Technology-Neutral Procurement – An Assessment

In the absence of full cost information or of externalities, should policies to support production of a good always be technology-neutral?   Scenarios can be constructed which suggest not, but the gains from departing from technology neutrality may be too small to be worthwhile.

Suppose a government wishes to secure the production of a good which can be produced by more than one technology.  It might be a good required by the government sector, or one required by firms or households which the government wishes to subsidise because it supports its social or environmental policy.  Should the government proceed in a technology-neutral manner, or could it be appropriate to favour one technology over another?  There are some circumstances in which the latter approach is clearly better.  One is where the government has full information on the production costs of the different technologies, so can choose the technology or combination of technologies offering the lowest cost.  Another is where the apparently similar goods obtained from the different technologies are not actually identical, an example being intermittent electricity obtained from sources such as wind and solar on the one hand, and continuous electricity (subject only to maintenance requirements and faults) obtained from nuclear on the other.  A third is where the technologies differ in respect of production externalities: again electricity provides an example via the contrast between generation from fossil fuels and from low-carbon sources.

Suppose however that none of these circumstances apply: in other words the government has less than full information on costs, the alternative technologies produce goods which are genuinely identical, and there are no production externalities.  I want to consider a line of reasoning suggesting that a technology-neutral approach may still not be best.  This post is largely prompted by a paper by Fabra & Montero (1), although I shall present the material in my own way and draw my own conclusions. 

In the interests of simplicity, I shall assume that the quantity Q, of the good to be secured has been pre-determined, that just two production techniques are available, and that the full cost of securing production is met by the government.  However I shall consider two interpretations of ‘best’. There is the view a government may well take that what is best is to minimise the cost to itself, and so minimise the additional tax revenue required.  Then there is the standard economists’ view that the aim should be to maximise welfare, defined as economic benefits less economic costs.  The economic benefits are the benefits to consumers of the good, but these are fixed by the quantity Q,.  To maximise the effect on welfare, therefore, we can focus on minimising the economic costs.  The cost to the government is not itself an economic cost, since it simply reflects a transfer from taxpayers to the government and then to producers.  The true economic cost has two components.  One is the cost of producing the good.  The other is the distortionary effect on the economy of the additional taxation, sometimes referred to as the excess burden of taxation (2).  In the literature this is sometimes quantified as the ratio \lambda, of the excess burden to the direct tax burden, and sometimes as the ratio of the sum of the excess and direct burdens to the direct burden, known as the marginal cost of public funds (MCF); thus MCF = 1 + \lambda,

To illustrate these two interpretations of ‘best’ and how they can be achieved, let us flesh out our scenario with sufficient detail to permit the use of mathematical optimisation techniques.  Let us assume that the government must pay the same unit price for all amounts of the good produced using a technique, but can discriminate in respect of price between the two techniques.  Let the quantities produced using the two techniques be q_1, and q_2,.  Suppose that each technique is available to many small firms with a range of production costs such that the aggregate production costs as progressively higher-cost firms come into production are (3):



Costs here are taken to include normal profit, so we can assume that a firm will produce if and only if the unit price offered by the government equals or exceeds its unit cost.  At aggregate level, therefore, the quantity of the good produced by a technique will be such that the aggregate marginal cost (4) equals the price offered:

c_1 + x_1 + q_1 = p_1\qquad(E3)         


Suppose further that the government knows the above formulae and knows the values of c_1, and c_2,, but not of x_1, and x_2,.  The latter, from the government’s point of view, are independent random variables, each with uniform distribution over the range [-k, k], where k, is a known constant.  In the central case which we will consider the known values are: c_1=100,\:c_2=20,\:k=10.  We also assume that Q=100, and \lambda=0.2,

To determine the unit price(s) the government should offer, it clearly needs to undertake some sort of auction process.  I shall consider five possible types of auction, setting out the relevant maths in some detail for the first and in outline for the others (5). 

An immediate question is whether the government should hold separate auctions for the two techniques or a single auction embracing both.  I will consider the separate auctions (technology-specific) case first.  This requires the government, using only the information it has, to determine the optimal quantities to be obtained by use of each technique.  Because some of its information is stochastic, it needs to consider the expectation, denoted E,, of the range of possible outcomes of any choice of quantities, and choose the quantities that minimise that expectation. 

If the aim is to minimise cost to the government, the problem can be formulated as:

\min E[p_1q_1+p_2q_2]\qquad(E5)

Since we require q_1 + q_2 = Q,, and using E3 and E4, we can eliminate p_1, p_2 and q_2, and express the problem as:

 \min E[c_1+x_1+q_1)q_1+(c_2+x_2+Q-q_1)(Q-q_1)]\qquad(E6)

Given that the distributions of the variables x_1, and x_2, have been defined as symmetrical about zero, we have E[x_1] = E[x_2] = 0,, so that on evaluating the expectation in E6 we can ignore the terms containing x_1, or x_2,.  For future reference, we also note that, since x_1, and x_2, are independent, E[x_1x_2] = E[x_1]E[x_2] = 0, but E[x_1^2], and E[x_2^2], importantly are not zero but equal k^2/3, (6).  Rearranging the terms not containing x_1, or x_2,, the problem becomes:

\min [2q_1^2+(c_1-c_2-2Q)q_1 + c_2Q + Q^2]\qquad(E7)

Differentiating with respect to q_1,, the first order condition is:

4q_1 + c_1 -c_2 -2Q = 0\qquad(E8)

implying (7):

q_1 = \dfrac{c_2 -c_1 + 2Q}{4}\qquad(E9)

Substituting our known values we have q_1, = (20 – 100 + (2 x 100))/4 = 30, from which we can infer q_2, = 70, p_1, = 130 + x_1,, p_2, = 90 + x_2,.  The implied expectation of the cost to the government is:

E[p_1q_1+p_2q_2]=E[(130+x_1)30+(90+x_2)70]= 10,200 (E10)

where, again, we can ignore terms containing x_1, or x_2,.  Although the aim in this case was not to maximise welfare, we may note that the economic cost is:

E\Big[(c_1 + x_1)q_1 + \dfrac{q_1^2}{2} + (c_2 + x_2)q_2 + \dfrac{q_2^2}{2} + 10,200 \lambda \Big]   

= E\Big[(100 + x_1)30 + \dfrac{30^2}{2} + (20 + x_2)70 + \dfrac{70^2}{2} + 10,200(0.2)\Big] = 9,340    (E11)

To obtain this outcome, the government must proceed by what I shall call Auction Type 1:

Invite bids from technique 1, and set the strike price at the level just sufficient to bring forth production at the level (q_1, = 30) determined by the minimum cost to government problem E5 AND Invite bids from technique 2, and set the strike price at the level just sufficient to bring forth production at the level (q_2, = 70) determined by the problem E5.

It is important to note that this procedure (and all the others to be considered) only works because of our assumption that there are many small firms with a range of production costs.  Because of this, we can take it that each firm’s bid reflects its actual costs.  A firm can gain nothing from a higher bid since, with many small firms, such a bid cannot significantly raise the strike price, but can (if the bid exceeds the strike price) result in the firm losing the business it could have gained.

If the aim is to maximise welfare, which as we have seen requires minimising economic cost, the problem is formulated as:

\min E\Big[(c_1 + x_1)q_1 + \dfrac{q_1^2}{2} + (c_2 + x_2)q_2 + \dfrac{q_2^2}{2} + \lambda (p_1q_1 + p_2q_2)\Big]\qquad(E12)

Substituting as before for p_1,\:p_2 and q_2,, eliminating terms in x_1, and x_2,, and setting the derivative with respect to q_1, equal to zero, we can obtain:

q_1 = \dfrac{Q}{2} + \dfrac{(1 + \lambda )(c_2 - c_1)}{2(1 + 2\lambda )}\qquad(E13)

Substituting known values we have q_1, = 100/2 + 1.2(20 – 100) / 2.8 = 15.714.  From this we can obtain the cost to the government (10,608) and the economic cost (9,054).  As we might expect, the former is considerably more than when we aimed to minimise the cost to the government, while the latter is considerably less.

To obtain this outcome, we require Auction Type 2:

Invite bids from technique 1, and set the strike price at the level just sufficient to bring forth production at the level (q_1, = 15.714) determined by the minimum economic cost problem E12 AND Invite bids from technique 2, and set the strike price at the level just sufficient to bring forth production at the level (q_2, = 84.286) determined by the problem E12.

A feature of both the approaches we have considered is that, given our known values, they result in different prices for electricity according to the technique by which it is produced.  Suppose instead that the government holds what we will call Auction Type 3:

Invite bids from techniques 1 and 2, and set a single strike price at the level just sufficient to bring forth total production at the required level (Q , = 100).

