Changes in our climate will affect all economic activity to some degree. This will come through the direct impacts of more extreme weather events, or through the development and adoption of zero carbon technologies and practices (and the cessation of high carbon alternatives). Global greenhouse gas (GHG) emissions have increased exponentially since the industrial revolution (with global warming today measured relative to ‘pre-industrial’ levels). Following centuries of economic expansion GHG emissions are still rising.
This blog looks at how the work of the Scottish Parliament’s Economy and Fair Work (EFW) Committee is central to the delivery of climate change targets and policy. It sets out how reducing emissions in Scotland is essential but will involve a restructuring of Scotland’s economy – with consideration given to potential costs and benefits. This blog is one of a series that illustrate how climate change relates to policy areas covered by each subject committee.
The remit of the EFW Committee has a strong connection to climate change policy. It includes:
- the Scottish Government’s economic policy and strategy, including a just transition to a net zero economy.
Alongside this, the Committee is set up to scrutinise the Scottish Government on:
- employment, procurement, investment, and trade policies.
- support for business, industry, tourism, and manufacturing.
- broadband connectivity and the digital economy.
- the Scottish National Investment Bank.
How each part of this remit connects to Scottish climate policy is considered in a Table later in this blog.
- The economic costs and benefits of mitigating the impacts of climate change.
- The Scottish perspective
- Low carbon economies and the green industrial competition
- The relevance of climate change to the EFW committee
The economic costs and benefits of mitigating the impacts of climate change.
There has been extensive analysis looking at a.) the costs of living with different levels of climate change and b.) how much reducing GHG emissions (and mitigating the impacts of climate change) could cost, and how much it could save. A key moment in the politics of climate change in the UK was the publication of the Stern Review in 2006. The Review’s main conclusion was that ‘the benefits of strong and early action far outweigh the economic costs of not acting.’ Stern concluded that countries needed to spend roughly 1% of their GDP annually to reduce GHGs but that this would avoid damages of between 5-20% of GDP. Shortly after its publication the UK and Scottish Government’s passed their first Climate Change Acts (in 2008 and 2009 respectively).
Since the Stern Review, there have been substantial developments in climate policy, for example, the move to more ambitious emissions targets (net zero as opposed to 80% reduction), and to some extent in the economics of climate mitigation, for example, cost reduction in some key renewable energy technologies. More recent cost benefit assessments of reducing emissions have been carried out by the Climate Change Committee (CCC). The CCC’s Sixth Carbon Budget in 2020 revised the estimated costs of lowering emissions to ‘less than 1% of GDP through to 2050…. reflecting our more detailed modelling and the falling costs of low-carbon technologies’.
- ‘UK low-carbon investment each year will have to increase from around £10 billion in 2020 to around £50 billion by 2030, continuing at around that level through to 2050. That compares to total investment in the UK of around £390 billion in 2019’ (all business and public sector investment).
- ‘Much of the investment spending can be recouped through lower operating costs. These savings, many of which relate to reduced reliance on imported fossil fuels, will rise to around £35 billion by 2035 and £60 billion by 2050.
The CCC and others note that many of the changes to bring about net zero will be capital intensive but will have lower operating costs (wind and solar require no fuel, electric vehicles are less expensive to run etc.), meaning that the cost of capital (interest rates) is of greater importance than in previous energy systems. From a recent report by the Resolution Foundation:
- ‘at current borrowing costs, capital expenditure accounts for two-thirds (67%) of the cost of energy from an offshore wind turbine, compared with just one-tenth (11%) for a gas-fired power station, where fuel accounts for the vast majority.’
At a European level, the European Commission have concluded:
- ‘The transition to climate neutrality is expected to have a moderate or positive impact on GDP, with estimated benefits of up to 2% of GDP by 2050. These estimates do not even include avoided damages from climate change, nor co-benefits such as improved air quality.’
