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
Political/policy context

• 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

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 modellingto clarify drivers behind
results

• Wide range of sensitivity analyses to determine
  what circumstances would increase costs
• What happens if ..
• energy efficiency doesnt 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
Personal conclusions

• 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?