How will a massive programme of energy efficiency improvements and energy generation infrastructure development be paid for?
Climate change science testifies to the urgent need for our planet to become zero carbon. Globally, we need to balance radiative forcing as soon as possible. This is an emergency situation so calculations were made to see how quickly it could realistically be done. The zerocarbonbritain2030 report shows that this is technically achievable in the UK within two decades. Across the world others are calculating what is feasible in their own nations and regions. See our ZeroCarbonWorld page for information and links to just a few of these projects.
How will a massive programme of energy efficiency improvements and energy generation infrastructure development be paid for?
Creating a new, sustainable economy will require both public and private financing.
An organised programme led by the government could attract private investment by using public money as a guarantor, for example through Local Authority bonds. Bonds and loans could be paid back through the financial savings made from reduced energy use. The returns from sustainable technologies are modest (at about 3%) but also secure. As with general government bonds today, they are well suited to be invested in by large pension funds.
Government could pay back bonds within the medium-term through the financial savings made from reduced energy use, through an improved balance of payments position (because there would be less imports of oil and gas), and through increased tax revenues from new and larger businesses in the energy efficiency and renewable power sectors as well as from the individuals working in them (see What does zerocarbonbritain2030 mean for jobs?).
The introduction of a national carbon pricing scheme or carbon tax could also raise significant revenue to be reinvested in energy efficiency improvements and new generation infrastructure. Depending on the type of scheme established, this could generate funds for individuals or for government, or for both, to reinvest in efficiency measures.
For individual households, various finance schemes could be offered to reduce the financial burden of making energy efficiency improvements in their homes (see Power Down FAQs for: How might a national refurbishment scheme be financed?.) Individuals could also invest in small-scale bonds such as “Granny’s Gone Green” government bonds, the funds from which would be earmarked solely for investment in low carbon technologies.
Shifting to ZeroCarbonBritain could provide significant economic benefits to the UK in increased employment (and therefore increased tax revenues). Jobs could be created in the energy-efficient construction sector, the renewable power sectors, and in transport and agriculture sectors as well.
The new economics foundation (nef) has examined the job creation potential of the zerocarbonbritain2030 scenario. They find that the total deployment of wind power in the UK as envisaged in zerocarbonbritain2030 would deliver over 3.4 million job years.
Retrofitting and new energy-efficient installations have a comparatively high labour intensity, as they are carried out on-site. An energy-efficiency drive will also create indirect employment in small- or medium-sized supplying manufacturing industries and induced employment through savings on energy that are re-spent within the community.
Of course, the shift to zero-carbon would also see job losses in carbon-intensive sectors, such as in the oil and gas industries. The UK’s oil and gas industry is already at risk from the recent peak production in the UK’s indigenous reserves, and the increased mechanisation of labour.
Expertise gained from oil rigs could successfully be deployed to support offshore wind development. The development of wind power in the UK also has the potential to ease the decline of the UK steel industry in the medium-term and, over the long-term, it has the potential to contribute to its growth as we export our technology. This offers particular potential for regeneration in post-industrial areas.
The government can promote the employment and economic benefits associated with decarbonisation and renewable energy by supporting small and medium-sized British businesses. The government can also promote a reduction in inequality by supporting re-skilling programmes in deprived areas.
Fuel poverty has grown considerably since 2004, largely due to the dramatic rise in energy prices. A household is said to be in fuel poverty if it needs to spend more than 10% of its income on fuel to maintain an adequate level of warmth. People in fuel poverty are disadvantaged by three factors: poor quality housing, high energy prices (possibly accompanied by unfair payment methods), and low income.
The zerocarbonbritain2030 report advocates the introduction of a national carbon pricing scheme which will raise the cost of carbon. It is critical therefore that energy efficiency schemes especially target the most vulnerable in society, so that an increased carbon price does not unfairly harm the fuel poor. Increasing the energy efficiency of homes will reduce fuel poverty in the long-term, and is a much more cost-effective solution to providing financial assistance with paying fuel bills. The zerocarbonbritain2030 report also advocates revised energy pricing schemes to replace the economically unfair and environmentally unsustainable practice of rewarding greater consumption with reduced per-unit costs.
Contraction and Convergence, proposed by the Global Commons Institute, is a coordinated plan to reduce global carbon emissions in a deliberate and controlled fashion. It involves a simple two-step solution:
Step 1 (Contraction):Based on scientific advice on the state of the atmosphere, a global carbon budget is derived. The budget would be split up into annual allocations. There is a year-on-year contraction (or reduction) in the size of the annual global allocation.
Step 2 (Convergence): Initially entitlements would reflect current emissions, but these initial entitlements would eventually converge towards equal per capita entitlements across the world. It is likely that rich countries, with high per capita emissions, would have to rapidly cut emissions while poor countries, with very low per capita emissions, could increase theirs or sell the surplus carbon shares to wealthier nations. At a given date, the per capita entitlements of all countries in the world would converge and then all countries’ entitlements would reduce at the same rate.
