Energy and environment
The Independent, editorial, 24 August 2007:
'Cambridge Econometrics needs to be listened to because, in these matters,
it has got form. Its analysts correctly forecast that the Government would
not meet its own, often-trumpeted target of reducing UK CO2 emissions by 20
per cent by 2010. And it did so in 2004, more than two years before the Government
itself admitted the failure, in one of the most embarrassing humiliations of
Labour's decade in office.'
Energy and environment issues are at present a key strategic priority for the UK government's policy making. Meeting the challenge of climate change and setting the UK on a path to achieving the ambitious legally binding target of cutting carbon emissions by 60% by 2050, remains, as the 2003 ' Energy White Paper' envisaged, the July 2006 'Energy Review', the May 2007 Energy White Paper and the November 2007 Climate Change Bill reaffirmed, at the top of policy makers' agenda. The government has also emphasised its continuing commitment to the UK's competitive energy market as the best way of delivering secure energy supplies and competitive prices and stated its intention of setting the right regulatory framework to enable the market to move in the right direction to meet the official long-term goal of a decarbonised UK economy by 2050. There is, however, a clear need for rigorous evidence-based quantitative analysis to analyse the impact of various policy measures on energy users and energy suppliers.
Tools and competence
CE specialises in the application of energy-environment-economy (E3) modelling and statistical data analysis techniques to support the needs of clients in business and government . Specifically we offer:
- an impressive track record of high-quality, innovative and successful E3 modelling and policy analysis undertaken for a wide range of government departments, public sector agencies and private sector organisations
- to our knowledge we are the only economic modellers who provide a commercial service providing regularly-updated (twice a year) forecasts for at least 10 years ahead of UK energy consumption (disaggregated by fuel and by type of user) and energy-related emissions (disaggregated by type of emission). Hence, we always have up-to date base projections for detailed energy consumption trends, incorporating views on the impact of technological change and policy initiatives which can inform any modelling work undertaken for clients.
- MDM-E3, our model of the UK economy, is to our knowledge, the only UK model that integrates economy, energy and environment ('E3') indicators with substantial disaggregation for industry sectors (41 sectors), energy (11 fuels, 13 fuel users) and environment (14 types of air emission). We are therefore familiar with, and expert in, the analysis of the economic aspects of CO2 emissions control policies.
- the ability to set, in the broader economic and industrial context, the impact of energy-environment policies and measures on industry sectors, fuel users and on environmental emissions. We do this by applying our expertise in rigorous formal modelling and other quantitative techniques, supplemented by the 'softer' skills of assessing and evaluating qualitative information
- a specialist team of experienced energy economists with extensive experience in E3 and econometric modelling, statistical data analysis, qualitative survey design and analysis, the UK electricity sector developments and also in advising, interacting and presenting to senior management/professional staff the results of our project work
The application of MDM-E3 is key to much of our work in the energy-environment field. Our experience in the energy and environment area is, however, much broader as shown by the examples of projects we have undertaken in recent years.
Examples of our work
Modelling the Cost and Level of Reduction of
Carbon Dioxide Emissions from Housing in Scotland
Scottish Government
The Scottish Government's ambition is to cut CO2 emissions by 80% by 2050 and it is considering whether or not to introduce a mandatory target. The project developed a bottom-up Domestic Energy Model for Scotland (DEMScot) that drew on existing research about the particular characteristics of the Scottish housing stock, CO2 emissions and their economic determinants to examine how these emissions from housing could be reduced over the period to 2050. There were several innovative features. First, the model combined a building stock/demographic component, based largely on the Scottish Housing Conditions Survey, with a building physics component that significantly improved on the BREDEM-12 based model used by the Government to predict current carbon emissions of different house types. Second, the modelling addressed the behavioural aspects of energy use in buildings by linking emissions to housing tenure. The model was applied to generate curves for CO2 emissions that took account of policy measures relating to domestic energy use.
