Written evidence submitted by the Zero Carbon Campaign (DHH0068)

Information on organisation:

The Zero Carbon Campaign was launched by entrepreneur and founder of OVO Energy Stephen Fitzpatrick in July 2019, following the introduction of the UK’s 2050 net zero commitment. It calls for the government to introduce stronger and more consistent carbon pricing across more of the UK economy, to help drive a fair and just transition towards net zero, whilst catalysing  a ‘green recovery’ from COVID-19. The Zero Carbon Campaign set up a Commission of leading scientists, business leaders, environmental and academic experts to work through the practical challenges of how such a policy might be structured and implemented. Our Commissioners include:

●        Lord Adair Turner, Former Chairman, Committee on Climate Change

●        Nick Butler, Visiting Professor, King’s College London and Energy Commentator

●        Professor Paul Ekins, Director, UCL Institute for Sustainable Resources

●        Professor Sam Fankhauser, Director, Grantham Research Institute on Climate Change and the Environment (LSE)

●        John Sauven, Executive Director, Greenpeace

●        Dr. Rhian Mari Thomas, CEO, Green Finance Institute

●        Georgia Berry, Director, Sustainable Business and Communications, OVO Energy and former Downing Street adviser on energy policy

Rachel Wolf of Public First acts as the Commission Secretariat. She authored the Commission’s interim report, which was published in June 2020. The final White Paper was published on September 21st and can be found here.

Questions and answers:

What has been the impact of past and current policies for low carbon heat, and what lessons can be learnt, including examples from devolved administrations and international comparators?

1. We can learn from the design and delivery of previous low carbon heat policies. The government has discontinued and defunded many of its previous low carbon heat programs - most notably the Green Deal and RHI[1] - after it became clear that they were failing to inspire the levels of household uptake originally projected. This reflects the government’s failure to offer householders the right incentives to switch low carbon heat, or to design policies in a way that effectively tackles the barriers that prevent them from doing so.[2] This includes a lack of public awareness that heating in buildings is one of the largest contributors to carbon emissions in the UK, and limited awareness around low-carbon heating technologies[3]. At present, more than 30% of the public are not familiar with alternatives to conventional gas heating, and 30% say they "don't know enough" to offer a view. None of the alternative technologies are familiar to more than 20% of the public.[4]
2. Some promising announcements have been made this year, not least the Green Homes Grant and Clean Heat Grant schemes. These policies will play a key role in stimulating the market for low carbon heating systems such as air and ground source pumps - and in removing the cost hurdles that have previously prevented consumers from opting to pursue energy efficiency upgrades. It is clear from rates of uptake[5] that the Green Homes Grant in particular is very popular with consumers, who - despite having low levels of understanding regarding the UK’s heat decarbonisation challenge - are increasingly accepting that changes are required to overcome it, and welcoming of financial support to enable public participation. Our own polling has revealed this latter consideration to be key - with expense cited as the number one barrier to uptake of energy efficiency improvements.[6] As such, this grant scheme will require sustained public investment over the long term to facilitate the low-carbon transformation of the 28 million British homes that are currently powered by fossil fuels, as well as ensuring all homes achieve a minimum energy efficiency standard of EPC Band C by 2035.[7]
3. Additional policy will be required to  ensure that uptake of energy efficiency improvements and low carbon heating options increases in line with decarbonisation goals[8]. Not only do we need to address the perverse pricing incentives that currently render gas and heating oil cheaper than electricity, but we also need to put the necessary parameters in place to ensure that the 37% of British householders who live in rented accomodation or social housing can benefit from such schemes.[9]
4. The government can learn from its predecessors’ progress in weaning the UK off coal, and reducing the cost and scaling uptake of renewable energy options. This success can largely be attributed to a combination of effective carbon pricing on power - via the Carbon Price Support ‘top up tax’ - and the use of contractual mechanisms (CfD’s) to secure investment when longer term cash flow projections are uncertain or potentially volatile. The strategic deployment of these policy instruments has earned the UK a genuinely world-beating record in power sector decarbonisation; we must now repeat this trick - where it makes sense to do so - across the rest of the economy.
5. A number of countries have also successfully encouraged the mass deployment of low carbon heat through a combination of standards, price incentives and revenue recycling, and should be studied as examples of international best practice:
1. Sweden introduced a carbon tax in 1991, alongside tougher building standards to require more insulation and three-layer glass windows. Since then, the use of fossil fuels for heating has fallen by 85%, largely as a result of the expansion of district heating networks. The majority of homes, towns and cities are now connected to these networks, which provide heat via electric pumps, biomass stoves or hot water piped in from community heating schemes. The revenue from the carbon tax has been used to subsidise the costs of switching to these renewable sources of heat; as well as to cut income tax, especially for lower earners. This has put Swedish buildings’ energy use on parr with their European counterparts, despite a harsher climate than most other EU countries.[10][11]
2. In Germany and France, carbon pricing revenue has been combined with other public revenues to create a substantial source of public finance for EE upgrades. Almost all of Germany’s ETS revenues are directed into the Special Energy and Climate Fund,[12] which also receives revenues from the budget of the Federal Ministry for Economic Affairs and Energy. In 2019 the federal Government announced the value of the fund would rise to €4.5 bn.[13] and that a portion of the money would continue to be ring fenced to provide households with financial support of up to €30,000 towards energy renovation and low carbon heat; with the level of subsidy linked to energy performance standards.[14] Similarly, the 2013 French Finance Bill enables ETS revenues to be recycled for use by the National Agency for Housing. A major priority for this money is EE refurbishment of buildings, particularly for low income families, as part of the national refurbishment programme.[15]