In this case, from E3 and E4 we can infer:

c_1 + x_1 + q_1 = c_2 + x_2 + q_2 = c_2 + x_2 + Q - q_1\qquad(E14)


q_1 = \dfrac{Q}{2} - \dfrac{(c1 + x1) - (c2 + x2)}{2}\qquad(E15)

Although we can infer formulae for p_1 = p_2, and q_2,, these all contain the variables x_1, and x_2,.  On calculating the expected cost to the government x_1, and x_2, drop out as before since we are simply multiplying the common price by the fixed quantity Q,; given our known values the expected cost to the government is 11,000.  In calculating the expected economic cost, however, the production cost formulae include the squares of q_1, and q_2, resulting in squares of x_1, and x_2, which as we have seen take the expected value k^2/3,.  The expected economic cost is 9,083, of which these expected values of squared variables contribute -102/6 = -17. 

This type of auction does not achieve the best outcome on either of our interpretations of ‘best’.  It results in an expected cost to the government higher than either Type 1 or Type 2, and an expected economic cost higher than Type 2.  What it does minimise, by equalizing the prices and therefore the marginal costs of production using the two techniques, is the total production cost.  But that is not what we want to minimize under either of our interpretations of ‘best’. 

It may come as a surprise that the government can do better than any of the approaches considered so far.  The key here is that the government can hold a single auction without committing itself to set a common strike price.  This is sometimes termed a product mix auction (8), the principle being applicable to differentiated goods or to a common good that can be produced in more than one way. Given that, based on our assumptions, each firm’s bid reflects its actual costs, the set of bids received in an auction provides the government with a lot of cost information.  It can use that information to choose strike prices for each technique according to its aim.

If the aim is to minimise the cost to the government, the problem to be solved after holding the auction is:

\min p_1q_1 + p_2q_2\qquad(E16)

Proceeding as above, albeit without needing at this stage to consider the expectation, we obtain:

q_1 = \dfrac{Q}{2} - \dfrac{c_1 - c_2 + x_1 - x_2}{4}\qquad(E17)

Note that we  do not ignore the terms in x_1, and x_2,; their values have effectively been revealed by the auction, so at this stage we are dealing with actual values, not with the expectation of a formula containing variables.  Using E17 we can infer formulae for p_1,\:p_2 and q_2,, all of which contain x_1, and x_2,, and for the cost to the government for the particular values of x_1, and x_2, which is:


For purpose of comparison with our earlier results, especially from Auction Type 1, we want the expectation of E18 over the range of possible values of x_1, and x_2,, which is:

\dfrac{Q^2}{2} + \dfrac{Q(c_1 + c_2)}{2} - \dfrac{(c_1 - c_2)^2}{8} - \dfrac{2k^2}{24} = 10,192    (E19)

We can also calculate the expectation of the economic cost which is 9,326.

For this expected outcome we require Auction Type 4:

Invite bids from techniques 1 and 2, and using the results of the auction, set the strike prices for each technique at levels which a) are just sufficient to bring forth total production Q, = 100 and b) among the combinations of strike prices which satisfy (a), minimise cost to the government. 

If the aim is to minimise economic cost, the problem to be solved, again after holding the auction, is:

\min \Big[(c_1 + x_1)q_1 + \dfrac{q_1^2}{2} + (c_2 + x_2)q_2 + \dfrac{q_2^2}{2} + \lambda (p_1q_1 + p_2q_2)\Big]\qquad(E20)

Proceeding as above, this can be solved to obtain:

q_1 = \dfrac{Q}{2} - \dfrac{(1 + \lambda )(c_1 - c_2 + x_1 - x_2)}{2(1 + 2\lambda )}\qquad(E21)

The expected cost to the government is 10,604 and the expected economic cost is 9,037.  These expected outcomes are achieved by Auction Type 5:

Invite bids from techniques 1 and 2, and using the results of the auction, set the strike prices for each technique at levels which a) are just sufficient to bring forth total production Q, = 100 and b) among the combinations of strike prices which satisfy (a), minimise total economic costs. 

Table 1 below summarises the above results.

Auction type12345
MinimisingCost to govtEconomic costCost of productionCost to govtEconomic cost
No. of auctionsSeparate auction for each technologySingle auction embracing both technologies
PricingPrice for each technologyCommon pricePrice for each technology
Cost to govt10,20010,60811,00010,19210,604
Economic cost9,3409,0549,0839,3269,037
Table 1: Comparison of expected outcomes of auction types, assuming c1 = 100, c2 = 20, Q = 100, k = 10, λ = 0.2

What can be inferred from these results?

Firstly, the classification of auction types reveals an ambiguity in the term ‘technology-neutral’.  Should we reserve that term for type 3 with a single auction and a single strike price?  Or should we also include types 4 and 5, the product-mix auctions, on the grounds that they have a single auction embracing both technologies?  The assertion is often made that climate change policies should be technology-neutral, often I suspect without awareness of the possibility of a product-mix auction.

Secondly, the choice of aim is important.  Comparing auction types 1 and 4 on the one hand with types 2 and 5 on the other, the former result in the cost to government being c 400 (3.8%) lower, while the latter result in the economic cost being c 300 (3.2%) lower. 

Thirdly, although the product-mix auctions 4 and 5 give the best results, the gains they offer relative to the best alternatives are very small, at least given the parameter values in our central case.   Focusing on expected economic cost, type 5 yields an advantage of only 17 (0.2%) over type 2.  Table 2 below shows the effects on expected economic cost of various changes in parameters, variation 0 being our central case.  Variations 1-3 show that changes in \lambda, have little effect on the advantage of type 5 over type 2, and variation 5 shows that a change in c_2, also has little effect.  However, variations 4 and especially 6 show that larger values of k,, the half-width of the random variability in production cost, result in larger advantages of type 5 over type 2.

 Auction type235
0c2 = 20; k = 10; λ = 0.29,0549,0839,037
1c2 = 20; k = 10; λ = 0.17,9877,9837,970
2c2 = 20; k = 10; λ = 0.06.9006,8836,883
3c2 = 20; k = 10; λ = 0.411,15811,28311,140
4c2 = 20; k = 18; λ = 0.29,0549,0468,999
5c2 = 50; k = 10; λ = 0.211,85711,85811,840
6c2 = 50; k = 40; λ = 0.211,85711,60811,583
Table 2: Effects of different parameter values on expected economic costs for selected auction types.  All variations have c1 = 100 and Q = 100.

It can be seen that type 5 is superior to types 2 and 3 in all cases except variation 2, when with \lambda, = 0 the expected economic costs with types 3 and 5 are equal.  However, the advantage of type 5 over the better of types 2 and 3 is never more than 0.5% (variation 4). 

Given that a product-mix auction may be perceived as introducing additional complexity for limited benefit, it is of interest to compare the outcomes of type 2, the technology-specific approach, and type 3, the technology-neutral common price approach.  Looking at variations 0 and 4, and then at 5 and 6, it can be seen that, other things being equal, changes in k, do not affect the outcome of type 2, but do affect that of type 3 (because as we have seen of the squared terms in x_1, and x_2,).  As a consequence, increased variability in production cost (higher k,) tends to favour type 3 over type 2, the difference in the case of variation 6 being 2.1%.

Comparing variations 0, 1, 2 and 3, it can be seen that the relative outcomes of types 2 and 3 are also affected by \lambda, with higher values tending to favour type 2.  However, only with \lambda, = 0.4  in the case of variation 3 does the difference exceed 1%, and many empirical estimates of \lambda, are considerably lower than that.  Browning (1976) estimated its value for US taxes on labour income as in the range 0.09 to 0.16 (9).  Harrison, Rutherford & Tarr (2002), in a study of Chile, found a value of 0.076 for VAT and 0.185 for a tariff (10).  Auriol & Warlters (2009) found an average value across 38 African countries in the range 0.19 to 0.21 (11). 


We have considered a limited range of scenarios.  Alternative scenarios might include any or all of the following features: more than two available techniques; different production functions; larger firms with scope for gamesmanship; government providing subsidies rather than meeting full costs.  The sorts of results we have obtained might not carry over to all scenarios. 

However, it has been shown that, if a technology-neutral auction is taken to mean an auction with a common strike price for different techniques for producing the same good, it will not necessarily yield more economic welfare than a technology-specific auction.  For the scenarios considered, however, the advantage of the technology-specific auction is very small given likely ratios of the excess burden of tax to the direct burden. 

It has also been shown that a suitably designed product-mix auction, which can be considered technology-neutral in the sense that a single auction embraces alternative techniques, can achieve more economic welfare than any other auction type.  However, the advantage over the best alternative auction type, in all the cases we have considered, is rather small.

Although the single auction common price approach is generally sub-optimal, from a welfare perspective it is no more than very slightly sub-optimal in any of the cases we have considered, except that in which the excess burden of tax ratio is very high.  This suggests that a government aiming to maximise welfare may be unlikely to go far wrong with a technology-neutral approach.

Our most significant finding is a rather obvious one.  Whether the auction type is technology-neutral or technology-specific, the choice of aim matters.  An auction designed to minimise cost to the government will result in a sub-optimal outcome from a welfare perspective.  Equally, an auction designed to maximise welfare will mean a higher cost than necessary to the government.  The difference in both cases may be of the order of 3-4%. 

