Net Zero Review - GOV.UK
Net Zero Review:Interim reportDecember 2020
Net Zero Review:Interim reportDecember 2020
Crown copyright 2020This publication is licensed under the terms of the Open Government Licence v3.0 exceptwhere otherwise stated. To view this licence, visit /version/3.Where we have identified any third party copyright information you will need to obtainpermission from the copyright holders concerned.This publication is available at: www.gov.uk/official-documents.Any enquiries regarding this publication should be sent to us atpublic.enquiries@hmtreasury.gov.ukISBN 978-1-911680-21-5 PU3063
ContentsExecutive summary2Chapter 1The net zero challenge7Chapter 2The economy and net zero19Chapter 3Estimating the costs of the transition33Chapter 4Market failures and policy choices45Chapter 5Innovation and private finance51Chapter 6International competitiveness and net zero62Chapter 7Households and net zero69Annex ANet Zero Review terms of reference83Annex BMarket failures and climate change85Annex CProcessing of personal data951
Executive summaryReaching net zero is essential for long termprosperityClimate change is an existential threat to humanity. Without global action to limitgreenhouse gas emissions, the climate will change catastrophically with almostunimaginable consequences for societies across the world. In recognition of the risksto the UK and other countries, the UK became, in 2019, the first major economy toimplement a legally binding net zero target.The UK has made significant progress in decarbonising its economy but needs to gomuch further to achieve net zero. This will be a collective effort, requiring changesfrom households, businesses and government. It will require substantial investmentand significant changes to how people live their lives.This transformation will also create opportunities for the UK economy. Newindustries and jobs will emerge as existing sectors decarbonise or give way to lowcarbon equivalents. The Ten Point Plan for a Green Industrial Revolution and EnergyWhite Paper start to set out how the UK can make the most of these opportunities,with new investment in sectors like offshore wind and hydrogen.1 The transition willalso have distributional and competitiveness impacts that the government will needto consider as it designs policy.In recognition of these challenges, the Climate Change Committee (CCC), in itsadvice on the net zero target, noted that “if policies are not sufficiently funded ortheir costs are seen as unfair, then they will fail” and recommended that theTreasury undertake a review to consider:“how the costs of achieving net zero emissions are distributed and thebenefits returned the fiscal impacts, risks of competitiveness effects andthe impacts of decarbonisation across the whole economy”; and“the full range of policy levers, including carbon pricing, taxes, financialincentives, public spending, regulation and information provision.”2The Treasury accepted this recommendation and published the terms of referencefor the Net Zero Review in November 2019. This interim report and the final report1 ‘The Ten Point Plan for a Green Industrial Revolution’, HM Government, November 2020; ‘Energy White Paper: Powering our NetZero Future’, HM Government, December 2020.2 ‘Net Zero: The UK’s contribution to stopping global warming’, Climate Change Committee, May 2019, p196.2
that follows will sit alongside a comprehensive Net Zero Strategy next year, as wellas sectoral decarbonisation strategies. They will form part of a government-wideeffort to achieve net zero, address wider environmental issues and make the most ofgrowth and employment opportunities.The interim reportThis interim report sets out the analysis so far and seeks feedback ahead of the finalreport. This section presents a summary of the findings.1. The combined effect of UK and global climate action on UK economicgrowth is likely to be relatively small. The scale, distribution andbalance of new growth opportunities and challenges will depend onhow the economy and policy respond to the changes required.The transition to net zero will create new opportunities for economic growth andjob creation across the country. The demand for low-carbon goods and services willencourage new industries to emerge, with the potential to boost investment levelsand productivity growth. Moving decisively in areas of comparative advantage couldgenerate export opportunities and establish the UK as global leader across the lowcarbon economy. Co-benefits from decarbonisation, such as improved air quality,can also be economically significant. However, reaching net zero will also involvecosts and lead to significant structural change.Overall, in the context of the rest of the world decarbonising, the net impact of thetransition on growth to 2050 is likely to be small compared to total growth overthat period, and it could be slightly positive or slightly negative. Policies like those inthe government’s Ten Point Plan have a role in ensuring the UK is able to make themost of the potential opportunities.Regardless of the size or direction of the impact on the economy, the transition willlead to structural changes. Employment opportunities in green industries willemerge, while high-carbon sectors will have to adapt or decline. Some of theseeffects will be regionally concentrated. New green jobs are already appearing insectors such as offshore wind, with growth and opportunities centred aroundregional clusters in the Humber and East Anglia. The net impact of the transition onlocal labour markets will depend on the costs of decarbonising for individual firmsand the flexibility of the labour market to match vacancies with the necessary skills.This means that, though the macroeconomic impact might be small, there could besignificant distributional implications. Government policy will need to continue torespond to this, ensuring levelling up across the country.Structural changes in the economy will also have implications for fiscal policy.Revenues from taxes on the consumption of fossil fuels and from emissions-intensiveindustries will decline during the transition, for example, as petrol cars are replacedby electric vehicles. Over time the government will need to consider how to offsetthese lost tax revenues – whether through adjustments to other taxes or reductionsin government spending – so that the UK can reach net zero while maintaining thelong-term health of the public finances.3