What key policies, priorities and timelines should be included in the Government’s forthcoming ‘Buildings and Heat Strategy’ to ensure that the UK is on track to deliver Net Zero? What are the most urgent decisions and actions that need to be taken over the course of this Parliament (by 2024)?

What incentives and regulatory measures should be employed to encourage and ensure households take up low carbon heat, and how will these need to vary for different household types?

A combination of effective carbon pricing, regulation and financial assistance will be required to decarbonise heat in UK homes by 2050. As outlined in our Commission’s recent report (September 2020) - How carbon pricing can help Britain achieve net zero by 2050 - there are a number of steps that can be taken within this Parliament to deliver on this ambition:

1. Introduce a carbon charge on all heating fuels (including gas and oil) at a rate of £40/tCO2e, rising to £55/tCO2e by 2025, and £75/tCO2e by 2030.[16] Gas and heating oil face no domestic carbon pricing and low commercial charges. This is the biggest distortion in current heating policy, which needs to be immediately addressed if we are to incentivise a move away from high-carbon heat sources. Government can address these perversities by amalgamating the three different existing carbon prices on electricity into a single, simple charge on energy companies, explicitly included on energy bills.[17] A consistent carbon price will act as a clear economic signal for all actors to move away from oil and natural gas, towards increasingly low-carbon options such as electricity.
2. We recognise that households will need some time to respond to this price signal by adjusting their heating choices. As such, we recommend that the charge on households should be announced immediately and introduced later in this parliament in order to give consumers time to adapt (i.e by switching heat sources, and implementing energy efficiency upgrades).
3. Remove the costs of decarbonisation from electricity bills. The inclusion of decarbonisation costs on electricity - including Contracts for Difference and Renewables Obligations - is a major price distortion which has artificially inflated the price of electricity relative to gas and oil. These costs - which we estimate could reach up to £40 per month for the average UK household by 2030 - should be removed from bills and placed into general taxation. Our calculations show that for the average dual fuel household, the removal of decarbonisation costs combined with a carbon price of £55/tCO2e - would by 2025 have a net impact on monthly energy bills of - £20.89.
4. Address distributional concerns by compensating households. In our view, households in the bottom three income deciles should be compensated for any increased costs above current bills that result from the introduction of a carbon charge. A new Commission on Fuel Poverty should be established to look at the best way of implementing compensation and provide recommendations within six months. The Government could also take inspiration from Ireland’s recently announced carbon tax increase; the potentially regressive impacts of which have been completely offset by corresponding increases in welfare payments.[18] The UK Government has recently set a precedent for adapting Universal Credit in line with the impacts of the pandemic, and should continue to utilise this flexibility to protect consumers from cost impacts as they implement the low-carbon transition. 
5. Further investment in low carbon heat and energy efficiency retrofit programmes. All households should also be able reduce carbon payments with sensible decision making. For that reason, we are proposing that additional financial support is made available to help scale the GHG and CHG schemes, and to expand the supplier market in order to meet demand. Once the carbon charge is introduced, we estimate that receipts from it could return up to £27bn of revenue to the Treasury per year by 2030, some of which could be utilised to support these ends.[19]
6. As well as providing a significant source of revenue, a carbon charge could act as a catalyst for scaling concessionary finance for energy efficiency; providing a price signal to support the crowding of private finance into the market. That the pot of public subsidy is enlarged by revenues from private sector investment is essential given that the government cannot cover the entire cost of renovations in the ‘able to pay market.’ Government must also ensure that the package of incentives and finance mechanisms it offers to consumers is varied, well marketed, low interest, easily accessible and inclusive of both easy and harder to treat upgrades (e.g. heat pump installations, as well as solid and cavity wall installations). Finally, finance must be structured so that measures offer a negative net cost to ‘able to pay’ householders (i.e. total repayments are lower than total long term energy bill savings).[20]
7. Clarify the obligations of different types of householders by introducing legal obligations commensurate with the EPC Band C target. This is particularly essential in the private rented sector (PRS), which now accounts for over 20% of the UK’s housing stock.[21] Progress on energy efficiency in the PRS has been stymied by claims of split incentives. Urgent action is needed to signal that - as the beneficiaries of rental receipts and the increased market value that EPC upgrades add to properties[22] - private landlords bear responsibility for paying for and implementing energy efficiency improvements to EPC band C by 2035.
8. Government should introduce regulation mandating this and prevent letting of properties that fall below Band C beyond 2025.[23] Given that Band D is the most common rating for private rented dwellings in England, Wales and Northern Ireland,[24] and that current law only prevents landlords from letting properties below Band E; it is reasonable to assume that the transition to Band C will not happen unless the Government upgrades regulation in line with its stated ambition. ‘Able to pay’ owner occupiers, local authorities and landlords in the social rented sector should also meet this legal obligation, though in the latter case the bill for upgrades should be met through a combination of landlord investment and central government funding. This  could be distributed in turn to local authorities to reinvest in programmes for retrofitting social housing at scale, as per the Social Housing Decarbonisation Fund Demonstrator.[25]
9. Ban the sale and installation of traditional gas boilers in existing housing stock from 2030.[26] The government has already announced that by 2025, all new homes will be banned from installing gas boilers; this is a welcome step forward, but needs to be supplemented by regulation to bring forward the phase out / replacement of the 25 million gas boilers that are already installed in UK homes[27], and to address the fact that over 1 million new gas boilers will be installed each year between now and 2025 before this ban comes into force.[28] Hydrogen ready boilers should only be allowed as part of this if the government has decided to make the requisite investments in infrastructure – it is crucial that new boilers actually contribute to lowering buildings’ emissions.
10. Phase out of coal. The sale of coal for heating should be phased out by regulation.
11. Supplement all of the above with a nationwide education programme to promote public understanding in regards to the costs and benefits of the transition to low carbon heat. In view of ensuring that the public are brought along on the journey to net zero, and as expanded upon in latter questions in this response.

