EEH0013

Written evidence submitted by the Zero Carbon Campaign

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 UK to become the first major economy to place a meaningful price on carbon, by using COP 26 to announce the extension of carbon pricing more broadly across the UK economy.

In February 2020, 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. The Commissioners include:

●        Lord Adair Turner, Senior Fellow, Institute for New Economic Thinking & Chair, Energy Transition Commission

●        Nick Butler, Energy Commentator, The Financial Times

●        Professor Paul Ekins, Professor of Resources and Environment Policy, Bartlett School Environment, Energy & Resources

●        Professor Sam Fankhauser, Director, Grantham Institute at LSE

●        John Sauven, Executive Director, Greenpeace

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

●        Baroness Worthington, Founder, Sandbag & co-author of the UK’s Climate Change Act

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

Rachel Wolf of Public First is acting as the ZeroC Commission Secretariat and will be writing the final policy paper.

Together, they have conducted a series of evidence sessions with environmental, economic, industry, consumer and academic stakeholders to explore the challenges inherent to the implementation of such a scheme. The sessions - and a corresponding call for evidence - have informed the development of a carbon pricing white paper. The paper is due to be published in July 2020, and will present a policy ‘strawman’ outlining how an extended carbon pricing scheme might work alongside complementary policies and revenue recycling mechanisms, such as those described in this response.

Are the Government’s targets on residential energy efficiency still appropriate to achieve its ambition to reach net zero emissions by 2050?

●        Actionable policy is required alongside targets. The Government’s target to upgrade all homes to EPC Band C by 2035 will not alone drive the change required to decarbonize residential buildings by 2050. This will only be achieved through the delivery of a detailed policy and regulatory roadmap, that encourages public participation (including with regards to energy consumption behaviour), and incentivises the installation of energy efficient and low carbon heating infrastructure in UK homes. The 2035 target should be brought forward, but it is the implementation of effective policy stepping stones - such as an effective UK carbon price, readily available financing for energy efficiency upgrades (EE) and the clarification of householder obligations - that should be prioritised.  

●        Interim milestones risk exacerbating existing barriers to uptake. The Government’s interim milestones of EPC E by 2020 and EPC D by 2025 risk incentivising an incremental approach to retrofit. Behavioural science suggests that this could have a detrimental effect on uptake, with hassle and disruption often cited as key factors in preventing households from completing upgrade works.[1] Failure to complete ‘all in one’ upgrades also risks undermining a key persuasive message; that the ROI associated with retrofit justifies its upfront costs.[2] Rather than addressing the least efficient buildings first (as these targets suggest), a more streamlined approach can be taken[3], accompanied by targets for the percentage of existing housing stock which will be upgraded to EPC C by each interim date.

●        EE policy needs to be considered holistically, as part of the wider challenge of decarbonising heat. These two challenges are inextricable from one another; high electricity costs (compared to natural gas - which costs roughly 1/4 of electricity) create a perverse incentive for consumers to stick with high emitting heating systems.[4]

●        The decarbonisation of heat requires the public to act. To ensure public participation, the Government must employ both regulatory and market-based levers, by strengthening incentives (and provisions) for making upfront investments.

●        Rapid change requires ambitious measures. The government must demonstrate urgency and ambition towards home retrofitting, and provide accessible and affordable avenues for consumers to reduce their emissions . Meeting EPC targets requires both “push” and “pull” mechanisms to help households overcome existing barriers to action. As well as the pricing, finance and regulatory measures outlined above, the Government  should consider:

1.      Strengthening building regulation for existing stock. Commit to a 2025 phase out / replacement date for the UK’s 25 million home gas boilers[5] and develop a scrappage scheme for the early retirement of boilers, to aid consumers in making the switch. 

2.      Strengthening standards for new homes.[6] Require all new builds to be net zero compatible from 2025, by extending operational emissions neutrality (which the Future Homes Standard addresses) to  embodied emissions as well, and by future proofing homes built between 2020 and 2025 with a transitional arrangement in place to meet net zero standards by 2025.[7]

3.      Marketing the wider benefits of EE. To encourage uptake, the Government should highlight the additional benefits which have been proven to motivate action on home decarbonisation alongside financial savings: warmer, smore comfortable homes,[8] long term health and wellbeing. These are valued at £2.5bn per year.[9]

What are the potential risks and opportunities of bringing forward the Government’s energy efficiency target?

●        Rapid progress is required to cut emissions . In 2017 the UK failed to reduce residential emissions by 13%, as required by the CCC’s cost-effective pathway for meeting carbon budgets,[10] and residential buildings still account for 19% of the UK’s total emissions.[11] Emissions are clearly not falling at the rate required, and the Government’s progress in persuading householders toward EE has been nominal - with approximately 5% of homes fitted with low carbon heating[12] and over 19 million homes requiring upgrades to achieve an EPC C grade.[13] A more ambitious target (i.e 2030) - accompanied by carbon pricing signals that encourage a move away from high-carbon heat sources and other financial and regulatory policies - may lower barriers to action and encourage progress.