CE 's role in the project was to use the outputs from the existing research, informed by its energy-environment-economy model of the UK (MDM-E3), to model scenarios representing different policy interventions. The scenario analysis showed the economic costs and savings of different carbon emission reduction scenarios representing different policy interventions to change Scotland's housing stock. The results from these scenarios, including including information on household electricity and gas prices and MDM-E3 based estimates of price and income elasticities of household energy demand, were then incorporated by Cambridge Architectural Research (CAR) in the DEMScot model for use as a ready-reckoner, allowing the Government to quantify the cost and carbon implications of different policies. The study was carried out by a consortium led by CAR, a specialist consultancy providing specialist advice on all aspects of the built environment and included CE and two Scottish-based partners, namely, Alembic Research which specialises in energy and fuel policy issues primarily within the household sector and Roger Talbot Associates, a strategic sustainability advice consultancy.
Project the UK CO2 emissions and assess the economic
impacts of carbon budget
Committee on Climate Change
The Committee on Climate Change (CCC) is an independent statutory body to provide independent, expert advice on how the UK can best achieve its climate change goals. It was set up under the Climate Change Bill, which is due to become law in 2008. This study provided a set of projections to assess the impact on CO2 emissions, energy use, and competitiveness and the macroeconomy of the three five-year carbon budgets, which will cover UK CO2 emissions up to 2022. The project had three objectives: (1) to provide a set of reference scenario projections of UK energy demand and CO2 emissions to 2030, under a range of assumptions on future fossil fuel prices, growth and demographic change and the effectiveness of policies; (2) to provide projections for energy demand and CO2 emissions for a range of abatement scenarios, and; (3) to provide an assessment of the economic impacts of the abatement scenarios. The work was carried out using CE's integrated Energy - Environment - Economy model of the UK economy, MDM-E3.
Evaluations of UK energy and emission targets
for 2020
Friends of the Earth
In this project, CE used the MDM-E3 model of the UK to represent a set of policies to assess policies required in the UK to meet the energy and emissions target set for by 2020 (20% renewables target, minimum reduction of 26% in CO2 emission and improvement of energy efficiency by 20%). The study considered the potential and impact of policies encouraging greater energy efficiency in all sectors of the economy including the residential sector, as well as policies promoting greater use of renewable fuels to generate heat and power. It also examined the impact of potential reductions in the costs of renewable power generation technologies to reflect induced technology changes that the EU-wide target could stimulate and impact of non-renewable power on installation of additional renewable capacity. The study assessed the impacts on the macroeconomy, the energy demand, prices, fuel mix of energy supply and CO2 emissions.
Business Opportunities and Challenges Presented
by Carbon Emissions Targets
Northern Ireland Department for Enterprise, Trade and Investment
This project, undertaken by a consortium led by CE, was commissioned by Northern Ireland's Department for Enterprise, Trade and Investment (DETI) to study the opportunities and challenges presented to Northern Ireland businesses by the CO2 emissions reductions set out in the draft UK Climate Change Bill. The study prepared a historical database of CO2 emissions by the business sector (led by AEA Energy and Environment) to provide a baseline, made projections for CO2 emissions to 2020 under a business-as-usual scenario (CE), identified the implications for firms and possible policy responses (SQW), and prepared a range of scenarios for alternative emissions reductions targets by 2020 to allow the economic implications to be calculated (CE). To prepare the CO2 emissions scenarios, CE developed a Northern Ireland-tailored version of the REEIO model which distinguishes the sectors of the economy in detail so that the implications for firms in the business sector could be identified.
Modelling Scenarios of Green Fiscal Reform for
the UK
Esmee Fairbairn Foundation
This project is investigating the major research issues related to the introduction of green tax reform in the UK. It is being carried out, on behalf of the UK Green Fiscal Commission (GFC) established to guide the work, by a consortium led by the Policy Studies Institute and including CE and the Cambridge Centre for Climate Change Mitigation Research (4CMR), University of Cambridge. The over-arching objective of the study is to establish an evidence base to support the large-scale introduction of green taxes so as to respond effectively to global environmental challenges (especially climate change) and bring about cost-effective environmental improvements that promote innovation in business and assist the creation of new industries. Green taxes are defined broadly as any revenue-raising market-based environmental economic instrument , including for example, auctioned emissions allowances.