Notes and References

  1. Fabra N & Montero J-P (2022) Technology Neutral vs. Technology Specific Procurement  MIT Centre for Energy and Environmental Policy Research  See especially pp 6-15
  2. Wikipedia – Excess burden of taxation
  3. For a more formal specification of the relation between firm-level and aggregate production costs see Fabra & Montero, as 2 above, p 6
  4. Obtained by differentiating E1 and E2 with respect to q1 and q2 respectively.
  5. Readers familiar with elementary algebra and calculus should be able, from the information given, to confirm all my results, although the algebra is in some cases rather tedious.
  6. Wikipedia – Continuous uniform distribution – Moments  See formula for second moments and put a = -k, b = k.
  7. To confirm that this value of q1 corresponds to a minimum, note that the second derivative is 4 > 0.
  8. The idea appears to be due to Paul Klemperer: see the first version (2008) of his paper on the topic at
  9. Browning E K (1976)  The Marginal Cost of Public Funds  Journal of Political Economy Vol 84(2) p 283
  10. Harrison G W, Rutherford T F & Tarr D G (2002)  Trade Policy Options for Chile: The Importance of Market Access  The World Bank Economic Review Vol 16 No. 1 p 57
  11. Auriol E & Warlters M (2009)  The Marginal Cost of Public Funds and Tax Reform in Africa  Toulouse School of Economics Working Paper Series 09-110

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UK Government Approves New Coal Mine

The long-delayed decision on the proposed West Cumbria Mining project in Cumbria, England, has been announced, to widespread criticism from the Climate Change Committee and others.

The BBC’s report of the decision and reactions is here. The analysis of the issues which I posted in March 2021, though slightly dated in a few respects, remains largely valid I believe.

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UK Climate Change Policy – A Critical Analysis (2)

The second of this series of posts focuses on carbon pricing in the UK, on policies for those sectors not currently subject to a carbon price, and on the integration of housing policy with climate change mitigation policy.

The UK has established a carbon price on significant parts of its economy via its Emissions Trading System (ETS), an example of what is sometimes termed a cap-and-trade system. In outline, the government sets an annual cap on the total emissions of firms within the scope of the system and issues emissions permits up to the amount of the cap.  Some permits are issued free and some are auctioned, the latter having raised government revenue of just over £4 billion in 2021 (1).  Firms within the scope of the scheme must limit their emissions according to the number of permits they have, but trading of permits between firms is allowed and this secondary market determines the carbon price, which is currently around £80 per tonne CO2 equivalent (2).  Firms therefore have an incentive to reduce their emissions up to the point at which the marginal abatement cost equals the carbon price. 

Such a trading system has the important property of economic efficiency.  The carbon price induces firms with lower abatement costs to reduce their emissions by more than those with higher abatement costs.  The total reduction in emissions across firms within the scope of the scheme is therefore achieved at least cost.

The fact that some permits are issued free should not limit the effectiveness of the ETS in reducing emissions.  Firms which receive free permits still have an incentive to reduce their emissions if they can do so at a cost less than the market price of permits, because they can then sell any unused permits.  More fundamentally, the cap applies to all permits, whether auctioned or issued free.  The effect of free permits is just distributional: to reduce government revenue while limiting costs to some firms and as a consequence helping to maintain their international competitiveness. 

For electricity generation only, the ETS is supplemented by a tax known as Carbon Price Support (CPS) at a current rate of £18 per tonne CO2 equivalent (3).

An alternative way to establish a carbon price, advocated by many (4), is via a carbon tax.  This has the same efficiency property as a cap-and-trade system.  A possible advantage over a trading system is that it could realistically be applied to small firms and individual households, many of which would have difficulty in coping with the complexities of permits and trading.  In principle, therefore, a carbon tax could provide a more comprehensive incentive for emissions reduction.  To help understand how big an advantage this might be, Table 1 below shows an analysis by sector of UK emissions and indicates which sectors are within the scope of the ETS or taxes providing an incentive to reduce emissions.

Table 1 is simplified in a number of respects, both in the classification of sectors and in the choice of taxes and similar instruments mentioned.  Because its data are for 2020, when passenger flights were greatly reduced due to the covid pandemic, the emissions figure for international aviation is much lower than for a normal year.  Apart from that, I believe the broad picture it presents is fair.  A couple of points merit explanation.  For electricity generation (fossil fuel) there is no mention of the significant addition to electricity bills for “environmental and social costs”.  The reason for this is that the policy instruments referred to in the third column are only those which provide an incentive for firms to reduce their emissions.  It is true that, within these environmental and social costs, a large element relates to climate policy costs, such as obligations under the contracts for difference scheme to subsidise wind and solar power.  However, the environmental and social costs are a levy on all electricity bills, not just those for electricity from fossil fuels, so they do not provide any incentive to electricity consumers to choose low-carbon electricity. 

The inclusion of Fuel Duty, a tax introduced to raise revenue long before climate change had become an issue, may appear puzzling. Let me offer here the following principle, which I have not seen stated as such, although I think most economists would agree.

People respond to the actual incentives created by a tax in the circumstances in which they find themselves, regardless of the intentions of the authorities in introducing and retaining the tax.  

Applied to Fuel Duty which raises the cost of running a petrol-driven car, and given that electric vehicles are now available as an alternative bearing no equivalent tax, the implication is that the duty provides an incentive to decarbonise personal transport. What’s more, the incentive is surprisingly large, as the following calculation shows.  The current rate of Fuel Duty on petrol is just over £0.50 per litre, but effectively £0.60 per litre because VAT at 20% is added to the duty (5).  When burnt, a litre of petrol yields about 2.4 Kg of CO2 (6). The implicit carbon price is therefore £0.60 / 2.4 or £0.25 per Kg, or £250 per tonne.  This is much higher than most estimates of the appropriate current carbon price to optimally address climate change, or the current price of ETS permits.  Even for the much lower rates of Fuel Duty applying to fuel for some agricultural uses (marked gas oil or “red diesel”) and shipping (fuel oil) (7), the implicit carbon price is a far from insignificant £40 per tonne. 

Let’s now consider the implications of the analysis in Table 1.  Of the total estimated emissions of 426 (MtCO2e), 257 are from sectors that are either wholly or mainly within the scope of ETS or subject to Fuel Duty.  The main potential benefit from a comprehensive carbon tax is that it could bring carbon pricing to the sectors responsible for the remaining 169 and so provide an incentive for decarbonisation in those sectors.  However, of this 169, 58 relates to sectors with mainly short-lived emissions such as methane and hydrofluorocarbons.  A carbon tax, understood as a tax on all emissions of greenhouse gases aggregated using the GWP100 metric, is not the most effective way to deal with such emissions.  As explained in my previous post, this metric significantly underweights their short-term warming effect.  Policy for these sectors should reflect the particular nature of their emissions. 

That leaves 111 (MtCO2e) of which the majority (65) relates to the residential combustion sector.  This sector consists of the burning of gas and other fuels for domestic heating and cooking (it excludes domestic use of electricity from fossil fuels because in that case the combustion takes place at the power station).  I will focus on gas since well over 80% of homes have gas central heating (8).  Taxes and levies on gas for domestic use are very low and provide little incentive to users to decarbonise.  Gas prices do include an element for environmental and social costs, but these are at a current rate of only about 3%, as compared with about 12% for electricity, including low-carbon electricity (9).  There is also VAT at 5%, but that also applies to electricity, again including low-carbon electricity (10).  In principle, there is a strong case for establishing a significant carbon price on residential gas use as an incentive to households to reduce their emissions.

At the time of writing, however, the price of gas to households has more than doubled in the last year, largely as a result of changes in global supply and demand.  This is one of a number of reasons for what has been termed a “cost of living crisis” in the UK.  If the price of gas should in due course fall back to the sort of level seen prior to 2021, then there may be a suitable opportunity to introduce a tax on residential gas use.  But to introduce such a tax at the present time would inflict significant hardship on poor households: politically it would be a non-starter. 

The conclusion I draw from this review of the main sectors for which no significant carbon price has been established, those outside the scope of both the ETS and Fuel Duty, is that to introduce a comprehensive carbon tax would be far from optimal as a means of mitigating the UK’s contribution to climate change, and – especially in view of its implications for the cost of gas to households – politically infeasible at the present time.  Hence:

Proposal 6:  Reductions in emissions in those sectors outside the scope of the ETS and Fuel Duty should be sought by suitable sector-specific policies (and not by a comprehensive carbon tax).

A number of sector-specific policies are already in place.  For waste disposal, the Landfill Tax, introduced in 1996 and progressively increased in real terms, is a major reason why methane emissions from landfill have fallen from 60MtCO2e in 1990 to 13MtCO2e in 2020 (11).  Rather than being the normal means of disposing of waste, landfill is increasingly regarded as a last resort where it is impracticable to use other waste management techniques such as recycling, incineration or generation of biogas.

The use of fluorinated gases including hydrofluorocarbons in refrigeration and air-conditioning has been regulated in the European Union since 2006, and since Brexit equivalent regulations have continued to apply in the UK (12).  Regulation is a more suitable instrument than taxation for this sector because emissions are difficult to measure: most occur not during the operation of equipment in good condition, but during manufacture or disposal of equipment, or during operation of poorly maintained equipment.  Hence measurement of emissions as a basis for taxation would be difficult, and the more effective approach adopted is regulation to specify which of the many types of these gases are permitted, to limit the total quantity of such gases used, and to promote good practice in manufacture, maintenance and disposal of equipment.

