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First Annual Report of the Council of Economic Advisers: December 2008

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Chapter 4
Achieving Scotland's 2011 Emissions Target

Background

4.1 The Scottish Government's Purpose is increasing sustainable economic growth. This indicates the weight the Scottish Government attaches to environmental as well as economic considerations. The concept of sustainability is especially important in the context of greenhouse gas emissions, where the Scottish Government has demanding goals in both the short and the long term.

4.2 The Government Economic Strategy sets out two Purpose targets for emissions:

4.2.1 to reduce emissions over the period to 2011 22; and

4.2.2 to reduce emissions by 80% by 2050.

4.3 In addition, the UK Climate Change Bill sets a target for a reduction of at least 26% of CO2 emissions by 2020, and the Scottish Government's National Performance Framework includes a target to generate 31% of electricity from renewable sources by 2011 and 50% by 2020.

4.4 The Council has given particular consideration to the target for 2011, both in its own right and in the context of the broader economy. The Scottish Government has made clear that the trajectory needs not merely to be downwards, but to set a course likely to deliver the 80% target by mid-century. The Council's concern has been to ask: whether that is likely; how it relates to the target for economic growth; and what points the Scottish Government needs to consider in drawing up a Strategic Overview of how Scotland can meet the 2050 Purpose target.

Evidence Base

Greenhouse Gas Emissions

4.5 By far the largest source of emissions is the energy supply sector. There has been a significant downward trend this century in both the absolute amount of net CO2 emissions from this sector and its share of the total (from nearly 48% in 2000 to 44.5% in 2005). This downward trend was interrupted by the large outages at nuclear plants in 2006 which resulted in a major increase in the amount of coal-fired generation and thus an increase in emissions.

4.6 Measuring the trend in emissions is complicated. The pattern is subject to large swings from year to year, driven by the mix of sources of power generation. Thus, in 2005, nuclear energy accounted for 38% of power generation but only 26.4% in 2006, whereas coal's share was 25% in 2005 and nearly 33% in 2006. A severe winter or a large outage at a nuclear plant tends to raise the proportion of coal and gas in the mix, and thus net greenhouse gas emissions; but a rise in the international price of fossil fuels may have the opposite effect.

4.7 The picture is further complicated by the flow of electricity between Scotland and the rest of the UK. A rise in demand in England may lead to a rise in the proportion of electricity generated in Scotland from coal and gas. An increase in Scotland's renewables capacity (see paragraphs 4.9 and 4.10 below) may not result in a corresponding decrease in electricity generated from coal, if the displaced coal-based electricity is exported.

Table 4.1 Electricity Generated in Scotland by Different Power Sources

2005

GWh

% of total generated

2006

GWh

% of total generated

% change 2005 to 2006

Nuclear

18,681

38

14,141

26

-24

Coal

12,186

25

17,547

33

+44

Gas

9,371

19

11,634

22

+24

Oil

1,902

4

2,141

4

+13

Pumped storage hydro

643

1

1,184

2

+84

Renewables

6,464

13

6,962

13

+8

Total non-nuclear

30,566

62

39,468

74

+29

Source: BERR Energy Trends, December 2007

Table 4.2 Total Electricity Generated and Consumed in Scotland

2005

GWh

2006

GWh

% change

2005 to 2006

Total generated

49,246

53,609

+9

Total consumed 1

35,753

35,675

-0.2

Total exported

7,315

10,941

+50

Gross Consumption 2

41,931

42,668

+1.8

1 Total consumption figure is calculated on total generation less own use, transfers and losses.

2 Gross consumption is total consumption including own use and losses (or generation less transfers).

Source: BERR Energy Trends, December 2007

4.8 However, the broad pattern has been a decline in net greenhouse gas emissions in Scotland between 1990 and 2005. Within this total, there has been a decline in emissions from energy supply, businesses and waste management, and a rise in those from transport and changing patterns of land use. While emissions may have crept up in 2006 and 2007, the UK Government's projections for Scotland, published in February 2008, indicate that emissions in 2010 are highly likely to be below the 2005 level, even when population and economic growth are both factored into energy demand.

Renewables

4.9 One measure that Scotland can take to achieve the 2011 emissions target is to generate a higher proportion of electricity from renewable sources. In 2006, renewables, largely in the form of hydro, accounted for 16.3% of Scotland's electricity consumption. This figure has risen since 2000, mainly thanks to the rapid expansion of generation from wind power, although the output of hydro power is subject to large variations from year to year depending on levels of rainfall.

4.10 The Council understands that the Scottish Government sees the associated 2011 target for renewables 23 as achievable, largely through the expansion of onshore wind capacity. In the longer term the Scottish Government expects that emerging technologies, including wave, tidal and offshore wind, will make a significant contribution to Scotland's energy mix. Currently, Scotland has around 3GW of installed capacity to generate electricity from renewable sources. To meet the 2011 target for renewables, a further 2GW of generating capacity is needed. The government currently estimates that a further 2.5GW of renewables capacity has consent or is under construction in Scotland. We are told that most of these projects are likely to be completed in time for the 2011 deadline, giving a total renewables generating capacity of about 5.5GW.