The subsidiary objectives of the GFC are threefold: first to generate in an accessible from a definitive body of knowledge about every aspect of revenue-raising green taxes of practical use to policymakers; secondly to increase the understanding of the impacts and net potential benefits of green taxes among policy makers, businesses, NGOs and other stakeholders; and, lastly, to raise the profile of green taxes in the political and economic debate expected to occur in the run-up to the next General Election.
CE's role within the project is to model illustrative scenarios to 2020 for green fiscal reform for the UK that give results for environmental impacts (particularly CO2 emissions), energy demand, fuel prices, GDP, employment, distributional effects within different economic sectors, and household income groups, and for key variables from household and transport energy consumption. The modelling is based on CE's energy-environment-economy model of the UK (MDM-E3). A major and innovative aspect of the modelling work in the study involves the further development by 4CMR of the existing household energy consumption and transport submodels in MDM-E3 and the extension by CE of the UK model to analyse income distribution and material flows.
An Analysis of EU ETS Phase II and the Effect
of Various Allocation Options on New CHP Capacity
Department for Environment, Food and Rural Affairs
This study was undertaken to inform the Government's plans to promote the growth of Good Quality Combined Heat and Power (GQ CHP) capacity, given its target of reaching 10 GWe by 2010. Using CE's CHP model, the study analysed several allocation options, based on CO2 emissions, within the National Allocation Plan (NAP) for the treatment of GQ CHP capacity in Phase 2 (ie 2008-12) of the EU Emissions Trading Scheme. The main objectives of this work were firstly to make projections for GQ CHP capacity in 2010 and 2015 under various options that give a subsidy to CHP developers; and secondly to determine the number of the allocations for a new entrant reserve in Phase 2 of the NAP that would be required to achieve the Government's target of 10 GWe of GQ CHP by 2010 and 2015, under low, medium and high carbon price scenarios. Scenarios were constructed in which bonus allocations (ie a subsidy) for GQ CHP in Phase 2 were raised by 10% and 30% respectively relative to the capacity-based benchmark for Phase 2. Off-model methods were used to derive the bonus allocation using the methodology adopted by Defra/DTI in Phase 1 of the NAP.
A third objective of the study was to estimate the CO2 emissions that would arise from new entrant CHP covered by the EU ETS (ie only for those installations above the aggregated capacity threshold of 20 MW included in the EU ETS directive) for Phase 2 under the different policy options. All policy options were considered relative to the 'business-as-usual' baseline (i.e. the Phase 1 approach). The baseline, to which the policy scenarios were compared, incorporated the net capacity effects expected from implementing the EU ETS for CHP. This work built upon an earlier CE study that had modelled the effects and costs of introducing a CHP Obligation.
The Economic Impact of Scotland's Natural Environment
Scottish Natural Heritage
This study examined the impact of Scotland's natural environment on the Scottish economy. The main objectives of the research were: to evaluate the contribution that Scotland's natural environment makes to the economy and to raise the awareness of the potential contribution to the value for money of policy interventions; to determine the current value of economic output /activity generated by the natural environment at an all-Scotland level and its regional distribution; to examine the level and relative importance of environmental employment in Scotland (broken down where possible by discrete occupations), the regional distribution within Scotland of environment-generated employment, and the likely indirect employment impact (via multipliers); and lastly to conduct a broad-based analysis of the wider benefits of natural environment to Scotland's economy.
CE developed a robust methodology for assessing the contribution to Scottish
value added from a quality environment. A practical method was implemented
that gave up-to-date estimates of the national and regional economic
output produced by Scotland's natural environment, and of employment
attributable to the environment-intensive sectors by categories of activity
and geographical region. The study was led by Risk & Policy Analysts
Ltd, a specialist, environmental consultancy, with CE providing the analytical
and modelling input relating to the interdependence between sectors,
the multiplier analysis for employment and output and the contribution
to Scottish GDP made by a quality environment.