The Cap & Share policy aims to place an annual cap on the amount of fossil carbon fuels that can be produced in the world. This cap is brought down rapidly every year. It can be implemented at a national, regional or international level.
Within Cap & Share, each person would receive a certificate every year equivalent to their share of the CO2 emissions allowance. These could be sold to fossil fuel extraction companies, via financial intermediaries such as banks and post offices, which would then be allowed to produce that amount of CO2 emissions. Most of the proceeds raised by the cap are therefore distributed among the adult population on an equal per capita basis. Funds can also be shared to support a number of schemes, such as sequestration or adaptation schemes or financial assistance to fossil-fuel-producing nations.
The Cap & Share policy would be quick to implement, and the cost of enforcement would be low (as it would only be necessary to monitor allowance purchases by fossil fuel extraction companies). However, at a global scale, there are significant logistical difficulties in trying to provide every person on the planet with a permit.
A large number of people could gain financially from the Cap & Share scheme. On the other hand, the full macro and micro implications, of, in effect, giving everybody a substantial sum of money, are not fully understood.
Tradable Energy Quotas (TEQs) work at a national level to distribute a carbon budget. The system starts at where we are now. It starts by using the per person emissions from last year and allocates that amount this year, then it reduces year-on-year.
Under a TEQs scheme an annual carbon budget would be calculated, based on limiting annual carbon emissions over 20 years. 40% of the annual issue of the budget would be distributed equally to every adult for free. The remaining portion would be sold by tender, via banks and other outlets, to all other energy users, including the government.
Any purchaser would have to surrender carbon units to cover the carbon rating of their purchase. Individuals will would use TEQs for fuel purchases only (e.g. for fossil-fuel generated electricity, gas, coal, petrol etc.). For other items, the TEQ price would be reflected in the costs of the product. Therefore, anything that is carbon-intensive will start to become more expensive.
TEQs would be tradable. So those using less than the average amount of fossil fuels (about 60% of the population of the UK if the scheme was national) could receive a payment, while those wishing to use more than their quota would have to purchase extra TEQs on the market. If the price of TEQs rises, this would stimulate an even greater demand for zero and low-carbon technologies and products, moving the price of TEQs lower again: the system could therefore largely regulate itself.
The revenue from auctioning TEQs to business could be used by the government to invest in low carbon technologies and energy efficiency measures. TEQs bring in a common purpose, making emissions everyone’s business. TEQs also offer the opportunity for high levels of public engagement in climate change politics and the public’s active participation in the solution. The main downside of the scheme is that it would be costly to establish an electronic system to track allowance usage by participants across all relevant retail points (petrol stations, energy suppliers etc) and reconcile this against their account holdings.
Theoretically, a TEQ system could be established on an international or a national basis, although in reality it would be extremely challenging to implement on an international level. It might be more feasible for national schemes in Europe to scale up into a European-wide scheme.
Certain international schemes require the vast majority of countries to sign up to them before they can be effective. However, there are also opportunities for Britain and other nations to lead the way, and reap the benefits of early action. There are also possibilities that lie between either completely unilateral or multilateral action – for example countries could form blocks and then encourage others to join them. Although a strong international approach is preferred, effective action can be taken using a regional approach or based on a loose international framework with national initiatives.
Clearly as climate change is a global problem, solutions will be more effective the more countries are involved. But that does not mean that it is worth giving up if we cannot get the international agreement that we would like straight away. The energy security issue offers another reason why Britain should act now, even without large-scale international cooperation. Increased reliance on foreign imports of fossil fuels is bad for our economy and wider energy security. With dwindling supplies of oil and gas internationally, prices will rise, further harming our balance of payments and increasing our reliance on a small number of exporter nations. It makes sense economically, and for our long-term security, to act now to reduce that reliance by reducing our energy demand and increasing our generation capacity by harnessing the power of renewables. By acting early, we can not only avoid the worst impacts of peak oil, we can also lead the way in the development and manufacturing of renewable technologies, and increasingly important sector of the global economy.
Any scheme which places an appropriate price on carbon will lead to investment into renewable energy technologies. This can be supplemented by more focused incentives for renewable generation infrastructure.
This should include replacing the current complex Renewable Obligation Certificates scheme with a feed-in tariff scheme for large-scale renewable generation infrastructure (as the government recently did for projects under 5MW). The feed-in tariff offers significant opportunity to decrease the economic risk associated with renewable electricity and promote strategic decision making.A feed-in tariff scheme should also be introduced for renewable heat technology to be complimented with investment into research and development of the technology.
A feed-in tariff would incentivise rapid development of the offshore wind industry in Britain. Supporting the development of a domestic supply industry would reduce the costs of offshore wind development significantly, and allow the retention of wider economic benefits. As the number of offshore wind projects increased, it would eventually become necessary to look for a different funding mechanism.