●        Covid-19 has made the barriers to individual action higher. A date of 2035 is unlikely to motivate immediate action, since  - at least in the short term - a far smaller share of the population will possess the disposable income to pay for upgrades upfront.[14]  Retrofit will not be a cost many can manage on their own - and where households are already carrying debt as a result of business borrowing[15] and mortgage support,[16] they may be reluctant to take out loans from banks.

●        But the pandemic can lead to behaviour change. Studies have shown that efforts to encourage people to make  environmentally friendly alterations to their habits are most salient when exogenous shocks such as energy price volatility and economic crises[17] occur. Salience is also heightened during transitional moments in people’s personal lives; with moving home identified as a key trigger point for consideration of EE.[18] AsCovid-19 has made homeowners question their living preferences,[19] the post-pandemic recovery may provide a favourable context to drive investment in (and uptake of) home retrofits.

●        The technology exists, but we are missing impetus to deploy it. Some may argue that large scale investment in EE is premature and should be delayed until solutions like hydrogen and low carbon gas have been further explored. However, speculative technology should not be banked upon, especially given the cost of scaling deployment to a commercially viable level. By contrast, EE measures (such as loft and cavity wall installation) and switching to low carbon modes of heating are proven measures that can guarantee progress toward reducing emissions at the speed and scale required. Committing to an ambitious EE trajectory will drive focus on the implementation of these existing solutions and prevent further progress-stalling equivocation.

●        The opportunities outweigh the risks. The cost of meeting more ambitious EE targets may limit the funds available for immediate decarbonisation interventions elsewhere, but this is a sacrifice worth making given the current environmental, economic and cultural landscape.

Should Government targets for energy efficiency be legislated for, and if so, what difference would this make?

●        Financial and policy support for EE has been on a steady decline. The Government has discontinued and significantly reduced funding for many of its previous retrofit programs[20], using disappointing uptake of domestic heating incentive schemes such as the Green Deal and RHI as justification. Yet, as previous inquiries have highlighted, this is more a reflection of the flawed design and delivery of these programs[21] than of the ROI that EE can offer to consumers.

●        The Government must clearly and coherently signpost that mass EE upgrades are imminent. Instead of withdrawing support from EE programs, the Government should place legal obligations on householders to implement EE schemes and invest in lowering the barriers to entry. Otherwise the UK will not close the 70% gap between the number of homes that have already received major updates and thoses that still need to be improved to meet EPC Band C.[22] 

●        Legislation[23] will support the Government in fulfilling its commercial decarbonization commitments by:

○        Raising public awareness of domestic heating emissions , whilst demonstrating how committed HMG is to tackling the problem; 

○        Encouraging HMT to prioritise raising revenue for EE;

○        Encouraging the building sector to future-proof the UK’s housing stock more rapidly, whilst providing a long term opportunity signal to drive private investment in the EE market;

○        Strengthening the incentivising different categories of householders who can afford to pay for measures upfront to become earlier adopters;

○        Ensuring continued ambition between administrations, and preventing further disruption to progress on account of political expediency.[24]

How will lack of progress on residential energy efficiency impact the decarbonisation of heat and the associated costs of this?

●        Public opinion research demonstrates the importance of maintaining a social licence to operate. Previous attempts to rollout EE have been challenging largely due to barriers that cause behaviours to be inconsistent with economic theory. These include fear of hidden costs, aesthetic bias and cost-benefit uncertainty.[25] Without a combination of policies to address these cognitive dissonances and drive the consumers’ transition toward low-carbon lifestyles, the Government is unlikely to make required progress on heat decarbonisation .

●        Failure to act will have climate, social and fiscal consequences. Lack of progress will have negative impacts on energy use and emissions production, as well as on consumer energy bills, which are expected to increase by around 16% between 2016 and 2030.[26] This will further exacerbate fuel poverty and climate change. However, EE measures are only one part of the holistic ‘carrot and stick’ approach that is required to encourage behavioural change across the UK economy. An effective carbon price -  levied on energy inputs based on their carbon content - can play a crucial role in driving consumers, businesses and industry away from high-carbon heat and energy sources, towards low-cost, low-carbon solutions. However, without a comprehensive and cost-effective EE package and low carbon solutions readily available to UK households, consumers will not be able to respond to these price signals, leaving environmental, social and fiscal gains unrealised.

How can the Government frame a Covid-19 stimulus strategy around improved energy efficiency of homes?

Recent empirical evidence highlights the significant potential of EE to stimulate jobs, regional investment and increase GDP in the post-pandemic period:

●       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.[27]

●       The Smith School at the University of Oxford found that green stimulus projects such as building retrofits 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.[28]

●       The Grantham Institute has identified energy efficiency retrofit as an area of the economy where the public sector could leverage private investment, and in so doing contribute to achieving the strategic priorities of regionally balanced growth and decarbonisation.[29]

●       Analysis by ECIU has revealed a synergy between areas of the UK with high levels of unemployment among skilled labourers and low levels of Band C housing stock; highlighting investment in regional retrofit as a means by which the Government could support sustainable job creation in left behind areas.[30]

Case studies of this positive economic impact could be quickly procured through immediate investment in social housing retrofits, which multiple studies have shown to offer ‘shovel ready’ programmes of works across multiple flats and houses at the same time, and could be targeted to support immediate job creation in the worst hit local economies across the UK.[31] Any presentation of the new policy should - alongside these extensive benefits - acknowledge where past mistakes have been made, and prioritise presenting the revised package as being low cost and minimally disruptive to consumers.