The Effect and Costs of Introducing a CHP Obligation
Department for Environment, Food and Rural Affairs
This study was undertaken as part of the Government's Review of the UK Climate Change Programme. Based on CE's November 2003 study, this project modelled the impact on Combined Heat and Power (CHP) take-up to 2010 and 2015 of introducing a CHP Obligation in 2007. A CHP Obligation would work in a manner analogous to the existing Renewables Obligation. In the analysis, the CHP Obligation was designed so as to ensure the achievement of the Government's immediate target of 10 GWe in 2010. The main effect of introducing a CHP Obligation would be to raise the value of CHP electricity exports and hence raise the profitability of CHP, bringing about more installations. Sixteen scenarios around the base projections to 2015 were developed, incorporating alternative electricity and gas price assumptions and sensitivities. The study also assessed the impact of the EU Emissions Trading Scheme, which the UK joined in January 2005, on the amount of installed CHP capacity in 2010 and 2015.
Estimates of the costs to the Exchequer, consumers and firms of the CHP Obligation were then derived for the base case and the alternative energy price scenarios. The study also estimated the cost per tonne of carbon saved under these alternative assumptions. Care was taken to ensure that the carbon displacement factors used for the calculations were consistent with those agreed for use in Defra's 'Interdepartmental Rules for Greenhouse Gas Policy Appraisal' set out for the UK Climate Change Programme Review process.
Modelling the Impact of Exempting CHP Electricity
Exports from the Renewables Obligation Base
Department of Trade and Industry
This study provided quantitative analysis to support the Department of Trade and Industry's qualitative evaluation of the Renewables Obligation (RO), undertaken as part of the Government's Review of the UK Climate Change Programme. Based on CE's November 2003 study, this project modelled the impact on Combined Heat and Power (CHP) developments to 2015 of exempting CHP exported electricity from the base on which the Renewables Obligation is calculated. Scenarios around the core base run model projections to 2015 were then developed, based on alternative electricity and gas price assumptions and sensitivities,as agreed with the DTI. These involved various combinations of plus/minus 20% and 40% variation around the baseline level of gas and electricity prices in 2010 and 2015. The objective was to assess the responsiveness of CHP capacity in the longer term to a wide range of alternative outcomes for fuel input (largely gas) prices and to the price received for CHP electricity exports.
Macroeconomic Rebound Effect of Energy Efficiency
Policies in the UK Economy
Department for Environment, Food and Rural Affairs
This project was led by 4CMR (Cambridge Centre for Climate Change Mitigation Research) in the University of Cambridge, with CE responsible for the modelling and scenario analysis. Other collaborators were Policy Studies Institute and Dr Horace Herring,an independent energy consultant. The main objective of the work was to examine the macroeconomic 'rebound effect' on the UK economy from energy efficiency policies and programmes. The rebound hypothesis suggests that, at the macroeconomic level, all energy efficiency measures might be offset in their effects on aggregate energy savings by associated increases in energy demand.
The study explored the relationships between energy efficiency, energy consumption, economic growth and policy interventions. CE's Energy-Environment-Economy model of the UK economy (MDM-E3) was used to model the policy impact , building on work undertaken previously to analyse the economic and environmental implications to 2020 of introducing renewable energy, combined heat and power (CHP) and domestic energy efficiency measures. CE provided a base case to 2010 and then developed and analysed a set of scenarios to allow the estimation of the rebound effects for final energy demand disaggregated by six MDM fuel-using sectors: energy-intensive industries, other industry, road transport, air transport, other final uses (commerce etc) and households (dwellings).
Modelling the Initial Effects of the Climate
Change Levy: Extension to 2020
HM Revenue and Customs
This study extended the analysis undertaken in an earlier project ('Modelling the Initial Effects of the Climate Change Levy') for HM Customs and Excise. It contributed to HMRC's evaluation of the Climate Change Levy (CCL) and the estimated annual carbon saving through to 2020 (CCL), required as an input to the Climate Change Programme Review led by the Department for Environment, Food and Rural Affairs and the Department of Trade and Industry. The project investigated the effectiveness of the CCL over the period 2010-20 in reducing energy use/carbon emissions, and examined its other (eg economic) effects. The project also modelled the sensitivity of the results for carbon saving to alternative profiles for the CCL to 2020. These included: the freezing of the Levy at current rates; a one-off increase in 2006, with rates increasing in line with inflation thereafter; and a steady increase in the CCL at rates above the projected rate of general inflation.
