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

1. The current position: a policy stocktake and reflection on the role of economic modelling to date Sarah Hendry, Department for Environment, Food & Rural Affairs, UK ABARE workshop, Canberra, May 2003

2. Our energy future: creating a low carbon economywww.dti.gov.uk/energy/whitepaper “Our new energy policy will ensure that energy, the environment and economic growth are properly and sustainably integrated” “The UK should put itself on a path towards a reduction in carbon dioxide emissions of some 60% from current levels by 2050”

3. The new goals of UK energy policy • Putting ourselves on a path to 60% cuts in carbon emissions by 2050 • Maintaining reliability of energy supplies • Promoting competitive markets in the UK and beyond • Ensuring that every home is adequately and affordably heated Aim is to achieve these together

4. RCEP recommendation: UK target to cut carbon emissions by 60% by 2050 Based on framework of Contraction and Convergence model UK Government position: UK/Annex 1 countries have to make deep long term emissions cuts to achieve UNFCCC objective No preconception about framework for future action Uncertainty of science and scenarios But 60% by 2050 is a reasonable approximation of what UK needs to do Political/policy context

5. Role of modelling… • To test feasibility of desired policy approach • Commissioned analysis from Future Energy Solutions using UK version of the MARKAL energy model (bottom-up technology model) • Objective to consider options and costs for achieving long term reduction in carbon emissions

6. MARKAL energy model

7. Costs of 60% CO2 reduction Key conclusion of 1st tranche of analysis: provided wider international engagement, costs of order of ½ - 2 % of GDP in 2050 …ie between £10-50bn against forecast GDP in 2050 of £2500bn … approximately 0.01-0.02 percentage points reduction on assumed GDP growth rate of 2.25% a year

8. Further modelling…to clarify drivers behind results Wide range of sensitivity analyses to determine what circumstances would increase costs: What happens if ….. • energy efficiency doesn’t deliver • if level of low carbon innovation is constrained • if gas use is limited • if costs assumptions for new nuclear build are varied • if options like new nuclear build and CO2 sequestration are excluded from consideration.

9. Key results… • range of technology options become available to cut CO2 • energy efficiency improvement and innovation very important to reduced costs • options in transport sector relatively high cost • fuel/generation mix of options sensitive to assumed technology costs • policy framework should reflect this uncertainty: tools should leave market to find lowest cost routes

10. Limitations of results? • only as good as input data and assumptions • lack of feedbacks eg from cost of technologies to level of energy demand • UK only • bottom –up model tends to assume availability of low cost technology and may underestimate hidden or transaction costs

11. Response to limitations • Care in use and interpretation of results • explore assumptions and sensitivities • Test out various visions for future, not create a single forecast • Care in policy conclusions – seek those that are robust across the range and use insights into key drivers for low cost • Seek expert input and peer review

12. Satisfactory approach for a [relatively] simple question Process as important as product: transparency & consultation were critical – both internally and externally How can we deal satisfactorily with complex issues around further international action? Suspicion that you commission modelling to tell you what you want to hear? Personal conclusions…