Which technologies are the most viable to deliver the decarbonisation of heating, and what would be the most appropriate mix of technologies across the UK?

One of the biggest barriers to the transition to low carbon heat has been the issue of technical uncertainty. Government has yet to decide whether gas should be a) replaced by hydrogen; b) replaced by zero-carbon district heating; c) replaced with heat pumps; or d) some combination of all three. This is one of the core arguments in favour of carbon pricing; it lets the lowest-cost low-carbon technologies emerge, rather than having to make a call on which speculative technologies are best suited towards the low-carbon transition. 

While we are not best placed to comment on precisely which technical mix is most appropriate for decarbonising heat in homes, we do believe that the following principles must guide government’s decision making:

1. The need to offer a clear signal to guide investment. The lack of clarity around the government’s energy mix strategy makes it difficult to create certainty around investment. The government should remedy this by committing to a long-term carbon price trajectory, combined with de-risking investment mechanisms that can aid the transition of UK industry, such as Contracts for Difference for CCUS and hydrogen.
2. Compliance with the 2030 emission’s reduction target. As set out in the fifth carbon budget in 2016, the UK is aiming to reduce CO2 by 57% by 2030, on 1990 levels. This target is set to be updated - and strengthened - with the publication of the 6th Carbon Budget in December, but even under the previous target, we will have to more than double the rate at which we have reduced carbon emissions over the last decade (28%). This reduction is largely attributable to improvements in energy intensity as a result of the growth in renewable sources of electricity, rather than a reduction in usage, which leaves huge scope for usage to be addressed.[29]
3. The risks of relying on speculative solutions. Given the scale of the challenges posed by the decarbonisation of heat - and the success of electrification in achieving emissions reductions to date - the government should think carefully before banking too heavily on hydrogen technologies and other “green” replacements for natural gas, which are not yet commercially scalable to a level compliant with emissions reduction targets. While it is tempting to be drawn toward such technologies on the basis that they can be more easily deployed via existing home heating infrastructure, we must not allow the imperative of ease to gain precedence over urgency. We need to get on with deploying the technologies that are available to us now or we will find ourselves further and further off track for meeting our 2030 and mid-century heat decarbonisation targets. Committing to an ambitious electrification trajectory will drive focus on the implementation of these existing solutions and prevent further progress-stalling equivocation.
4. The imperative to reduce overall energy consumption, as well the emissions intensity of energy. Whether the UK opts to replace gas as a heat source with green electricity, pursue the widespread use of hydrogen for heating homes, or a hybrid pathway that uses a mixture of both electricity and gas; reducing household energy demand by around 25% will be a vital pillar in our heat decarbonisation strategy.[30] Consistent increases in the deployment of energy efficiency measures like glazing, door replacement and loft and cavity wall installations will be required, as will the creation of a flexible energy grid, and the deployment of smart devices for both energy storage and usage measurement.