Is the £5 million Green Home Finance Innovation Fund enough to stimulate the market for and drive action from the banks to encourage owner occupiers to improve the energy efficiency of their homes? What policy and/or regulation could supplement it?

●        A massive increase in investment is required to meet current targets. The GFI has found that meeting the UK-wide target for EPC Band C by 2035 would require a total investment of up to £65bn.[32]

●        This figure cannot be met through ‘action from the banks alone.’ Misplaced assumptions about balances of public and private sector funding were a major factor in the failure of previous schemes[33] and, as noted earlier in the response, Covid-19 makes the challenge of stimulating household investment even tougher.

●        The Government has a responsibility to address retrofit as a central part of its net zero strategy. 67% of people think that it is the UK Government’s responsibility to tackle climate change.[34] Given this expectation, and that the average EE retrofit package for existing buildings requires around £12,000 of upfront investment - with a further £10,000 required to install low-carbon heating[35] - the Government must provide support to the rollout of EE. We recommend prioritising significant subsidy to support a national EE retrofit programme that funds upgrades for the fuel poor and providing financial assistance to lower the costs of retrofit for the able to pay.

●        Carbon taxation could help the Government recoup this upfront investment in EE whilst correcting the price distortions on gas. Recent modelling[36] has demonstrated that a carbon pricing scheme could raise approximately £5bn per year between 2021-2030 to help finance home EE.[37] If these public revenues were combined with private capital, available finance could be scaled to even larger levels.

●        There are risks to this approach, but they can be overcome. It should be acknowledged that, without revenue recycling - in the form of EE upgrades and additional compensation for certain households - such a policy risks producing regressive effects and political opposition. However, as analysis of the Gilet Jaunes’ movement in France has revealed, this is predominantly problematic where price rises are implemented without feasible low carbon alternatives. A carbon tax that recycles revenues into a stimulus for household EE may well drive the support required, especially as part of a holistic set of green recovery policies. 

Which models in other countries have been successful at stimulating demand for energy efficiency within this market?

A number of countries have successfully encouraged the mass deployment of EE through a combination of standards, price incentives and revenue recycling:

●        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.[38][39]

●        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,[40] 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.[41] 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.[42] Similarly, the 2013 French Finance Bill tenables 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.[43]

What additional policy interventions are needed for social housing, leaseholders, landlords and tenants?

●        Clarify the responsibilities of different types of householders by introducing legal obligations commensurate with the EPC Band C target. As the beneficiaries of rental receipts and the increased market value that EPC upgrades add to properties[44],  private landlords bear responsibility for paying and implementing improvements. Government should prevent letting of properties that fall below Band C beyond 2025. Given that Band D is the most common rating for private rented dwellings in England, Wales and Northern Ireland,[45] 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.[46]

●        Scale up concessionary finance measures / eco loans. While the responsibility of ‘able to pay owner’ occupiers for paying for EE and low carbon heating is clearer, uptake has been frustrated by the immediate lack of financial incentives for doing so. A carbon tax would go some way to resolving this by strengthening price signals and enlarging the revenues available for public subsidy. However, given that public funds cannot cover the entire cost renovations in the ‘able to pay market,’ a varied package of incentives and finance mechanisms must be designed and marketed. Government should ensure  that finance is low interest, easily accessible and inclusive of both easy and harder to treat upgrades (heat pump installations, solid and cavity wall installations). Finance also needs to 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).[47]

How should the proposed Home Upgrade Grant Scheme be delivered to help the fuel poor? Should the new grant scheme supplement ECO in its current form, or should ECO be redesigned?

●        Design a new, national retrofit programme. Government should design a new system for delivering upgrades, to ensure the new regulation, increased funding and improved coordination required to meet energy efficiency targets for both able to pay and fuel poor households. We support Greenpeace’s calls for the establishment of a WarmHomes Agency[48] (or equivalent national delivery body with central government funding) to guarantee that targets are met and ensure that retrofit contributes to the Government’s industrial strategy ambitions. By simplifying and streamlining the retrofit market, the Government can spur capital investment in the efficiency supply chain and address other barriers to action - including proliferation of choice, lack of trusted suppliers[49] and poor enforcement.[50]

●        Deliver low income and fuel poor households’ upgrades via local-authority-led area-based schemes, supported by the Warm Home Agency. Delivering the Home Upgrade Grant 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.[51] This can also be guaranteed by funding the Home Upgrade Grant through carbon tax revenues. By moving the cost of environmental and social programs from consumer energy bills to taxation, the Government can ensure  costs are more fairly distributed and prevent further political backlash to increases in the costs of heating.