2. The costs of the transition to net zero are uncertain and depend onpolicy choices.The amount of investment required to reach net zero and the consequential impactson operating costs are difficult to estimate. They are affected by a range of factors,including the precise path of the transition, changes in behaviour and the rate atwhich technology costs fall and efficiency gains are made, all of which are subject tosignificant uncertainty.3. Government needs to use a mix of policy levers to address multiplemarket failures and support decarbonisationIn choosing the best way to support the transition, government policy should seekto target market failures directly where possible, subject to distributional andinternational competitiveness impacts. The most important market failure to addressis the negative externality associated with the emission of greenhouse gases, butthere are many others holding back the transition to net zero, including inertia andlack of information. The market failures interact in complex ways within and acrosssectors.Carbon pricing is an important lever in addressing the negative externality problembut should be supplemented by other policies in order to achieve an equitablebalance of contributions from households, businesses and taxpayers. Thegovernment has announced it will introduce a domestic emissions trading schemecovering heavy industry, power generation and aviation after the UK leaves the EU.4. Well-designed policy can reduce costs and risk for investors, supportinnovation and the deployment of new technologies.The development of technology will be important for meeting the net zero target,keeping costs down and maximising the potential economic benefits. Much of thefinance required can come from the private sector, but the risks and uncertaintiesassociated with novel technologies can hold this back. A clear policy frameworksetting out the government’s approach at different levels of technologicaldevelopment can help address these uncertainties. Where uncertainty is at itsgreatest, government may need to provide more direct support.The government’s Ten Point Plan announced support for some of these emergingtechnologies, including an extra 200 million for two new carbon capture clustersby the mid-2020s, with another two for the 2030s and up to 500 million fortrialling the use of hydrogen for domestic heating and cooking, starting with aHydrogen Neighbourhood in 2023.5. The risk of carbon leakage will increase with efforts to reduceemissions.The transition to net zero will have implications for the competitiveness of the UKeconomy. Some sectors will enjoy new export opportunities, but others couldbecome less competitive if other countries follow different decarbonisation paths.These changes could lead to carbon leakage where policies achieve their goal oflowering emissions in one jurisdiction but inadvertently increase emissions4
elsewhere. The size of the risk depends on each sector’s costs of decarbonising, theirtrade exposure and international policies.There is little evidence to suggest that carbon leakage has been a significant factorso far, but as the UK implements new policies to support this transition, the risk ofcarbon leakage may increase. The government has a number of ways to seek tomitigate this risk, including through its climate diplomacy and the design of policiesto support the transition.Additionally, the UK will host the COP26 climate negotiations next year and takeover the G7 presidency. The UK is determined to use these opportunities toencourage ambitious international climate action and reduce global emissions.Collective action to reduce global emissions worldwide helps to reduce the risk ofcarbon leakage globally. The government is also using domestic policies like the 315 million Industrial Energy Transformation Fund to help sectors in the UK todecarbonise.6. Households are exposed to the transition through their consumption,labour market participation and asset holdings. Government needs toconsider these patterns of exposure in designing policies for thetransition.Different types of household will have different levels of exposure to the transition.For example, higher-income households consume more carbon in absolute terms,but lower-income households tend to consume more carbon relative to theirincome, and households in Northern Ireland tend to have larger carbon footprintsdue to a higher prevalence of oil-heated housing.Households are also exposed to the transition through the labour market, withpeople in certain occupations (skilled trade, and process plant and machine workers)more likely to work in more carbon-intensive industries. People in these occupationsare also disproportionately likely to have a lower level of education and to be lowerincome workers.Analysis of households’ exposure to the transition does not show where the costswill fall. This will depend on a range of factors, including the cost of decarbonisingeach sector, the availability of alternative low-carbon products and the distributionof new green jobs in the economy. However, government will need to be mindful ofthese issues as they consider the best way to design policy to support the transition.The government is already taking action with a 6.7 billion package of measures tohelp the lowest paid with their energy bills and by providing support for the creationof jobs in new green industries.The final reportThe final report will be published in spring 2021. This will build on the analysis setout in the interim report, including by looking at: Innovation and growth: How the government can reduce policy uncertaintyto encourage innovation, technological development and investment. It will5