What are the barriers to scaling up low carbon heating technologies? What is needed to overcome these barriers?

What action is required to ensure that households are engaged, informed, supported and protected during the transition to low carbon heat, including measures to minimise disruption in homes and to maintain consumer choice?

The two most important to scaling up low carbon heating technologies are:

1. Lack of public understanding as regards the scale of the challenge, and the changes required to meet it. As we have noted earlier in this response, consumers of energy in the home currently face a range of overlapping price signals lumped under the banner of ‘green taxes on electricity bills.’ This opens the door to misleading claims that green charges on energy bills are the sole cause of bill price rises[31] and contributes to the lack of transparency around where and how we are charged for our consumption of carbon. Recent research from BEIS has revealed the negative impact of this confused landscape on public understanding; revealing low levels of comprehension of the contribution of residential heating to Britain's emissions footprint, and the low-carbon heating technologies that will be necessary for the UK to meet its net zero goals.[32] Research by Citizens Advice and Energy Saving Trust has also exposed public understanding of the relationship between energy usage and cost as weak. The polling revealed that a third of respondents (31%) don't consider managing their energy use as a priority, nor do they think there would be costs associated with controlling their energy use (19%).[33]
2. Drawbacks are perceived as outweighing the benefits. As touched upon earlier in this response, the perceived cost barriers and lack of financing options have proved to be an important disincentive for low carbon heating investment by able-to-pay households. However, it isn’t only cost that prevents people from participating in home heat decarbonisation. There’s a plethora of evidence to suggest that the potential for hassle and disruption that comes with home upgrades are equally important factors in constraining households from action.[34]

The main actions that government should take to help overcome these barriers are:

●        Match consumers’ desire to shift to climate conscious behaviour with proper incentives for doing so. Although polling has revealed that the public underestimates the challenge of decarbonising heat in the UK, it also demonstrates that with understanding comes a keen desire to act. All the potential heat decarbonisation routes that BEIS proposed in its research were viewed as more acceptable than unacceptable by respondents, and two thirds supported phasing out gas boilers for more environmentally friendly systems. It’s clear that the public wants to do more to help solve the decarbonisation challenge - what is missing is an economic incentive to encourage the participation of UK households in switching away from fossil fuel based heating. Combining existing charges into a single, simple carbon charge that is explicitly labelled on consumers’ energy bills could help promote public understanding as regards the role and benefits of green taxation, and provide a clear guide to consumer decision making. We have already seen the positive impact that visual stimuli can have on energy usage through the roll-out of smart metres; with more than a third (34%) of people saying their energy consumption had gone down as a result of being made more aware of their energy usage by the device.[35]

●        Introduce policy that allows choice and flexibility to be maintained. Homeowners preference for policy that maximises their freedom to choose when and how to switch (and what technology to switch to) has been established by several major pieces of research, most notably, the Climate Assembly’s Path to Net Zero report.[36] Introducing a carbon charge on heating will not only provide a clear signal and cost incentive to move away from carbon-intensive heat sources, but it will also ensure consumers retain an element of choice over their heating choices; this will be key to ensuring consumers continue to support the UK’s transition towards a low-carbon economy, as research by conservative think tank Bright Blue has demonstrated.[37]

●        Investment in efforts to communicate the benefits that households stand to gain from embracing low carbon heating technologies. The government should not only work to drive public understanding of the vast contribution that heating makes to the UK’s carbon footprint, but should also make a concerted effort to support consumers in understanding of the advantages of low carbon heat, including the potential to achieve a warmer and more comfortable homes[38] and improved long term health and wellbeing. These are valued at £2.5bn per year.[39] Government should also market the huge job creation potential of investment in low carbon heat - there’s a plethora of research to support this, including:

1. A recent report by LSE, which finds that investing to help the UK meet its net-zero carbon emissions target for 2050 could create 80,000 jobs across the country in the near term and set the groundwork for sustainable and resilient longer-term economic growth.