Modelling the Initial Effects of the Climate
Change Levy
HM Revenue and Customs
This study examined the environmental effectiveness of the Climate Change Levy (CCL), focussing specifically upon the identification of any 'announcement' effects and the effects of induced price changes on energy markets and greenhouse gas emissions (GHGs). The findings were used to support the British government's analysis of the CCL in delivering carbon dioxide savings by 2010, published in Section 7.19 and Box 7.2 of the UK Budget 2005 report 'Investing for our future'. The study was led by CE in collaboration with the Policy Studies Institute, Westminster University and the Department of Applied Economics, University of Cambridge. The overall objective of this study was to investigate the effectiveness of the CCL in reducing energy use/carbon emissions, which was its principal purpose, and, where possible, its other (eg economic) effects. It was essential to consider the effects of the Climate Change Agreements (CCAs) in the modelling work, since the overall impact of the price signal provided by the CCL was necessarily influenced by the presence of the CCAs. This innovative study used the Cambridge Econometrics MDM-E3 (energy-environment-economy) model of the UK to construct alternative scenarios, combined with off-model analysis and other research methods where necessary. The project contained the following three elements, which were addressed in turn: first, the investigation of the CCL's announcement effect (if any) on business energy use, supported by a comprehensive technical paper proposing a 'best practice' method or economic evaluation following a literature review of the announcement effects of carbon/energy taxes and related ex-post evaluation studies; second, the investigation of the CCL's effects since its introduction on business energy use so far; and finally, the likely energy and carbon savings from the CCL by 2010 that were informed by the findings from the ex-post analysis.
Analysis to Support a Review of the Likely Effectiveness
of the UK Climate Change Programme
The Carbon Trust
This study provided analysis to support the Carbon Trust's investigation into the measures currently included in the UK Climate Change Programme. Various policy scenarios were constructed to understand the impact and effectiveness of different economic policy instruments for limiting CO2 emissions in the industrial and public sectors. These included the Climate Change Levy, the Climate Change Agreements negotiated with several energy-intensive industrial sectors, and the EU Emissions Trading Scheme. The scenarios were implemented in CE's integrated energy-economy-environment model of the British economy, MDM-E3, and the results showed the expected behavioural responses to the policies so as to inform an assessment of the feasibility and cost-effectiveness of the various policy measures. The results were then compared with findings from alternative modelling approaches based on bottom-up, technologically-based industrial end-use simulation and macroeconomic general equilibrium-type models, to strengthen confidence in the findings (in the cases where the models agreed) and to identify which findings depend critically on the kind of modelling approach adopted.
Modelling Combined Heat and Power Capacity to
2010; Revised Projections
Department of Trade and Industry
This study extended earlier work on modelling the take-up of good quality Combined Heat and Power capacity by 2010 which underpinned the Government's CHP strategy launched in May 2002 and provided a key input into the Government's formulation of a National Allocation Plan in preparation for the UK's participation in the EU Emissions Trading Scheme, scheduled for 2005. The earlier project had applied CE's Multisectoral Dynamic Model (energy-environment-economy) of the UK Economy (MDM-E3) to quantify the effect of various existing and potential policy measures affecting business decisions to install CHP capacity. An innovative nature of the original modelling was that it extended MDM-E3 to include a detailed 'bottom-up' analysis of CHP technologies and cost-benefit decisions. The current project involved the re-estimation of the CHP submodel to include the latest 2002 data for the installation of CHP capacity, a period during which the market was weak. The model was also refined to reflect more closely the characteristics of the CHP market. The work incorporated views from CHP industry representatives on key assumptions, ranging from the capital cost estimates of CHP installation to the appropriate discount rate for appraising CHP investment projects.