look at areas where the UK might have comparative advantage andconsider how to maximise the economic benefits. Competitiveness: The scope for addressing the risks of carbon leakage andcompetitiveness that may arise from the transition to net zero. Household impacts: More detailed analysis of the implications forhouseholds from the decarbonisation of transport, buildings and powerand options for managing any adverse impacts, as well as the trade-offsthe government may face. Embedding the findings: How HM Treasury could incorporate climateconsiderations into spending reviews and fiscal events and how to embedthe principles of the Net Zero Review into policy making acrossgovernment.6
Chapter 1The net zero challengeThe UK has made significant progress towards decarbonising its economy overthe last 30 years and was one of 195 countries to sign the Paris Agreement in2015. Consistent with this and on the advice of the Climate ChangeCommittee, the UK adopted a target of net zero greenhouse gas emissions by2050.The transition to net zero will lead to a more sustainable economy but impliessignificant changes for households, businesses and government. HMTreasury’s Net Zero Review will consider how these changes can be managed.It will look at how to maximise the economic opportunities from the transitionto net zero, how the costs associated with the transition should be met andhow to ensure an equitable balance of costs and benefits across differentparts of society.The Review sits alongside other work by the UK government and the devolvedadministrations examining how best to decarbonise the economy and achievenet zero.Net zero is the “pro-growth strategy for the longerterm”1.1In 2006, HM Treasury commissioned the Stern Review of the Economics ofClimate Change. This estimated the overall costs and risks of global warming to beequivalent to losing between 5 and 20% of global GDP each year. Action to reducegreenhouse gas emissions reduces this risk, with the costs of action necessary tostabilise greenhouse gases concentrations in the atmosphere at 500 to 550 parts permillion estimated to be between 1 and 2% of global GDP. Stern concluded that“tackling climate change is the pro-growth strategy for the longer term, and it canbe done in a way that does not cap the aspirations for growth”.11.2The Climate Change Act 2008 established the independent Climate ChangeCommittee (CCC) to recommend emissions reduction targets for the UK (known ascarbon budgets) and to evaluate progress towards meeting them. The initial goal set1 ‘Stern Review: The Economics of Climate Change’, HM Treasury, October 2006; the data for the cost of action was revised from1% in the original report, to 2% in 2008.7
in the Act was to reduce emissions by 80% compared to 1990 levels by 2050,2 inline with advice at the time from the CCC.31.3Although the UK has made significant progress in reducing greenhouse gasemissions since 1990, global atmospheric concentrations of greenhouse gases havecontinued to rise (Chart 1.A) with consequential implications for the climate. Theaverage temperature in the UK between 2008 and 2017 was 0.8 C higher than inthe period from 1961 to 1990. The UK is seeing wetter winters and drier summersand has experienced several extreme weather events in recent decades. Theseinclude significant flood events in England in the winters of 2013 to 2014 and 2015to 2016 and the joint hottest summer on record in 2018, with temperaturesequalling the summers of 2006, 2003 and 1976. There are 240,000 homes andproperties currently in high flood risk areas, and if shoreline management plans arenot implemented, 5,000 properties could be affected by coastal erosion over thenext 20 years as sea levels rise and more wave energy reaches the coast.4Chart 1.A: Atmospheric concentration of selected greenhouse gases300Index (1750 100)2502001501005001750180018501900Carbon dioxideMethane19502000Nitrous oxideSource: European Environment Agency.1.4In recognition of the risks to the UK and globally, the UK was one of 195countries to sign the Paris Agreement in 2015, committing to hold the increase inthe global average temperature to well below 2 C above pre-industrial levels and topursue efforts to limit the temperature increase to 1.5 C.5 It is implicit in this targetthat global greenhouse gas emissions should reach net zero in the second half ofthis century.61.5Following the Paris Agreement, the UK, Scottish and Welsh governmentsasked the CCC for advice on when it would be feasible to reach net zero greenhouse2 Climate Change Act 2008 as enacted.3 ‘Interim advice by the Climate Change Committee’, Climate Change Committee (CCC), October 2008.4 ‘Climate change impacts and adaptation report’, Environment Agency, November 2018.5 ‘Paris Agreement’, United Nations, 2015, article 2.6 Ibid, article 4.1.8