●        The Green Finance Institute (GFI) projects that investments in building energy efficiency could support more than 150,000 skilled and semi-skilled workers across the construction supply chain and support the wider recovery by enabling increased consumer spending as a result of household energy cost savings.[40]

●        The Smith School at the University of Oxford found that green stimulus projects create more jobs, deliver higher short-term returns per dollar spent, and lead to increased long-term cost savings, by comparison with traditional fiscal stimulus.[41]

How can the costs of decarbonising heat be distributed fairly across consumers, taxpayers, business and government, taking account of the fuel poor and communities affected by the transition? What is the impact of the existing distribution of environmental levies across electricity, gas and fuel bills on drivers for switching to low carbon heating, and should this distribution be reviewed?

1. The current distribution of environmental levies across electricity, gas and fuel bills is unfair, inefficient and confusing. 82% of consumers support the transition away from fossil fuels to renewable energy,[42] but are unable to access it as cheaply as high emitting sources of heat. This proffers an unfair advantage to households on the highest incomes, whose carbon footprint from heating is five times as large as those on the lowest incomes, and yet they pay only 1.9 times more towards low carbon policy costs. It is also unfair for businesses who are attempting to bring clean electricity to market, as their low-carbon alternatives are forced to compete with the artificially low prices of higher-carbon options.
2. To ensure the costs of decarbonising heat are distributed fairly across consumers, taxpayers, business and government, the government must reform carbon pricing in the power sector. Rather than layering on additional costs - carbon taxation should predominantly be used to replace (i.e. change the emphasis and simplify) existing forms of emissions pricing that are inefficient or unfair, as outlined earlier in this submission. 
3. Those who are fuel poor or on low incomes must be compensated. As part of our Commission’s review of UK carbon pricing, we asked LSE and Vivid Economics to investigate the impact of a ‘carbon charge’ on energy bills. They found that any price rises that occur as a result of a carbon charge would be more than balanced out by a combination of energy efficiency improvements, and the issuing of rebates to compensate those on low incomes.

Where should responsibility lie for the governance, coordination and delivery of low carbon heating? What will these organisations need in order to deliver such responsibilities?

Delivering the decarbonisation in the residential sector will involve the transition of whole areas of housing to low carbon heating systems, working at a rate of around 20,000 homes per week over a 25 year period.[43] Success will depend on effective governance to protect policies from short term political pressures, ensuring compliance with the net zero and interim climate targets, and that systems make sense - and are cost effective - at a local level. We recommend the following measures to help clarify responsibilities and empower effective implementation:

1. Legislate for a clear carbon price trajectory through 2030. Accompanied by clear rules relating to how that price trajectory might be changed in response to its impact (for example, it could be raised in certain sectors if it was not having the desired effect on the UK meeting its Carbon Budgets).
2. Give new responsibilities to an existing body (such as a sub-committee of the Committee on Climate Change) or set up a new one to report on:

○        How the carbon price is affecting UK projected emissions;

○        Its impact against the UK meeting its Carbon Budgets;

○        Any offshoring (‘carbon leakage’) of emissions and their cause. As part of this, the body should pay particular attention to the amount of emissions consumed in the UK, including from products made abroad and imported into the UK;

○        Impacts on consumers and;

○        The amount of private investment being brought in.

3. Establish a new, national enforcement agency to oversee the UK’s transition to low carbon heat and deliver low income and fuel poor households’ heating upgrades via local-authority-led area-based schemes. Government should design a new system for delivering low carbon heat and energy efficiency upgrades, to ensure the new regulation, increased funding and improved coordination required to meet targets across different household types. Local authorities can play a key role here, facilitating heat network projects, and bringing their asset base, infrastructure management.[44] By simplifying and streamlining the market, the Government can spur capital investment in the low carbon heat supply chain and address other barriers to action - including proliferation of choice, lack of trusted suppliers[45] and poor enforcement.[46] Moreover, delivering low income and fuel poor households’ heating upgrades in this way will ensure that solutions are bespoke to the fuel poverty challenges faced by local areas and have a progressive impact on vulnerable communities, in line with just transition imperatives.[47] This can also be guaranteed moving the cost of environmental and social programs from consumer energy bills to carbon taxation.

November 2020