The Net Zero juggernaut grinds relentlessly onwards
Did you know that there is an Interministerial Group for Net Zero, Energy and Climate Change? Hardly anyone does. But there is such a thing, comprising representatives of the UK Government, the Welsh Government the Scottish Government and the Northern Ireland Executive, which together form the UK Emission Trading Scheme Authority, and it issues, in the style of aristocratic, haut en bas, international diplomacy, occasional ‘Communiqués’ on its meetings.
The latest, reporting a discussion on the 21st of February, was released on the 2nd of May. In spite the long interval the substance of the public statement is brief and can be quoted in its entirety:
2. What was discussed
The Interministerial Group discussed the UK Emissions Trading Scheme, specifically the UK ETS Authority’s plans set out in July 2023 for expansion of the scope of the scheme to additional sectors of the economy.
Is that it? you ask. Yes indeed; that’s all you are allowed to know about a discussion and perhaps a decision that will add further industries to the UK ETS, and bring yet more of the economy under the low-carbon whip, loading consumers with still further costs. But it will not be the last of such opaque and ridiculously brief ‘communiqués’ from the four governments on this and many other matters related to Net Zero.
If the man and woman in the street said that this looks more like bureaucracy than democracy, it would be hard to disagree. The low-carbon policy agenda is now deeply embedded within the process of UK government, binding the four devolved authorities together in the collaborative development of policies to deliver one agenda – Net Zero greenhouse gas emissions by 2050. The policy and the process are now indistinguishable, and in spite of the turbulence affecting the Net Zero plans here and abroad, the green juggernaut grinds relentlessly onwards behind closed doors and away from prying eyes. The public may think that the Prime Minister is responding to concerns about the costs, and he may even think this himself, but the truth is that the ‘Interministerial’, and other similar Net Zero delivery agents such as Ofgem, carry on their work relatively undisturbed by such external criticism.
This matters a great deal. Direct income support subsidies to renewable generators are now well-known, and controversial. The OBR estimates that the Renewables Obligation will cost consumers some £8 billion in the current year, the Contracts for Difference scheme some £2.1 billion, the Capacity Market some £1.4 billion. The Feed-in Tariff for small scale generation adds a far from small scale £1.73 billion.[1]
But the UK Emissions Trading Scheme, which the ‘Interministerial’ communiqué is preparing to expand, already adds at least another £6 billion a year to consumer costs, equivalent to about half the other green levies in total. This cost is incurred by companies to purchase permits to emit carbon dioxide, the funds being received by the government. To avoid these costs, emitters must reduce their emissions by adopting low-carbon technologies. But this is not a cost-free option, since low-carbon energy supply is, and in spite of government propaganda, much more expensive than unpenalised fossil fuels.
Of course it is true that, in an otherwise undistorted market, companies would only choose to avoid emitting carbon dioxide if that were cheaper than buying emissions allowances. But the UK economy is not otherwise undistorted, and company directors are under considerable legal and media pressure to adopt Net Zero measures, regardless of cost and in anticipation of an emissions-free economy in 2050. My own paper, A Little Nudge with a Big Stick (2021),[2] discusses one of these, the embedding of the Streamlined Energy and Carbon Reporting Framework within the Companies Act, thus making it a criminal offence for directors to fail to report or to misreport their emissions and energy consumption and best efforts to reduce them.
The costs of the UK ETS to the consumer, then, is in two parts. Firstly, the cost of permits purchased by companies that cannot avoid emitting carbon dioxide. Secondly, and obscurely, the cost of low-carbon technologies and fuels adopted to avoid the ETS penalties. Government revenues may fall as the ETS drives the economy towards Net Zero, but consumer costs will only fall if the low-carbon alternatives are cheaper, and there is no evidence that this is generally the case.
It is rational to infer that expansion of the ETS to the domestic maritime sector from 2026, to waste and incineration, including energy from waste, and the inclusion of emissions from carbon dioxide venting by the upstream oil and gas sector, will all eventually load additional cost on to the consumer, and it is this which the Interministerial was discussing in secret.
In addition, to make the UK ETS fully Net Zero consistent, the UK ETS Authority, which is comprised of the four governments making up the Interministerial, will reduce the number of emissions allowances by 30% by 2030. Even the authority itself admits that this is ‘ambitious’, [3] implying a steep rise in the cost of permits.
The governments are aware of the dangers of expansion of the scheme and a reduction of allowances, and in their jointly authored 2023 Review of the UK Emissions Trading Scheme, they announced a smoothing measure, redistributing allowances from existing reserve ‘pots’ of allowances between 2024 and 2027. Just over 50 million additional allowances will be released, which will in part but only in part offset the effect of introducing the Net Zero consistent pathway and the expansion of the scheme, ‘reducing the risk of upward price shock’.
This smoothing effect probably explains the projected falls in revenues from the ETS over the next few years. The OBR estimates ETS revenue will drop from £6.1 billion in 2023/4 to £3.6 billion in 2024/5, with further falls bringing the annual cost to £1.6 billion a year in 2028/9.[4]
But as we have seen, a fall in government receipts from the ETS does not necessarily result in a fall of costs to consumers. The low-carbon alternatives required to prevent emissions may not be much cheaper than the ETS at its height, and may even be more expensive.
Thus, while the OBR’s figures suggest that the costs of Net Zero are falling, this is an almost certainly in part an illusion. While companies are buying emissions allowances, the policy costs are explicit; when companies avoid those costs by turning to low-carbon energy, perhaps through corporate power purchase agreements, the costs are internalised and buried in the overall cost of doing business. One could in principle laboriously extract them from company reports, but these Net Zero costs will no longer be on the government books.
The main take-home here is that the full, actual cost of the UK Emissions Trading Scheme as it is expanded and as allowances are cut to put it on the Net Zero consistent trajectory is very hard to determine. If you believe, as Lord Callanan, the well-meaning UK government representative on the Interministerial apparently does, that low-carbon fuel costs are low, then you will think the costs will fall. But if you judge, from a host of empirical indicators such as audited wind farm accounts, industry demands for subsidy, and underlying physics, say, that the costs are extremely unlikely to be low, then you will guess that the actual cost to consumers over the coming decades will be considerably upwards of the £6 billion a year that the ETS generated in revenue in 2023/4 and 2024/5.
This is a non-trivial cost, and it would be extremely interesting to know whether the members of the Interministerial, effectively the UK ETS Authority in full session, showed any awareness of this risk in their discussions on the 21st of February. Net Zero Watch will submit an FoI for the full minutes of this meeting in the public interest.
Notes
[1] https://www.ofgem.gov.uk/publications/feed-tariffs-fit-annual-report-2022-23
[2] https://www.thegwpf.org/content/uploads/2021/02/Constable-SECR.pdf
[3] https://assets.publishing.service.gov.uk/media/657c79201c0c2a001318ce63/uk-ets-2023-review.pdf
[4] https://obr.uk/docs/dlm_uploads/E03057758_OBR_EFO-March-2024_Web-AccessibleFinal.pdf