ICAEW chart of the week: OBR climate change scenarios

Our chart this week is on the OBR Fiscal Risks Report, highlighting how delaying action to achieve net zero could double the cost to the public finances compared with acting more quickly.

Chart show public debt change in 2150-51 as % of GDP for different scenarios: Investment switch and motoring tax -12%, early action high productivity +10%, early action scenario +21%, early action low productivity +32%, late action scenario +43%, unmitigated climate change +38%. The final column for unmitigated climate change also has the public debt change in 2100-01% of +161%.

With two ‘once in a century’ events in less than two decades adding more than £1tn to public debt, it is unsurprising that the OBR’s Fiscal Risks Report published earlier this week places much more emphasis than previous reports on the potential for catastrophic risks, whether that be from further pandemics, major wars, climate change or cyberattacks.

The report focuses on three particular risks: the coronavirus pandemic, the cost of debt, and climate change, with the latter being the subject of the #icaewchartoftheweek. 

The OBR distinguishes fiscal risks from climate change between those stemming from global warming itself (physical risks) and those relating to the move to a low-carbon economy, including the policies to achieve that (transition risks). In unmitigated climate change scenarios, the physical risks dominate, whereas the more that is done to mitigate global warming by reducing emissions, the more important transition risks become. 

The chart illustrates two main scenarios explored by the OBR – an early action scenario where the UK and other governments around the world push forward with plans to achieve net zero by 2050 and a late action scenario where the UK government delays taking actions to decarbonise the economy. The chart also shows three variants on the early action scenario depending on whether decarbonisation boosts or damages productivity or where investment is switched from other areas and motoring taxes retained. 

In the early action scenario, the OBR estimate that public sector debt would rise by 21% of GDP by 2050-51 (equivalent to £469bn in current prices) as a consequence of lost fuel duties and other taxes of 19%, additional spending of 6%, indirect economic effects of 6% and interest on borrowing of 4% less 14% from carbon taxes imposed to incentivise the shift to net zero. 

The high productivity variant is similar in terms of costs and carbon tax receipts, but with indirect economic effects contributing additional tax receipts with a consequent reduction in borrowing costs over 30 years, resulting in net additional debt of 10% of GDP. The low productivity variant assumes the reverse with lower tax receipts and a smaller economy combining to increase the net increase in public debt to 32% of GDP. The other variant identified by the OBR has the effect of reducing public debt, where investment in decarbonisation is funded by cutting other public investment plans and existing motoring taxes are shifted onto electric cars to retain that source of income to the exchequer.

A key finding in the report is that delaying action would cost a lot more than moving early with public sector debt rising by 43% in 2050-51, more than double the early action scenario, as it would require a more radical intervention costing more and resulting in more adverse economic effects.

Ironically, the OBR estimates that doing nothing would have a smaller impact on net debt by 2050-51 than the late action scenario as decarbonisation costs would not be incurred. However, the OBR estimates that unmitigated climate change would have a significant impact for the rest of the century, with public debt potentially rising to 289% of GDP by 2100-01 if action is not taken to prevent temperatures rising around the world.

For more information read the OBR Fiscal Risks Report.

This chart was originally published by ICAEW.

ICAEW chart of the week: UK electricity projections

6 November 2020: Renewables, imports and nuclear are expected to provide around 85% of UK electricity generation by 2040, but will that be good enough to achieve carbon neutrality a decade later in 2050?

UK electricity projections chart (reference scenario):
Nuclear: 48 TWh in 2008, 62 TWh in 2020, 86 TWh in 2040.
Imports: 11 TWh, 28 TWh, 74 TWh.
Renewables: 23 TWh, 125 TWh, 188 TWh.
Carbon: 297 TWh, 109 TWh, 58 TWh in 2040.

The latest official energy and emissions projections, released by the Department for Business, Energy & Industrial Strategy (BEIS) on 30 October 2020, now extend out to 2040 – a decade before the 2050 target set by the UK Government to reach net zero.

The #icaewchartoftheweek takes a look at the progress being made on decarbonising electricity generation, with renewables, nuclear and imported electricity (much of which comes from nuclear or renewable sources) expected to increase from around 20% in 2008 to 66% this year and to just over 85% in 2040.

Overall electricity demand is expected to fall over the first half of the coming decade as improved energy efficiency and energy conservation measures (such as better insulation) continue to offset more demand from a growing population and economy (caveats apply). Lower demand in the residential and services sectors are then expected to be outweighed by higher demand for industrial and transport, particularly the latter as electric vehicles take to the roads.

Coal has now been almost entirely eliminated from electricity generation, falling from 118 TWh in 2008 (when there was also 6 TWh from oil and 173 TWh from natural gas) to 2 TWh projected in 2020 alongside 107 TWh from natural gas. Even so, coal may remain a small part of the mix even in 2040 as part of a projected 5 TWh of electricity from carbon capture and storage (CCS) plants. This should leave just 53 TWh from low (but still not no) carbon natural gas generation to eliminate over the subsequent decade.

Unfortunately, electricity is only part of the energy picture, with the reference scenario calculated by BEIS projecting that carbon sources will provide 980 TWh of final energy consumption in 2040 outside of electricity supply and direct power from renewables. This includes the equivalent of around 370 TWh from natural gas used domestically, 250 TWh from diesel and petrol used in transport, and 160 TWh from aviation fuels.

So while there continues to be welcome progress in greening the electricity supply, achieving net zero overall is not going to be as easy.

This chart was originally published on the ICAEW website.