A Low Carbon Economy – absorbing the shock

'Economy does not lie in sparing money, but in spending it wisely.' - Thomas Huxley 

In many countries, including the UK, there is a very fortunate synergy between climate change policy and economic stability.

The UK is a net importer of fossil fuels, particularly oil and gas, making it vulnerable to price shocks caused by events which may be completely out of the control of UK policy. This is precisely why we hear so much talk about energy security.

A volatile world

In addition to the pressing climate change issues, reducing our dependence on imported fossil fuels is vital in achieving economic stability in a volatile world. Policies which encourage energy efficiency and increase capacity of ‘home grown’ energy such as solar, wind and to some extent nuclear, can thus be seen to be beneficial on more than one level.

DECC recently commissioned a study by Oxford Economics on this very subject. The report ‘Fossil fuel price shocks and a low carbon economy’ can be accessed here.

The focus of the study was the effect on the UK economy of an oil and gas price shock (i.e. a sudden and unexpected rise in the import cost of these commodities). A quick look at a graph of oil prices over the last few decades demonstrates that there is a clear historical precedent for such shocks.

Price shocks 

The study investigated two types of price shock: (I) A demand shock resulting from a large increase in demand due to rapid economic growth and (II) A supply shock resulting from a disruption to global supply. Both types of shock result in a sudden increase in oil and gas prices but they have slightly different implications with a supply shock being the most damaging to the economy.

The study then investigated the effect on the UK economy of a 50% price increase in oil and gas due to either of these shocks under different climate change policy scenarios. The first scenario, business as usual (BAU) assumes no implementation of climate change policies out to 2020 and 2050. The second scenario, low carbon (LC) assumes that oil, gas and coal demand are reduced by 50%, 70% and 90% respectively by 2050.

These reductions are stimulated by a carbon tax which increases energy efficiency and the development of renewable energy technologies. The report does not address the details of how these reductions are achieved but instead focuses on the impact of achieving them.

The findings 

The main findings of the study are that a 50% oil and gas supply price shock would have the following impacts on the UK economy:

Scenario	Reduction in UK GDP (%)
	2010	2020	2050
BAU	1.0	0.9	0.7
LC	-	0.7	<0.4

The takeaway message is that reducing our dependence on fossil fuels doesn’t only make sense from a climate change perspective, it also makes sense in terms of increasing our resilience to price shocks in volatile fossil fuel markets. A low carbon economy could almost halve the impact of a fossil fuel price shock on the UK economy in 2050.

At what cost? 

A recent example of this are the large increases customers have seen in their fuel bills. This has to some extent produced a backlash against renewable technologies such as wind energy due to misinformation that has been circulated blaming the price rises on these technologies.

In reality, the annual cost to consumers in 2011 of developing wind energy was on average £8, the cost due to increases in gas prices however was a staggering £120, more details here. It is precisely technologies such as wind and solar which will help us to avoid both the future impacts of climate change and the economic impacts of fossil fuel price shocks which are being felt right now. 

Hence in my opinion it makes sense to make the investments needed now while we still have the opportunity.

Image courtesy of Images of Money