Fugitive emissions arising in the extraction, processing and distribution of oil and gas are difficult to measure for similar reasons.  These may be due to leakage at joints or valves, venting and flaring of waste gas, equipment failure and accidents.  A variety of regulations and regulatory bodies apply to different parts of the supply chain, with the North Sea Transition Authority (also known as the Oil and Gas Authority), the Environment Agency and the Health and Safety Executive all playing important roles.  Despite this, a study in 2021 by CATF, a campaign group, found numerous examples of poor practices resulting in methane emissions (13). This is perhaps unsurprising given that the relevant regulations and regulatory bodies have a variety of objectives of which climate change mitigation is just one.  In particular, the North Sea Transition Authority, according to its website:

“… has discretion in the granting of licences to help maximise the economic recovery of the UK’s oil and gas resources, whilst supporting the drive to net zero carbon by 2050” (14)


Proposal 7: Regulation and enforcement relating to fugitive emissions from the oil and gas industries should be reviewed to ensure that it gives adequate focus to climate change mitigation and takes due account of the powerful greenhouse effect of methane emissions.

While the raising of livestock is strongly regulated in respect of animal welfare, the UK has no significant policies designed to reduce the methane emissions arising from the digestive process of ruminant animals including cattle and sheep.  As Table 1 shows, this is the UK’s largest source of short-lived emissions.  Comparing different forms of meat in terms of the methane emissions associated with production of one kilogram of meat, these are highest by far for beef, much lower for lamb, and much lower still for pork and chicken (pigs and chickens not being ruminants) – see Table 2 below.  This is partly because beef cattle are typically slaughtered at around two years, as against about six months for sheep and pigs.  While other greenhouse gases also need to be considered, especially nitrous oxide from livestock waste, the conclusion remains that beef cattle make by far the largest contribution of any livestock to climate change per kilogram of food produced.  The contribution of dairy cattle is much less because of the very large quantity of milk that a dairy cow can yield over its lifetime.

Although the amount of a cow’s methane emissions depends on various factors – its breed, diet and age at slaughter – it is significant for all cows (15).  Measurement of emissions from a single cattle farm appears impracticable.  It is difficult to see how either an emissions tax or regulation could significantly reduce emissions while maintaining beef output.  It seems possible that developments in breeding or dietary science will eventually lead to beef production that could genuinely be considered low-methane, and without adverse effects on productivity or animal welfare.  For the time being, however, the only practical way to achieve a substantial reduction in emissions is to reduce beef production.  Fortunately, many consumers regard beef and other kinds of meat as near substitutes, implying that a small increase in the price of beef would probably lead them to reduce their consumption of beef and increase their consumption of alternatives.  This creates an opportunity for a significant contribution to climate change mitigation at the price of a small loss in consumer welfare.  Hence:

Proposal 8: The sale of beef should be taxed at a moderate rate with the aim of reducing beef production and so reducing methane emissions from cattle.

Several features of this proposal should be noted.  Firstly, while the policy may result in a  reduction in total meat production, it is not essential that it should do so. Even if a reduction in beef production were exactly offset by increased production of other meat, a reduction in methane emissions would still result.  Secondly, I refrain from making the claim that measures needed for climate change mitigation will, as an additional benefit, promote the adoption of healthier diets.  That may be so, but most people I think will want to take advice on diet from experts in that field, rather than as part of an argument about climate change.  Thirdly, the policy leaves even those consumers who do not eat pork for religious or cultural reasons with a reasonable choice of other meats: lamb, poultry and – at a somewhat higher price – beef.  Fourthly, beef production, especially when the cattle are mainly grass-fed, is land intensive: a reduction in beef production is likely to free some land for other uses.  Finally, a tax on the sale of beef will impact not only domestic production but also overseas production of beef for import to the UK, thus making a small contribution to reducing methane emissions abroad and so to Proposal 2 in my previous post.

Policy on emissions from international aviation is constrained by the Chicago Convention and other international agreements which, it is understood, do not allow the taxation of aviation fuel (IATA).  As a permitted alternative, in 1994 the UK introduced Air Passenger Duty, a tax per passenger per flight at a rate currently depending on the class of travel and whether or not the distance is more or less than 2,000 nautical miles, with exemption for children under 16 travelling by economy class (16).  Since the total tax due in respect of a fllght is therefore roughly correlated with the number of passengers and distance travelled, and since international airliners are mostly fairly similar (given current technology) in their fuel consumption, Air Passenger Duty can be considered a very imperfect substitute for a tax on aviation fuel.  In addition, flights to destinations in the European Economic Area are within the scope of the ETS (Airport Watch).  The combination of these measures provides little incentive to reduce emissions on long-haul flights, which account for the bulk of emissions (17).

The UK consulted in 2021 on a strategy to decarbonise aviation known as Jet Zero.  It includes some sensible ideas on improving fuel efficiency, improving management of airports and airspace, and developing low-carbon aviation fuels.  However, none of its scenarios show  aviation emissions reducing to zero by 1950 (18).  To get to net zero, they all rely on what it terms “abatement outside aviation sector”, that is, technologies yet to be identified for the removal of greenhouse gases from the atmosphere (19).  A common feature of all the scenarios is that demand reduction due to carbon pricing is estimated to lead to only a 9% reduction in emissions.  That I submit suggests a lack of seriousness about tackling climate change and perhaps a lack of willingness to make the case for discouraging international air travel and reducing the size of the aviation industry.

Having argued above that it would be inappropriate at present to bring residential gas consumption within the scope of carbon pricing, I will not make the same argument for aviation.  There is a fundamental difference between the two cases: home heating is an essential while international air travel in most cases is a luxury.  Most journeys from UK airports are either for holidays or to visit friends and relatives: less than 20% of journeys in 2019 were for a business purpose (20).  To create a stronger incentive to reduce aviation emissions, the practicable and sensible approach in the short term is to increase Air Passenger Duty on long-haul flights.  Hence:

Proposal 9: Rates of Air Passenger Duty on long-haul flights should be raised so that the overall structure of rates relates more closely to flight distance and therefore to fuel consumption.

A small – much too small – step in this direction has been taken by the introduction from 1 April 2023 of a slightly higher rate of duty for journeys over 5,500 miles.

Although taxes and levies on gas for domestic use are very low, a number of policies are in place or proposed with the aim of reducing emissions from domestic combustion.  The Heat and Buildings Strategy envisages gradual progress towards a future in which buildings are better insulated and heated mainly by electric heat pumps, with heat networks and hydrogen-powered boilers as alternatives in some circumstances (21).  Specific policies include:

  • The Social Housing Decarbonisation Fund: £800 million for social landlords (local authorities and housing associations) to carry out energy efficiency upgrades (eg insulation) in their tenants’ homes.
  • Phasing out the installation of new natural gas boilers from 2035.
  • The somewhat misleadingly named Boiler Upgrade Scheme: £450 million offering grants to households to contribute to the cost of installing heat pumps and, in limited circumstances, biomass boilers.
  • The Heat Pump Ready Programme: £60 million to support innovation in heat pumps and improve consumer experience in installation.
  • In due course, rebalancing energy prices so that heat pumps will be no more expensive to buy and run than gas boilers.
  • Ensuring that from 2025 all new homes are ready for net zero so that they will not need to be retro-fitted later.

The Strategy also indicates an ambition of both greatly expanding UK production of heat pumps and reducing their cost, although the specific policies to achieve this are not entirely clear.

The case for promoting the installation of heat pumps on a very large scale in place of gas boilers is twofold.  Firstly, heat pumps are powered by electricity, so are a zero-carbon source of heating provided the electricity is itself from a zero-carbon source.  Secondly, they are an extremely efficient source of heat. For other forms of heating such as gas boilers and conventional electric heaters, efficiency, measured as the ratio of heat energy output to energy input, cannot exceed 100%.  A heat pump, however, because it uses electricity to draw in heat from the air or ground outside a building, can achieve efficiency of 400% or more (22).  Additional benefits are that heat pumps, once installed, require little maintenance, and some models have the facility, when needed, to go into reverse and act as air-conditioners, a consideration that may became increasingly important as we need to adapt to climate change.

However, heat pumps also have disadvantages. The initial cost of purchase and installation depends on circumstances, but can easily be more than £10,000 (23), as against typically £2,000 to £3,000 for a gas boiler.  Costs may fall somewhat in future as an expansion of heat pump manufacturing in the UK yields economies of scale.  But it would be over-optimistic to expect a dramatic fall in costs such as solar power has experienced over the last decade.  The  unfamiliarity of heat pumps to many people in the UK may suggest that they are a relatively new technology with plenty of scope both for improvement and cost reduction.  In fact, the first heat pump was built in 1856 (24).  In the UK in 1945, an engineer named John Sumner developed a large-scale heat pump to heat the premises of the Norwich City Council Electrical Department, and later installed a heat pump in his own home.  Subsequently, the technology was adopted in some other countries much more widely than in the UK: the US is estimated to have had 750,000 heat pumps in operation by 2008.  By 2020, almost 180 million heat pumps were in use worldwide, the majority having been installed in new buildings (25). Considerable numbers were in countries colder than the UK, including Norway, Sweden and Finland. Two conclusions should be drawn from this. One is that there has already been plenty of opportunity across the world for innovation to improve the performance of heat pumps and reduce costs, suggesting that the benefits of further innovation may be only marginal.  The idea that heat pumps will eventually be no more expensive than gas boilers appears rather optimistic.  The other is that there is a lot of experience worldwide of installing heat pumps in different circumstances, and the UK should be drawing on that experience as much as possible (an example of Proposal 4 in my previous post).