The Cost of Unproductive Use of Resources for
Scottish Businesses
Scottish Executive
The project examined the potential benefits to Scottish business from adopting waste minimisation measures, generalising from case-study evidence. It used the methodology that had been developed for a study conducted in April 2003 for the Environment Agency. Estimates of the potential benefits to Scottish businesses of adopting best-practice resource efficiency methods were produced by sector, by country (ie Scotland and Wales) and by English region, focussing upon manufacturing and the significance of these costs in terms of the economic performance of Scotland. As the available data on the implementation of waste minimisation measures are partial and specific to particular cases, the results were evaluated in terms of their robustness and sensitivity to alternative assumptions about the way in which the case study data were generalised. Finally, the results of the study were set against the wider context of the work in relation to international developments including the outcomes of the 2002 Johannesburg World Summit on Sustainable Development and current national (ie UK and/or Scottish) resource productivity programmes. The project was led by CE in collaboration with AEA Technology, who provided the company-specific case studies drawn from the analysis of the manufacturing sector under the UK Government's Envirowise programme.
Greenhouse gas emissions benchmarking and monitoring
for local authorities in Yorkshire and Humber
Yorkshire and Humber Assembly
This study developed practical proposals for a regional approach with a package of support for local authorities to undertake the benchmarking and monitoring of greenhouse gas emissions (GHGs). The objective was to assist the Yorkshire and Humber Assembly (YHA) in its strategic role of developing a regional climate change action plan and coordinating its implementation as part of the overall Regional Sustainable Development Framework. The analysis took account of current work on this in the Yorkshire and Humber region, and also drew on good practice and experience in national programmes and local authorities in other parts of England and Wales. The project addressed the following issues: the identification of current national programmes to support local authority benchmarking and monitoring of GHGs; the identification of current systems and programmes in place in local authorities in the region to benchmark and monitor GHGs combined with an assessment of their effectiveness; and an analysis of the trade-offs between effectiveness and potential costs of different levels of monitoring activity.
BNIF/HM Treasury Workshop: Energy Scenarios
British Nuclear Industry Forum
This project provided projections, for presentation at a workshop with HM Treasury, for economic growth, energy demand and the resultant carbon emissions to 2010 under various policy scenarios using the Cambridge Multisectoral Dynamic Model of the UK economy, MDM-E3. The context of the report was the Energy Review published by the Cabinet Office's Performance and Innovation Unit in February 2002, suggesting that a move to a low carbon economy in the longer term would require difficult choices by policy makers. The scenarios explored in the study were (a) the continuation of present trends with no policy changes, (b) the impact of the policy measures recommended by the PIU's Energy Review to improve the take-up of renewables and energy efficiency measures, (c) a carbon tax policy option, and (d) a carbon tax policy option augmented by the building of new nuclear capacity. The carbon tax scenarios were designed so that they produced as an output the required level of the tax to achieve the official targets for reducing carbon emissions by 2010, given the assumptions for non-carbon-based generating capacity.
Impact of the Climate Change Programme on Industrial
Carbon Emissions
Department for Environment, Food and Rural Affairs
The Government's reporting requirements under the Kyoto Protocol require it to demonstrate progress in achieving further emissions reductions by UK industry. This project, undertaken in collaboration with Entec (UK), involves extending an existing 'bottom-up' database and model, which identifies the key technologies associated with energy use in manufacturing sectors. The extension involved the inclusion of sectors outside of manufacturing, notably water, construction and energy, and incorporating the elasticities of output to energy use The model was then used to analyse alternative scenarios for environmental policy, such as the Climate Change Levy and Emissions Trading, and reviewing the implications for fuel use and greenhouse gas emissions by UK industry. A particular challenge of the project was to extend the technical level of analysis in the current model to include the potential to analyse 'win-win' scenarios for industry, whereby adopting energy-efficiency best practice yields additional competitive benefits.
For further information, including prices, and to order the service,
email:
Sudhir Junankar
Manager, Energy-Environment Service
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