Emissions and economic growth

4.11 Between 1998 and 2005, greenhouse gas emissions fell by 13.9%, or less than 3% at an annual rate, whereas economic growth rose by 14.7%. Until now, emissions declines have tracked the shift in economic activity in Scotland away from energy-intensive activities such as manufacturing and mining. The Council has welcomed the Scottish Government's willingness to consider the economic growth targets in the light of the emissions targets and to discuss the two in parallel.

Policy Considerations

4.12 The Council recognises that it will be much more difficult for Scotland to meet the 2050 emissions target than that for 2011. To reduce emissions by 80% will require an annual rate of reduction averaging more than 3%. The reduction likely to be achieved by 2011 is not sufficient to put Scotland on that downward trajectory. Moreover, without the prospect of further major shifts in the structure of the Scottish economy, even this pace of change will be harder to achieve in future.

4.13 In addition, Scotland's two nuclear plants, at Hunterston and Torness, are both reaching the end of their design lives. Some extension may be possible: Hunterston has already been granted an extension until 2016, while Torness is currently able to run until 2023, and both could then have further life extensions. But, as the plants age, outages may become more frequent, and on present trends, that will result in the burning of more fossil fuel for replacement power generation. Whatever happens, both plants are likely to be shut down well before 2050. If Scotland builds no further nuclear capacity, alternative non-fossil or low-fossil forms of power generation or Carbon Capture and Storage ( CCS) will be required, over and above what is already needed to achieve current planned levels of emissions reduction. We note that there have already been proposals for CCS plants in Scotland and recognise the geology and infrastructure in the North Sea makes Scotland well placed for this technology.

4.14 The main options for the Scottish Government are to reduce energy demand or to alter the mix of energy used to generate electricity. In seeking to reduce demand, the Scottish Government has limited powers to use fiscal instruments. Environmental taxation is a reserved issue, and so the key taxes lie outside Scottish control, though the Scottish Government can still support renewables to get a similar result. The sharp rises in energy prices earlier this year - if sustained - would undoubtedly have had an impact on the pattern of energy demand. Although energy prices have fallen in response to the economic downturn, this should not be considered permanent; higher energy prices are likely to return as economies recover. The Council believes that the Scottish Government should use this interim period of lower energy prices to forge ahead with measures to help Scotland cope and profit from higher energy prices when they return.

4.15 In altering the balance of supply, Scotland will need to work on developing non-fossil forms of energy or low-fossil options such as CCS. The Council understands that Scotland has an estimated 25% of Europe's potential marine resource potential, in the form of offshore wind, tidal and wave power. Scotland clearly has an opportunity to become an international leader in developing these technologies, which might make a significant contribution both to economic growth and reducing emissions. In this context it is noteworthy that the current regulatory arrangements for incentivising the development of renewable energy and CCS projects, to a large extent, lie outside direct Scottish control.

Chart 4.1 UK Cost Curve for Measures to Reduce Greenhouse Gas Emissions

Source: McKinsey UK cost curve from the CBI Climate Change Task Force publication 'Climate Change : Everyone's Business' published in November 2007, seehttp://www.avtclient.co.uk/climatereport.

4.16 The Council is also conscious that, in international terms, many emissions reduction measures that have a negative cost are still not being taken up, and some that are being pursued are likely to be extremely costly. It noted with interest the cost curve 24 for emissions reductions for the UK produced by McKinsey (see chart 4.1) which shows the cost of abatement for individual abatement options in terms of Euros per ton of carbon dioxide equivalents 25 in 2002 prices. This illustrates what the Council would like to see constructed for Scotland. The UK curve suggests that meeting their 2020 target 26 is going to be very challenging and will only be possible if all additional abatement initiatives are adopted. The Council recognises that some non-carbon technologies are likely to be much more cost-effective than others in reducing Scotland's emissions. The pattern of energy costs may differ in Scotland from international indicators: for example, Scotland's potential to exploit solar power may be limited, whereas the potential for on-shore wind or biofuels may be more promising.

The Council's Recommendations for the Scottish Government

4.17 The Council recommends that the Scottish Government:

Recommendation 6: commissions an independent assessment of the full economic costs and abatement potential of the various energy options open to Scotland. The Council hopes for a wide-ranging public debate on the range of technological options. Investment decisions taken in the next few years will make a very substantial difference to Scotland's ability to deliver its emissions target for 2050 without a significant cost to economic growth;

Recommendation 7: explains how it will ensure that environmental and economic considerations are given due weight, and that environmental goals are considered in parallel with goals for economic growth; and

Recommendation 8: identifies the most cost-effective options for reducing energy demand. High on this list is the better insulation of Scotland's existing housing stock. The Council urges the Scottish Government to explore ways to defray the up-front capital costs of energy efficiency measures, perhaps by finding ways for consumers to pay back the capital costs over a number of years, for example, through their energy bills. We would encourage Scotland's banks and energy companies to work with the Scottish Government to explore ways of delivering transformational levels of home insulation.