To heat a home of any size, a heat pump alone is insufficient. The heat pump itself simply draws in heat from outside, but that heat then needs to be distributed to all parts of the home.  A variety of systems are in use, but to illustrate some potential complications I will refer to what is termed an air-to-water heat pump (26).  In outline, an outdoor unit takes in heat from the air and transfers it via a heat exchanger to a hot water tank.  Hot water is then circulated via a network of pipes to radiators located in the rooms of the home.  Suppose now that such a system is to be installed in a home which previously used a gas-powered central heating system. The conversion might seem fairly straightforward: the pipe network and radiators can be retained, the hot water tank can go in the space previously occupied by the boiler and, assuming the boiler was next to an external wall (as is likely for release of its waste gases) the outdoor unit can be fitted on the external side of the wall.

In practice, however, there can be various difficulties which will make the installtion of a heat pump system more complicated,  more costly, and perhaps impossible.  In some homes, especially flats, the boiler is not on the ground floor.  It may then be possible to fit an outdoor unit outside an upper floor, but it will need suitable physical support, and in a block of flats will probably require the landlord’s permission which could be refused, if only to preserve the external appearance of a block.  Even if the boiler is on the ground floor, the ground outside the wall may not be a suitable place to locate an outside unit.  In my home, for example, the boiler is next to an external wall, on the other side of which is a public pavement: an outside unit would have to go somewhere else, requiring fitting additional pipework to connect to the existing network with disruption to another ground floor room.  A further complication is that the existing radiators may not be suitable: a heat pump system will not heat water to as high a temperature as a gas boiler, and therefore larger radiators may be needed to yield the same heating effect (27).  Fitting larger radiators may in turn require changes to the location of furniture, and make it difficult to fit, say, a bed and a wardrobe into a small bedroom.  This helps to explain why some heat pump systems avoid radiators and instead use underfloor heating, but that further adds to the installation cost.

The conclusion to be drawn is that, although heat pump systems are an excellent option when included from the outset in designs for new homes, retro-fitting them into existing homes is in many circumstances awkward and expensive, and in some cases practically impossible.  It would not be surprising if some home-owners are induced by unscrupulous or poorly-trained salesmen in conjunction with government financial help to accept the installation of systems which turn out to be less satisfactory than their previous gas central heating.

A further feature of heat pump systems – although it may seem counterintuitive – is that they require coolants, typically hydrofluorocarbons or similar chemicals (28).  That means that, just as explained above for refrigerators and air-conditioners, heat pump systems may contribute to the atmospheric concentration of short-lived greenhouse gases.  Hence:

Proposal 10: The government’s aims of encouraging the installation of heat pump systems and reducing their cost should not be at the price of weakening measures to limit emissions of fluorinated gases.

The essential problem with the Boiler Upgrade Scheme is that it is not technology-neutral.  The government has picked its winners – heat pumps and, in limited circumstances, biomass boilers – and other low-carbon heating technologies do not qualify for financial support.  Why should equivalent financial support not be available for a household which replaces a gas-powered central heating system with modern electric heaters and also improves its insulation?  Provided the electricity is from a low-carbon source, such a system is just as low-carbon as a heat pump system, and has the advantage of avoiding any risk from fluorinated gases.  If storage heaters are used it can also contribute to balancing the timing of supply and demand for electricity – of which more in another post.  For the household, the capital cost may be much lower than for a heat pump system, and installation much less disruptive.  Hence:

Proposal 11:  Eligibility for the Boiler Upgrade Scheme should be extended to any household conversions from fossil-fuel heating systems to electric or other low-carbon heating systems, subject to defined standards of loft and wall insulation and glazing so as to limit energy consumption for heating.

Other low-carbon systems would include those powered by hydrogen (if and when hydrogen replaces natural gas in the local or national gas grid) and by solar thermal.  The Heat and Buildings Strategy notes the possible potential of hydrogen as a heating fuel which does not produce CO2 emissions because its combustion yields water vapour only (29).  Provided hydrogen can be produced in a zero-carbon way and distributed safely, it appears to offer an attractive heating solution for homes currently heated by gas central heating which for whatever reason are unsuitable for a heat pump, with only the boiler needing to be replaced while pipework and radiators could remain.  However, experience worldwide with hydrogen as a home heating fuel is very limited (30), and the Heat and Buildings Strategy sensibly plans safety and feasibility testing leading to a “village scale” trial by 2025 (31). 

Some other aspects of the Heat and Buildings Strategy are also questionable.  The date of 2035 for phasing out the installation of new natural gas boilers is explained in the Strategy as being 15 years before 2050, around 15 years being the lifetime of such a boiler (32).  That is presumably just an average: some will last longer and, if installed just before 2035, may continue, if permitted, to contribute to carbon emissions beyond 2050.  Furthermore, even if every gas boiler lasted exactly 15 years, many boilers might be contributing to carbon emissions right up to 2049, which would be consistent with the 2050 target but hard to reconcile with the plan of steadily reducing carbon budgets over the whole period to 2050.  Also, the “phasing out” wording leaves it unclear what exactly the government intends, and seems to represent a retreat from earlier statements referring to a “ban” which prompted strong reactions in some quarters.  There is clearly a dilemma for the government in trying to promote the installation of heat pumps and development of the heat pump industry to that end while avoiding the opposition that could be generated by perceptions of high costs for households and (even if some years away) compulsion.  Its hope, presumably, is that potential opposition can be overcome by a combination of innovation leading to cost reductions, support for improvements in consumer experience, financial support for early adopters, and a rebalancing of prices between electricity and gas. Whether that approach will be successful appears far from certain.  Hence:

Proposal 12:  Progress in phasing out the use of fossil fuels for home heating should be carefully monitored, and consideration given to a ban on new fossil-fuel systems (in addition to financial support for alternatives) should progress be insufficient.

It might be asked why it should be required that all new homes from 2025 be net zero ready.  Clearly, it is much cheaper to install zero-carbon heating when a home is built than to install a conventional heating system and then retro-fit later.  But is that a sufficient reason to ban anyone from building or buying a new home that has, say, gas central heating, at a time when such heating is still widely used in older homes?  Why not rely on the good sense of buyers to understand that, given the broad direction of climate change policy, buying a home that will need to be retro-fitted later represents a poor long-term investment unless the price is at an appropriate discount relative to a net-zero-ready but otherwise similar home, and on the recognition by developers that they will not make profits by selling new homes at such a discounted price?  One reason is that buyers may be unaware of the need for subsequent retro-fitting, or have no clear idea of how much it might cost or how much disruption it might involve.  But even if they are well-informed on these points, the need for retro-fitting may have little salience for them relative to other points they have to consider when choosing a new home, such as number of bedrooms, location, transport links, and local facilities.  It seems quite possible, therefore, that in the absence of government intervention, developers would still find a profitable market for new homes that were not net zero ready.

There is a further reason for government intervention which also illustrates a more general point about the political economy of climate change.  I referred above to the broad direction of climate change policy as a “given”.  But it isn’t a given: whether policies designed to progressively reduce emissions leading to net zero by 2050 will receive sufficient political support to enable them to be delivered is far from certain (33).   Even if bringing climate change to a halt is in the long-term interests of all, and even if many people are willing to accept some degree of sacrifice to that end, there are bound to be groups seeking to oppose particular climate change policies which would adversely affect their interests in the short and medium term.  Effective government in respect of climate change mitigation is not only about adopting the ‘right’ policies: it is also about building support for those policies by strengthening supportive interest groups and weakening opposition (34).  The large number of households with gas central heating is a substantial interest group, and I have already noted above that to put a significant carbon price on domestic gas use in current circumstances would be a political non-starter.  Financial support for the installation of heat pumps is one policy which will tend to weaken that interest group, by reducing its numbers.  Requiring new homes to be net zero ready may not reduce by very much the absolute number of households with gas heating: probably most new homes will be a net addition to the housing stock, rather than replacing existing homes.  It will however increase the proportion of homes that are net zero ready, and so gradually weaken potential opposition to measures that are likely to be needed eventually such as a carbon price on domestic gas and a ban on new gas heating installations.

The impact of the requirement will depend on how many new homes are built.  Average annual UK housing completions over the five pre-pandemic years 2015-19 were about 190,000 (35).  At that rate, completions during the whole period 2025-49 would be just under 5 million, about one-sixth of the current total housing stock of 29.5 million (36).  The impact would be much larger if annual completions were to increase to 300,000, a target indicated in the 2019 Conservative manifesto (37).