gas emissions.7 In May 2019, the CCC published its recommendation that the UKshould reach net zero by 2050, with individual targets for Scotland and Wales.8Later that year, the UK became the first major economy to implement a legallybinding net zero target.91.6The net zero target requires that by 2050 any greenhouse gas emissionsproduced within the UK must be reduced as far as possible and any residualemissions must be offset, for example by increasing natural carbon sinks such asforests or using technology like carbon capture and storage.101.7The target is focused on the flow of emissions into the atmosphere andapplies to tonnes of CO2-equivalent (tCO2e). This measure aggregates emissions ofdifferent greenhouse gases based on their global warming potential relative tocarbon dioxide.111.8The target covers emissions that take place on UK territory. It does notinclude the emissions embedded in goods and services that the UK imports: underinternationally agreed frameworks for emissions accounting, established under the1990 UN Framework Convention on Climate Change, these are the responsibility ofthe country of origin. The target therefore focuses decarbonisation efforts on theemissions over which the UK government and devolved administrations have mostinfluence and which they are best able to measure.The UK has made good progress since 1990, but hasa long way to go to reach net zero1.9Between 1990 and 2019, the UK reduced its greenhouse gas emissions by43%, compared to just 5% for the G7 as a whole (Chart 1.B). At the same time, theUK economy grew by almost 80%.12 The rate of reduction in the carbon intensity ofthe UK economy since 2000 has also been the fastest in the G20.131.10 This progress so far has been led by the power sector (Chart 1.C), whereemissions have fallen by over 70% since 1990, largely through reducing the role ofcoal in electricity generation and increasing the role of renewables. Industrialemissions have also fallen significantly, by more than 50% over the same period.This represents emissions reductions across all parts of industry, manufacturing,construction and fossil fuel supply. In the manufacturing sector, CO2 emissions fellby 25% between 2009 and 2017. These falls reflect a combination of reducedenergy intensity, a shift to less carbon-intensive energy sources and changes in thestructure of the manufacturing sector.7 ‘UK climate targets: letter to the Climate Change Committee (CCC) – 15 October 2018’, Department for Business, Energy &Industrial Strategy (BEIS), Welsh Government and Scottish Government, October 2018. Northern Ireland does not currently haveits own climate change legislation or emissions targets, but emissions from Northern Ireland are still covered by the wider UKtarget.8 ‘Net Zero: The UK’s contribution to stopping global warming’, CCC, May 2019.9 ‘UK becomes first major economy to pass net zer
2 ‘Net Zero: The UK’s contribution to stopping global warming’, Climate Change Committee, May 2019, p196. 3 that follows will sit alongside a comprehensive Net Zero Strategy next year, as well as sectoral decarbonisation strategies. They will form part of a government-wide
The Net-Zero riteria are part of the STi’s Net-Zero Standard. The Net-Zero Standard, which entails both the Criteria and forthcoming Net-Zero Guidance, will be finalized by November 2021 in advance of the 2021 United Nations Climate Change Conference (COP26). Public consultation of the Net-Zero Guidance is scheduled to begin in July 2021.
List of Figures, Tables and Boxes Figures 2 Figure S1 Overview of the key nuances of net-zero target implementation approaches 5 Figure S2 Ten basic criteria for net-zero target transparency 14 Figure 1 Internet searches for net-zero emissions 15 Figure 2 Map of cities and regions pursuing net-zero emissions 16 Figure 3 Population of cities and regions with net-zero targets, by geographic region
emissions ('net zero emissions') has grown, so has the need for a common understanding on what net zero emissions means and how to achieve net zero goals. Investors are also putting pressure on companies to lay out their plans for reaching net zero emissions and to demonstrate how net zero pathways are integrated into their long-term strategy.4
China net zero and job creation: Potential for the creation of c.40 mn jobs by 2060 33 Laying out the path to a net zero China: A sectoral deep dive 34 China net zero: The role of carbon sequestration 61 China net zero: The potential implications for natural resources demand 64
part of the Army’s Net Zero pilot program and builds on past Net Zero Energy work sponsored by FEMP and supported by NREL. FEMP continues to support the Net Zero program with project implementation strategies. The energy team members at each of the Net Zero Energy pilot sites and some of the staff members from NREL, the Pacific
A Net ZERO INSTALLATION applies an integrated approach to management of energy, water, and waste to capture and commercialize the resource value and/or enhance the ecological productivity of land, water, and air. “The primary goal is a focus toward net zero and when we talk about net zero, it's not only net zero energy, but
Navigating the Net Zero Landscape Global net zero landscape. The recent wave of net zero targets has brought global emissions trajectories closer to the Paris Agreement's 1.5 C goal. As of December 2020, 127 countries have either set net zero emissions targets or declared intentions to do so, representing cumulatively, around 63% of
5 The Road to Net-Zero Finance The AGF's Recommendations for delivering net-zero finance in the UK A. Strategic 1. The UK should commit to be the world's first net-zero financial system 2. Make net-zero projects and plans investable, by increasing the predictability of cash flows and reducing risks through sector pathways, carbon pricing and de-risking
