AR5 assessment that ‘it is likely that including the climate–carbon feedback for non-CO2 gases as well as for CO2 provides a better estimate of the metric value than including it only for CO2’. their emissions reductions, with

319 Sixth Carbon Budget – The path to Net Zero Countries are also requested to submit a mid-century low-greenhouse gas development pathway to the UNFCCC by the end of 2020. The UK previously submitted its Clean Growth Strategy, which set out plans on the path to the previous UK long-term emissions target to reduce emissions by at least 80% by 2050 relative to 1990. The Government has stated its intention to submit a new Net Zero Strategy as an updated mid-century pathway. Countries are also expected to contribute more widely to tackling climate change, for example through adaptation and climate finance. We discuss some of these opportunities in sections 3 and 4.
These wider contributions are particularly important for the UK as COP26 President to help support the wider effort to increase ambition to tackle climate change internationally. b) How our scenarios reflect the Paris Agreement principles The Committee has factored in key obligations from the Paris Agreement and UNFCCC into the construction of the scenarios used in this • ‘Highest possible ambition’ has been a key principle in the scenario design set out in Chapters 1 to 3. This includes pushing forward on the development of multiple options where the optimal solution isn’t clear. Scenarios are designed to reduce emissions as fast as reasonably possible, rather than making changes as late as possible, while still allowing the 2050

Chapter 7: The Sixth Carbon Budget as a contribution to the Paris Agreement 320 All scenarios in this report involve a considerable progression in effort from the existing EU NDC (which has covered the UK’s formal commitment to the Paris Agreement to date) and existing UK carbon budgets. These scenarios require the UK to deploy actions necessary for the world to keep warming below 1.5°C before they are required from the world as a whole (Section • Common-but-differentiated responsibilities in the light of different national circumstances. The UK’s Net Zero target for 2050 covers all greenhouse gases (GHGs). This Net Zero date is around two decades earlier than when global GHG emissions reach Net Zero in emissions pathways assessed by the IPCC as limiting warming to 1.5°C (50% probability with no or low overshoot). An earlier Net Zero date for the UK than the world is consistent with the UK’s responsibilities as a relatively rich country with a high historical contribution to climate change and high overseas consumption emissions footprint. Consistent with this principle, our pathways to this Net Zero target are constructed to require ambitious early action to reduce emissions, with most emissions reductions occurring within the first half (2020 – 2035) of this • Respective capabilities. The pathways in this report are built based on detailed bottom-up analysis of the UK’s circumstances, challenges and opportunities. This helps inform judgements around the feasible limits for ambitious but credible emissions reductions targets in the near-term. Our international modelling, set out in section 2, draws out how these relate to opportunities in other countries. Section 2 considers whether the resulting pathways can be considered a ‘fair and appropriate’ contribution from the UK, recognising the various accounting International a ccounting conventions mean that the UK NDC is expected to be set as a percentage reduction target for the year 2030 with greenhouse gas emissions aggregated together, using the global warming potential metric (with a time horizon of 100 years – GWP100) from the IPCC 5th Assessment Report. This represents an accounting change from the current UK inventory basis of aggregating using GWP 100 values from the IPCC 4th Assessment Report. The status of emissions from international aviation and shipping (IAS) are no t explicitly a ddressed under the Paris Agreement. • Under the Kyoto Protocol (the agreement that committed developed countries to emissions reductions over 2005 – 2012 with an extension to 2020), responsibility for IAS emissions was delegated to alternative UN bodies – the International Civil Aviation Authority (ICAO) and the International Maritime Organisation (IMO), and parties only report their IAS emissions (calculated from the use of bunker fuels) to the UNFCCC as a memo item in national inventories tha t aren’t included within the all -economy total. • The status of IAS emissions within NDC targets also remains unclear – most countries’ NDCs exclude IAS emissions, although the current EU NDC is aligned to a package to achieve a 40% reduction in emissions ( relative to 19 90) including international aviation emissions, but not including shipping emissions. The EU Commission’s recent impact assessment for its proposed 55% reduction NDC includes multiple scopes, with extra-EU aviation and shipping emissions full y included and excluded from possible scopes for The 2030 percentage reduction consistent with the Balanced Net Zero Pathway varies from a 64% reduction from 1990 levels including the UK’s share of IAS emissions to a 68% discusses the Committee’s recommendation on the appropriate scope for a UK NDC. 321 Sixth Carbon Budget – The path to Net Zero Zero Pathway for UK NDC in 2030 ‘IAS’ refers to international aviation and shipping. Chapter 7: The Sixth Carbon Budget as a contribution to the Paris Agreement 322 2. Is the Balanced Pathway a fair and ambitious contribution? Under the UNFCCC, the UK is required to justify how its NDC is a ‘fair and ambitious’ contribution to achieving the goals of the Paris Agreement. This section compares the recommended Balanced Net Zero Pathway to global pathways expected to achieve the Paris Agreement long-term temperature goal. In this section we set out how we interpret ‘fair and ambitious’ and compare the Balanced Net Zero Pathway for consistency on a variety of metrics that capture both the economy-wide emissions outcomes and actions underlying this transition. This is outlined in three a) Principles for a ‘fair and ambitious’ contribution b) Comparing with global pathways c) Comparing with international commitments a) Principles for a ‘fair and ambitious’ contribution The Paris Agreement does not specify how the global goals should be translated to national contributions beyond the principles set out in the previous section – Parties are themselves required to judge how to balance the different principles, and to be accountable for their contributions to domestic and global public opinion. In this report we take a hybrid (i.e. top-down and bottom-up) and holistic (i.e. considering all aspects of the UK’s contribution to tackling climate change) approach to assessing a ‘fair and ambitious’ contribution from the UK to the Paris • Recognising the need to go further than global averages.