A faster rate of homebuilding would have two significant advantages in respect of climate change mitigation, over and above the general economic advantages of lowering housing costs by increasing supply and of facilitating labour mobility.  One would be to increase more rapidly the net zero ready proportion of the total housing stock.  The other would be, by increasing overall housing supply, to lower housing costs and so increase the proportions of household incomes available for other expenditure.  This in turn would increase the willingness of households to bear the costs needed to address climate change.  Putting the point another way, it is likely to be difficult to secure political acceptance for extra costs on households to reduce the UK’s emissions, let alone to provide generous financial help for poor countries in respect of climate change, while many households have little choice but to spend a large proportion of their incomes on housing, leaving them in the position of just managing – or not managing – in respect of other essentials such as food and fuel.

The rate of homebuilding could be increased with minimal public expenditure, simply by relaxing planning restrictions which can make it difficult for developers to obtain approval for new housing in areas where people want to live.  It is unfortunate that the government appears to have abandoned the main thrust of its White Paper Planning for the Future (2020), considered in this post, which included a proposal to designate growth areas within which outline approval for suitable housing development would be automatically secured.  It is also unfortunate that, despite the current intense concern and interest regarding the cost of living crisis, the cost of housing seems to be the elephant in the room, rarely mentioned despite being for many households by far the largest element in their spending. 

It has to be acknowledged that there is currently a substantial carbon footprint associated with the building of a new home, arising mainly in the manufacture of materials such as bricks, tiles, glass and cement.  The quantity, sometimes termed the embodied carbon, depends on the type of home and materials used, but for an average house is of the order of 60 tonnes CO2 equivalent (38).  To put that figure into perspective, annual emissions from an average house heated by gas central heating are about 2.4 tonnes.  We can infer that, in a scenario where an average gas-heated house is replaced by a new zero-carbon house, the ‘carbon payback period’, that is, the period it takes for the embodied carbon to be offset by the avoidance of ongoing emissions from gas heating, is 25 years (60 / 2.4).  The conclusion to be drawn is that, considered purely as a means of climate change mitigation, and even before consideration of cost, replacing old homes with new is a rather poor approach. 

Unfortunately, current VAT rules tend to favour new buildng over renovation.  VAT is not chargeable on the construction of new homes.  Under rules introduced in the April 2022 Budget, VAT is also not chargeable in most circumstances on the installation of energy-saving materials including heat pumps, insulation and solar panels.  However, there is no general VAT exemption for home repairs and refurbishments.  If therefore a home is in very poor condition but capable of being refurbished to a good standard, the extra VAT cost could tip the balance in favour of demolition and rebuilding, despite the much larger embodied carbon that would result.

Most demand for new homes is for reasons unrelated to climate change mitigation, including population growth, employment opportunities in particular regions, and (perhaps becoming increasingly significant in future) adaptation to climate change via replacement of homes lost or uninhabitable due to sea level rise, coastal erosion or frequent flood risk.  In such cases the carbon payback period is less relevant, but the issue of embodied carbon remains.  Indeed, those keen to maintain current planning restrictions might deploy the argument that such restrictions contribute to climate change mitigation.  However, such restrictions are not the best way to address the carbon footprint of building new homes.

Like all greenhouse gas emissions, the embodied carbon associated with new homes is a form of market failure, a negative externality consisting in the fact that, without government intervention, developers and home buyers do not bear the cost of the damage the emissions cause.  There are three reasons why is it better to address that externality via a carbon price on building materials than by stringent planning restrictions with the effect of limiting the number of homes built.  Firstly, a carbon price on building materials at the same rate as on other goods within the scope of the ETS will enable the market to find the best trade-off between building new homes and producing other goods, subject to the ETS cap on emissions.  More formally, it will ensure that profit-maximising developers build homes up to the point at which the marginal benefit per unit of emission from new homes equals that from other goods, assuming that benefit is reflected in the prices buyers are willing to pay.  Current planning restrictions, by contrast, yield a rate of homebuilding that depends on the vagaries of separate decisions by local planning authorities having little regard either to national housing needs or to climate change mitigation.  Secondly, the carbon price on materials is location-neutral: unlike planning restrictions, it has no bearing on developers choice of where to build new homes. Other things being equal, therefore, it enables developers to choose to build homes in areas where people want to live. Thirdly, the carbon price provides an incentive to design new homes, in terms of size and choice of materials, with less embodied carbon.  Strategies for limiting embodied carbon include avoiding sites requiring deep foundations, choosing simple, compact shapes (eg rectangles rather than L-shapes), and using timber-framed structures where possible.

Summarising the above, I propose the following package of measures to integrate housing development policy and climate change mitigation policy:

Proposal 13: To facilitate an appropriate trade-off between the economic benefits of housing development and the need to mitigate climate change:

  1. Planning restrictions on housing development should be relaxed, broadly along the lines of the White Paper Planning for the Future (2020);
  2. All new homes put on sale from 1 January 2023 should be required to be net zero ready;
  3. Repair and refurbishment of existing homes, including installation of insulation and low-carbon heating systems, should have the same VAT status as construction of new homes;
  4. The manufacture of materials used in building new homes and associated infrastructure should be subject to a carbon price at a rate consistent with the UK’s carbon budget at the time.

All these points require changes from current policy, although the changes needed are largest for (a) and (c). Point (b) implies bringing forward to 2023 the date of 2025 specified in the Heat and Buildings Strategy. There is no justification for allowing homes that will need retro-fitting to be sold for a further two years.

Point (d) is largely implicit in the ETS, which applies to the large-scale manufacture of, among other materials, bricks, tiles, cement, glass, metals and plaster board (39).  However, the scope of the ETS in many sectors is limited by thresholds.  Where production involves fuel combustion, the threshold is often 20 MW.  Other sectors have thresholds in terms of daily production capacity, including bricks and tiles (75 tonnes), glass (20 tonnes), and cement clinker (500 tonnes if from rotary kilns, 50 tonnes if from other furnaces).  Hence:

Proposal 14:  The various sector thresholds set out in Schedule 2 of The Greenhouse Gas Emissions Trading Scheme Order 2020 should be reviewed to ensure that they are no higher than necessary.

A threshold might be considered necessary if, for production at any scale below the threshold, the costs of compliance and enforcement, including measurement of emissions, would be  disproportionate to any benefit from abatement of emissions.  The logic behind the various current thresholds is far from clear; one suspects that they were arrived at partly as a result of lobbying by firms or industry bodies.  What’s more, the threshold quantities are quite large.  The power rating of a central heating boiler for an average house might be about 30 kW (40).  The 20 MW threshold is therefore equivalent to about 670 (20 x 1,000 / 30) such boilers.  For cement clinker, the daily 500 tonnes threshold is equivalent to about 180,000 tonnes annually, which is about 2% of total annual cement production (9 M tonnes (41 Statista)).  Because of these thresholds, some of the embodied carbon in new homes, and more generally much small and medium scale industrial production, is not currently subject to a carbon price. 

Notes and References

  1. ICAP  Factsheet 99 – United Kingdom  p 3
  2. EMBER  Carbon Prices
  3. HM Treasury  Spring Statement 2022 – Policy Costings  p 31
  4. Economists’ Statement on Carbon Dividends Organized by the Climate Leadership Council
  5. HM Government  Tax on Shopping and Services – Fuel Duty
  6. Carbon Independent,1%20gallon%20is%204.546%20litres).
  7. HM Government (17 May 2022)  Excise Duty hydrocarbon fuel rates
  8. English Housing Survey: Energy Report 2019-20  p 18
  9. Ralston J, ECIU (2022)  Energy bills: getting the balance right
  10. SSE Energy Services  Costs that make up your gas and electricity bills
  11. DBEIS  Final UK greenhouse gas emissions national statistics 1990-2020  Table 1.4 Row 75
  12. The Fluorinated Greenhouse Gases (Amendment) (EU Exit) Regulations 2021 (SI 2021/543)
  13. Clean Air Task Force (2021)  New evidence of UK methane pollution uncovered ahead of COP26;swpmtxnonce=4b770f2d2f
  14. North Sea Transition Authority – Licensing & consents – Overview
  15. Dewhurst R & Miller G (2019)  How do different livestock types, sizes and breeds differ in their greenhouse gas emissions?  pp 3-4
  16. H M Revenue & Customs  Rates for Air Passenger Duty
  17. Dept for Transport (2021)  Jet Zero Consultation para 3.14 p 26
  18. Dept for Transport, as (17) above  pp 13-15
  19. Dept for Transport, as (17) above  pp 35-36
  20. Statista  Purpose of air travel at airports in the United Kingdom 2002-2019,to%2017%20percent%20in%202019.
  21. DBEIS (2021) Heat and Buildings Strategy
  22. Pears A & Andrews G (2016)  Back to Basics: Heat Pumps
  23. EDF Energy  A complete guide to air source heat pumps
  24. Finn-Geotherm  The History of Heat Pump Technology
  25. International Energy Agency  Heat Pumps
  26. Idronics  Air-to-water heat pump configurations
  27. Kensa Heat Pumps – Radiators,efficiency%20of%20the%20heating%20system.
  28. WSP (2018)  The importance of refrugerants in heat pump selection
  29. DBEIS, as (21) above  p 82
  30. International Energy Agency (2021)  Hydrogen
  31. DBEIS, as (21) above  p 233
  32. DBEIS, as (21) above  p 20
  33. Lockwood M (2013)  The political sustainability of climate policy: the case of the UK Climate Change Act  Global Environmental Change 23 (2013) pp 1339-40
  34. Lockwood M, as (33) above  pp 1340-41
  35. Statista  New homes completed … in the UK from 1949 to 2019
  36. ONS  Dwelling stock by tenure, UK, 2020 edition  Table 1 row 25
  37. Conservative Party Manifesto 2019 p 31
  38. Barrett J & Wiedmann T (2007)  A Comparative Carbon Footprint Analysis of On-Site Construction and an Off-Site Manufactured House p 9
  39. HM Government  The Greenhouse Gas Emissions Trading Scheme Order 2020  Sch 2 Table C
  40. PlumbNation (2021)  What size boiler do I need for my home?
  41. Statista  Cement production volume in Great Britain from 2001 to 2019,levels%20seen%20prior%20to%202009.
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UK Climate Change Policy – A Critical Analysis (1)

In the first of a series of posts, I focus on objectives and some issues regarding technology.

