5th carbon budget commits UK to reduce emissions by 57% by 2032

Parliament has officially passed the Government’s fifth carbon budget into law, committing the UK to reducing emissions by 57% against 1990 levels by 2032.

Under the Climate Change Act, the UK Government has set ambitious targets for the UK emissions of greenhouse gases in 2050. There is currently a projected target of an 80% reduction in emissions based on a 1990 benchmark.

On the 19th July the House of Lords, following the House of Commons, approved the draft statutory instruction which legally binds the UK to a carbon budget of 1,725 MtCO2e for the period 2028 to 2032.

As a signatory of the Paris agreement (COP21), the UK has committed to “holding the increase in global average temperature to well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5°C above pre-industrial levels”.  This commitment has been further reinforced by the post-Brexit UK Government and sets out clearly our ambitions as a country to continue to be a leader in emissions reductions over and above those commitments under the EU.

The 57% target is more ambitious than the EU target of reducing emissions by 40% to 2030 and demonstrates the UK’s on-going commitment in continuing to pursue the low-carbon agenda despite the initial fears that a Brexit vote would damper the UK’s on-going commitment.

The newly formed BEIS (Business, Energy and Industrial Strategy) has clearly stated that climate change is still a significant threat and pursuing the ratification of COP21 and continuing the UK’s commitment to tackling climate is critical to our low carbon future, there has been concern by others than our ambitious plans are an act of economic self-harm.

Whilst the UK is on track to meet emissions reduction targets in the near-term there is still considerable concern that we are currently on target to meet the ambitious targets as detailed in the fourth carbon budget and the newly agreed fifth carbon budget. This suggests that the UK Government will need to seriously consider making strong policy decisions to bring the UK back in line with its ambitions.

The key concerns which arose from the House of Lords debate on the 19th July are:

  • There was no mention of the impact of Brexit on future climate change plans and their relative impact on economic stability. Therefore, the future impact of Brexit may pose a risk to the Government’s plans.
  • An extra 17% reduction over and above the EU targets will not make a major impact on global figures – it would reduce global emissions by 0.15% – a reduction in global warming by between 0.001 and 0.003°C. Therefore, without a joined up global approach we may simply be creating a UK risk without supporting countries also taking on-board the same degree of risk.
  • The National Audit Office’s latest study confirmed that there is likely to be an overspend on the levy control framework (the mechanism which sets the low carbon support levies which have driven up the consumer cost of energy) – about £1bn over the £7.6bn permitted in 2020. It is anticipated that the current planning permissions for renewable generators could overshoot the electricity component of the target by approximately 35% – for which there is no budget.

It is anticipated that the impact of the UK’s carbon budgets and the subsidies supporting the UK electricity sector will be in the region of £150bn – £200bn between 2002 – 2035. This is a considerable cost which will be borne by the UK consumer and poses a risk to our industrial and commercial competitiveness over this period.

5th carbon budget commits UK to reduce emissions by 57% by 2032

What are the key conclusions for energy consumers?

UK energy consumers are already seeing the impact of the current low-carbon ambitions through increased non-energy costs (levies and taxes to support low-carbon generation) and through increased compliance legislation (ESOS etc). The continued simplification strategy for carbon legislation has already seen the closure of the CRC – with the tax folded into the CCL from 2019 onwards. It is anticipated that the continued evolution of compliance markets, coupled with the strong policy decisions needed to meet the fourth and fifth carbon budgets, will:

  • Further cause consumers to face an un-certain future, with continued change to the current compliance framework. This is likely to create a more reactive strategy based on changes.
  • Increase the cost of compliance, given the strong policy decisions needed to push emissions reductions. Whilst energy is not the largest sector within the overall emissions reduction sector, it has seen the largest decline in emissions and is likely to be pushed further as it is the key focus and easiest mechanism for emissions savings given the currently accepted consumer funded model – i.e. levies and taxes in a bill support low-carbon generation.
  • Mean that current and future schemes are likely to require a more enforced mandate for minimum levels of energy efficiency. This is already being seen in the forthcoming changes to the EPBD (Energy Performance of Buildings Directive) which will pose significant risks to the commercial estate sector.
  • Create a difficult period over 2017-2019 for energy consumers as assuming the UK Government creates stronger policy signals to delivering the fourth and fifth carbon budgets during this period, we may see a lack of investment or funding for efficiency measures which may increase the capex cost to consumers.
  • Open up uncertainty in a number of areas, adding further complexity to delivered energy bills alongside the risk of changing compliance and this will undoubtedly create challenges for energy consumers.
  • Push the focus heavily on indirect emissions and energy consuming sectors such as transport and fleet.
5th carbon budget commits UK to reduce emissions by 57% by 2032

What is Beond advising?

The current state of uncertainty in a post-Brexit UK means that the current trajectory is our energy and carbon markets is likely to change. At this time, and until we start to see policy decisions from the UK Government to meet our fourth and fifth carbon budgets alongside the proposed impact of Brexit decisions on our UK energy market model and its links to the EU, it is difficult to fully gauge the anticipated risks or opportunities to energy consumers.

This uncertainty suggests that:

  • All organisations should consider the relative scenarios for their organisations and how this differs from the current internal energy and carbon markets strategy. Beond can help support this discussion and highlight the risks and opportunities in a clear board level engagement.
  • Reviewing current funded models or efficiency plans should be included in the strategy to highlight any changes to the current or proposed business plan.

Beond is uniquely placed as a specialist energy market consultancy to consider the wider implications over and above the traditional energy procurement services. Our unique insights into current and future market conditions have been proven to deliver credible insights which have helped our clients deal with not only immediate energy and carbon savings but also support their organisations in planning for the future – which is a key requirement in a post-Brexit world.