Anyone who takes seriously the task of analysing climate change policy is liable to be daunted by what they find.  The literature is vast, embracing many disciplines – climate science, technology, economics, behavioural science, international relations – and many sources – governments, inter-governmental bodies, academics, think tanks, campaign groups, industry bodies.  Just to understand the elements of current policy is a challenge, as my previous post – and the many sources I had to refer to to put it together – shows.  Then there is what might be termed the problem of numbers.  On the one hand one cannot get very far in policy analysis without considering numbers – to assess the importance of issues, to distinguish the possible from the unrealistic, and to compare the costs of different approaches.  On the other hand the literature abounds in numbers that for one reason or another are not useful, ranging from the poorly defined, the excessively detailed and the out of date to the incorrect and the just plain silly (a favourite from the last category: “recycling just one banana skin generates enough energy to charge your smartphone twice” (1)).

The complexity of the issues surrounding climate change policy perhaps invites the taking of short cuts.  In terms of the classification of thinkers into hedgehogs – those who view the world through one big idea – and foxes – those influenced by a variety of ideas (2) -, it seems that many of those who offer opinions on climate change policy have what may be called hedgehog tendencies.  The prisms through which different groups view climate change policy are varied: environmentalism; criticism of profit-seeking corporations; faith in free markets to deliver innovative solutions;  inequality (both between and within countries); general distrust of experts; and (at a more technical level) lively appreciation of the merits of a uniform carbon price.  Each of these prisms brings something useful to the policy debate, but is too narrowly focused to offer anything like a sensible overall policy package.  Climate change policy analysis – perhaps even more than most policy areas – needs foxes as well as hedgehogs.

I start with objectives.  The objective of net zero by 2050 is the centrepiece of current UK policy.  In recommending this objective, the Climate Change Committee referred to the Paris Agreement aims of limiting the increase in global average temperature to well below 2°C and pursuing efforts to limit it to 1.5°C.  It also noted the Agreement’s emphasis on equity and expectation that developed countries should take the lead.  Against that background the Committee considered that “an appropriate UK contribution … should go beyond what is required for the world overall” and recommended a path leading to net zero by 2050 as “towards the high end of the estimated range of necessary reductions for a limit of 1.5°C” (3).

The Committee also argued that “setting and pursuing [the net zero target] will confirm the UK as a leader among the developed countries on climate action” (4). It noted that several other climate leaders had set or were considering net zero targets by 2050 or earlier, and warned that for the UK to adopt a weaker or later target would undermine these moves towards a broader international consensus.  This is a most important point. The UK’s territorial emissions are only about 1% of the global total, so any influence it can exert, via its policy towards the 1%, on other countries’ policies towards the remaining 99%, represents a significant outcome of UK policy.  As it happens, a large number of countries have now committed, either in law or as government policy, to a target of net zero by 2050 or earlier, including Australia, France, Germany, Japan, South Korea, Spain and the US (5).

A possible criticism of the net zero target is that it is not grounded in economic analysis seeking to find the optimal balance between the harm done by climate change, including in the very long term, and the costs of mitigation.  A number of economists have developed Integrated Assessment Models which, in principle, can be used to determine mitigation paths which maximise welfare over time.  Such paths are typically characterised in terms not of carbon budgets progressing towards a net zero target at a certain date, but of a gradually increasing social cost of carbon.  For example, one version of the DICE model developed by Nordhaus and others implied a social cost of carbon to maximise welfare of $43 in 2020 rising to $105 in 2050 and $295 in 2100 (6).  In my view these models do not provide a suitable basis for setting climate policy.  One problem is that they depend on numerous assumptions, some based on less than conclusive evidence, and some involving contentious ethical judgments.  Perhaps the most contentious issue is what discount rate, if any, should be used in comparing costs of mitigation with the harm they are expected to avoid in the distant future.  Nordhaus (2018) states that “the debate on discounting … is just as unsettled as it was when first raised three decades ago” (7).  A matter on which economists are far from agreed is not an adequate basis from which to try to build a national and international consensus on climate policy. 

I readily accept that 2050 may not be the optimal date for the net zero target.  If it were possible to specify a suitable model and resolve all necessary issues regarding assumptions, the optimal date might well be found to be a few years either earlier or later.  But the nature of the climate change problem is that it requires global action.  To achieve a consensus around an easily understood objective which may only approximate to optimality would be a fairly good outcome.  To lose the opportunity for such a consensus by focusing on the possible sub-optimality of the 2050 date would not. 

However, acceptance of the net zero target should not be taken to imply that any methods of reducing emissions are acceptable.   Net zero is not an ultimate objective but a means to the end of limiting climate change.  Climate is influenced not only by the quantity of greenhouse gases in the atmosphere but also by the reflectivity (albedo) of the earth’s surface.  The widespread view that planting trees helps to mitigate climate change is an oversimplification: in some circumstances, especially at high latitudes, the effect of trees in sequestering carbon can be outweighed by their effect in absorbing more sunlight than lighter surface covers such as grass or snow (8).  Although the Climate Change Committee’s recommendations on the Sixth Carbon Budget include increasing the rate of afforestation to 50,000 hectares (about 190 square miles) per year by 2035 (9), I could not find any mention of reflectivity in the Committee’s very detailed supporting methodology document (10).  Hence my first proposal:

Proposal 1: Emissions-reducing projects involving large-scale changes in land use such as afforestation should be adopted only if careful assessment of their total effects, including their effects on reflectivity, clearly demonstrates a mitigating effect on climate change.

Subject to that caveat, I support the UK’s maintenance of the net zero by 2050 target. But I am not persuaded by all the points made by the Climate Change Committee in recommending that objective.  In arguing that the the UK should go beyond what is required for the world overall, the Climate Change Committee noted that the UK has “a significant carbon footprint attached to imported products” (11) (ie consumption emissions, which are not included within the UK’s net zero target and carbon budgets).  While that is a correct statement, the unstated suggestion is that the UK’s consumption emissions are a relatively minor issue which is adequately addressed by adopting a challenging net zero target.  It is hard to measure consumption emissions with great accuracy, given the the impracticability of determining the emissions from production of many different goods from many countries (and this may become even harder in future as some production processes in some countries become decarbonized).  However, it is estimated that 43% of the emissions associated with UK consumption are embedded in imports (12).  Reducing its consumption emissions is potentially therefore a very significant way in which the UK can contribute to mitigation of global climate change, requiring an objective of its own.  Hence:

Proposal 2: The UK should adopt an objective of substantially reducing the emissions embodied in its imports

Whether such an objective is best expressed as a quantified target is debatable, given the difficulty of accurate measurement.

The Climate Change Committee presented as a merit of the net zero target that it applies to all greenhouse gases, aggregated using the GWP100 metric (13). This is another oversimplification.  The GWP100 metric weights different gases according to the contributions which 1 tonne of a gas would make to global warming over 100 years (14).  Thus it provides a good measure of the long-term warming effect of a cocktail of gases.  However, policy also needs to consider the short-term effect of greenhouse gases, which can be crucial in determining whether and when warming will reach 1.5°C or 2°C, and in that context GWP100 is a poor measure because it gives insufficient weighting to the warming effect of short-lived greenhouse gases, primarily methane.  Sun et al (2021) state:

“… current net zero targets do not inherently call for early action on short-lived GHG’s, which a growing body of research shows is a key strategy to slow down global warming in the near-term.  Emissions of short-lived GHG’s account for nearly a third of today’s gross warming, and … emissions reductions in these GHG’s can quickly lead to slowing down the global-mean rate of warming” (15)

In conjunction with substantial global reductions in carbon emissions, early reductions in methane emissions can reduce by about 0.2°C the peak of global warming, which could make the difference between success and failure in meeting the Paris objective of keeping the increase in global mean temperatures below 2°C (16).  Hydrofluorocarbons – a large group of mostly short-lived greenhouse gases (17) widely used in refrigeration and air-conditioning – can also contribute to this effect.  Hence:

Proposal 3: The UK should supplement its net zero target with specific legally binding targets for reductions in short-lived greenhouse gas emissions including methane and hydrofluorocarbons

Although the UK has regulations in place regarding fluorinated gases including hydrofluorocarbons, these do not include a specific focus on short-lived hydrofluorocarbons (guidance relies on the flawed GWP100 metric (18)).  So far as methane is concerned, the UK (along with over 100 countries) has signed the Global Methane Pledge aiming to cut global methane emissions by 30% by 2030 (19), but has not yet adopted a legally binding target for reductions in its own emissions.

In arguing that the net zero objective is achievable, the Committee stated that its scenarios for reaching the target are based on “known” (or “existing”) technologies (20).  This again is an oversimplification.  I am struck by the contrast with Bill Gates’ book (reviewed in this post), which lists numerous technologies needed to achieve net zero (21).  Admittedly Gates was addressing the problem of getting the whole world to net zero.  But the main reason for the difference is surely the vagueness of claiming that a technology is “known”?  A widely used framework for assessing the status of a technology is the 9-point Technology Readiness Level scale (22), where Level 1 is “basic principles observed” and Level 9 is “actual system proven in operational environment”.  Technological innovation is often a gradual process, and the suggestion that technologies are either known or unknown is not helpful.  Research, development and innovation have a crucial part to play in getting the UK to net zero.

Sensible policy on technology for climate change mitigation requires an appropriate balance in several respects: between the roles of the government and the private sector; between technologies already at an advanced state of readiness and those which are more speculative; and between making new things possible, reducing the cost of what can already be done, and facilitating and promoting uptake of proven technologies. There is a risk however that policy may be distorted by over-ambitious aspirations to make the UK a global leader in climate-related technologies. In the introduction to his Ten Point Plan for a Green Industrial Revolution (2020), the Prime Minister wrote:

“We will turn the UK into the world’s number one centre for green technology and finance, laying the foundation for decades of economic growth by delivering net zero emissions in a way that creates jobs” (23).

The UK has indeed been a global leader in some aspects of climate change mitigation: for example in being one of the first countries to adopt a legally binding target for emissions reductions.  As a developed country with one of the world’s largest seven economies, and with a relatively long history of industrial emissions, it has a responsibility to act as a leader.  In respect of technology, it can reasonably aspire to technological leadership in fields where it has or can develop a comparative advantage, because of either its natural resources and geography or its stock of physical and human capital. Offshore wind energy is perhaps such a field. 

It would, however, be a mistake for the UK to attempt to become a technological leader in every climate-related field.  The likely outcome would be that resources for innovation would be spread too thinly to be effective, with the UK’s efforts in many fields dwarfed by those elsewhere.  Furthermore, an obsession with leadership may result in opportunities to learn from other countries being missed.  Hence:

Proposal 4: The UK government should accept that, for some technologies needed for climate change mitigation, its main focus should be on encouraging and facilitating the application and adaptation to the UK’s circumstances of what has been learned through innovation and experience in other countries.  It is neither necessary nor advantageous for the UK to try to achieve global leadership across the full range of climate-related technologies. 

My final proposal in this post concerns the assessment of progress towards net zero. The progressively reducing carbon budgets are important because mitigation of climate change depends not only on the level of emissions at 2050 and beyond but also on the pathway of emissions between now and 2050 (24).  These budgets also serve as a measure of progress towards net zero, but only in a very imperfect way.   Currently, the UK is towards the end of the third budget period, for which the budget, likely to be achieved, is equivalent to a reduction in emissions of about 34% relative to 1990.  That indicates progress in a sense.  But it is misleading to assess progress towards net zero without regard to the degree of readiness of the technologies that will be needed to complete the transition.  Have the technologies needed to secure the remaining 66% reduction been demonstrated to work, in the particular circumstances in which they need to operate in the UK, at reasonable cost?  And if not what are the innovations that are needed? 

I cannot find answers to these questions in the Climate Change Committee’s latest progress report to Parliament.  In fact, although the report runs to more than 200 pages, it contains very little about technology.  For example, a lengthy chapter entitled “Underlying progress on key enablers of the path to Net Zero” is divided into sections headed, respectively, “Governance and delivery”; “People and public engagement”, “Just Transition – who pays and who gains?”, “Just Transition – workers and skills”, and “Other key drivers of progress” (25).  Within the latter, there is a short subsection (26) on innovation and infrastructure.  Hence:

Proposal 5: The annual progress reports to Parliament by the Climate Change Committee should focus in more detail on the extent of the UK’s technological readiness to achieve the net zero target by 2050.

Cement production is an example of a sector in which the UK (and indeed the world) appears to lack  the technology needed for net zero, in the sense that the reasonable cost requirement has not yet been met.  One way to express the cost issue is what Gates calls the green premium – the percentage by which the cost of producing a good using the cheapest available zero-carbon technology exceeds the cost of conventional production (27).  For cement, he quotes (for the US) a range for the green premium of 75% to 140% (28). The equivalent range for the UK will probably be slightly different, but in any case that’s a large extra cost, given that cement is an essential input to concrete which is used in very large quantities in buildings and infrastructure. 

The Climate Change Committee uses the more conventional concept of abatement cost – the cost per tonne of CO2 of reducing emissions to zero.  I could not find in its publications an abatement cost for cement production, but for the whole of the manufacturing and construction sectors, of which cement production is an important part, it indicates a cost of c £100 per tonne (29).  Gates’ figures however are equivalent to £150 to £280 per tonne (30).  These are not necessarily inconsistent with the Committee’s figure since the abatement cost may be much lower for other parts of the manufacturing and construction sectors.  But it does highlight the need for more detailed information on technologies and costs to give credibility to the Committee’s claims about the feasibility and costs of attaining net zero.

Notes and References

  1. Seen in a leaflet about food waste recycling distributed in the Merton area of south west London.  The connection with climate change is that the processing of the food waste to produce fertiliser and gas which is used to generate electricity results in much less CO2 equivalent emissions than would taking the waste to landfill.
  2. Wikipedia – The Hedgehog and the Fox
  3. Climate Change Committee (2019)  Net Zero – The UK’s contribution to stopping global warming  p 19
  4. Climate Change Committee, as (3) above  p 21
  5. Energy & Climate Intelligence Unit – Net Zero Scorecard
  6. Nordhaus W D (2018)  Climate change: The Ultimate Challenge for Economics  Nobel Prize Lecture  p 454              
  7. Nordhaus, as (6) above  p 455
  8. Popkin G (2019)  How much can forests fight climate change?  Nature 15 January 2019  p 281
  9. Climate Change Committee (2020)  The Sixth Carbon Budget  p 170
  10. Climate Change Committee (2020)  The Sixth Carbon Budget Methodology Report  pp 223-6
  11. Climate Change Committee, as (3) above  p 19
  12. DEFRA  UK’s Carbon Footprint 1997-2018  p 3
  13. Climate Change Committee, as (3) above  pp 16-17
  14. NIWA  What are ‘Global Warming Potentials’ and ‘CO2 Equivalent Emissions’?
  15. Sun T et al (2021)  Path to net zero is critical to climate outcome  Nature Article No. 22173 (2021)  p 2
  16. Sun T et al, as (15) above.  See Chart A p 4
  17. IPCC (2013)  Climate Change 2013: The Physical Science Basis  Ch 8 Anthropogenic and Natural Radiative Forcing  Table 8.A.1 pp 731ff
  18. EU Regulation No. 517/2014 specifies GWP100 in Article 2 Definition 6  Since Brexit the equivalent rules apply in the UK via Regulation SI 2021/543
  19. BBC (2/11’2021)  COP26: US and EU announce global pledge to slash methane
  20. Climate Change Committee, as (3) above  pp 21 & 26
  21. Gates B (2021)  How to Avoid a Climate Disaster  Allen Lane  p 200
  22. Science Direct – Technology Readiness Level
  23. H M Government (2020)  The Ten Point Plan for a Green Industrial Revolution  p 3
  24. Sun T et al, as (15) above  p 1
  25. Climate Change Committee (2021)  Progress in Reducing Emissions: 2021 Report to Parliament  pp 96-105
  26. Climate Change Committee, as (24) above  p 104
  27. Gates B, as (21) above  p 59
  28. Gates B, as (21) above  p 107
  29. Climate Change Committee, as (9) above  Read from Fig 5.6 p 261
  30. To convert Gates’ figures to abatement costs per tonne of CO2 we need the following data: UK cement production in 2019 was 9.1 M tonnes (31) and generated 4.4 M tonnes CO2 emissions (32), implying that emissions from producing 1 tonne of cement were c 0.5 tonnes.  The cost of producing 1 tonne of cement was c £100 (33), so with the green premium would have been in the range £75 to £140 per tonne of cement, or £150 to £280 per tonne CO2.
  31. Statista – Cement production in Great Britain from 2001 to 2019,million%20metric%20tons%20of%20cement.
  32. DBEIS – 2019 UK greenhouse gas emissions: final figures – data tables (Excel)  Table 1.2 row 78 col AF
  33. Construction Enquirer
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