Globally estimates of the % of GDP required for net zero are higher, with McKinsey and the International Monetary Fund making recent estimates. Similar to the CCC, McKinsey highlight that ‘many investments have positive return profiles (even independent of their role in avoiding rising physical risks) and should not be seen as merely costs’. The McKinsey analysis also points out that exposure to the costs of net zero are lower in ‘service based economies’ like in Scotland and higher in countries that are fossil fuel producers, have a large share of high emitting manufacturing or agricultural based economies.
The Scottish perspective
The Scottish Government has set emission reduction targets that are some of the most ambitious in the world (net zero emissions by 2045). Although they have not published their own analysis of the level of GDP involved in emissions reductions efforts, in a Supplementary Financial Memorandum to the 2019 Scottish Climate Bill, the Scottish Government reiterated the findings of the CCC’s Net Zero analysis i.e. a central estimate around 1% of GDP. It also highlighted the potential for ‘significant benefits to human health from better air quality, less noise, more active travel and a shift to healthier diets’. These impacts are not included in the CCC analysis above.
The Scottish Fiscal Commission (SFC) recently published a report ‘Fiscal Sustainability Perspectives: Climate Change’. One of the key findings from this report included that reducing emissions will cost more in Scotland (per capita) than the rest of the UK; largely as a result of higher spending on land use change and forestry (‘Scotland contains 32% of the UK’s land mass, with roughly half of its trees and 70% of its peatland’). The asymmetry between Scotland’s population share of the UK, which determines a significant part of the available funding for the Scottish Government, and the need to spend more in Scotland due to the greater share of the landmass will put the existing fiscal framework between the Scottish and UK governments under strain. However, the SFC also note that:
- “The UK and Scottish net zero targets are interdependent and both are based on the CCC’s advice. Under the CCC’s pathway scenario for the UK to reach net zero by 2050, Scotland reaches net zero in 2045. The UK Government needs reductions in Scottish emissions to achieve the overall UK target. Similarly, the Scottish Government’s targets include emissions from sectors, such as energy, over which it has limited powers to intervene and reductions in emissions in these sectors relies on UK Government policy.”
The then Chief Executive of the CCC suggested that this state of affairs could be remedied by additional funding from Westminster, and/ or UK and Scottish Governments working together to direct additional funding to devolved areas.
While the conclusion of these analyses is that the costs of action (reducing emissions) are much lower than the costs of inaction (the impacts of climate change), avoiding the impacts of climate change is contingent on a global effort to reduce emissions with ongoing UN climate negotiations designed to try to ensure sufficient and synchronous action. The negotiations are seen as a ‘political failure’ by some, as overall global emissions are still rising and the level of global warming is likely to breach 1.5oC above pre-industrial levels in the next decade. Current government commitments are estimated to result in around 2.7oC of warming.
It is important to note that ‘estimates of climate impacts are inherently uncertain’ and also, as highlighted in a ClimateXChange analysis for the Sottish Government in 2017 that:
- ‘abatement costs and damage costs are borne by different people geographically, and different generations in time, which raises important issues of intergenerational and international equity that are as much the domain of ethics and politics as they are of economics.’
Low carbon economies and the green industrial competition
The global effort to reduce emissions has instigated a global green industrial competition, with countries and firms looking to harness the economic opportunities from the development and proliferation of new technologies and services. This competition can be seen with the ‘Inflation Reduction Act’ in the USA, which will see nearly $400 billion used to encourage investment in green technologies, often on the condition of supply chains being based in the USA.
Partly as a result of this American policy, the EU has set out it’s Green Industrial Plan which includes the relaxation of previous state-aid rules i.e. some form of requirement for production to be based in Europe. Other international examples include the Green Transformation Act in Japan and the National Reconstruction Fund in Australia. The level of financial support provided by the Chinese government to green technologies has a much longer and much more generous history than any of the examples above
The previous UK Government suggested it would not seek to replicate these subsidisation approaches but would ‘target public funding in a strategic way in the areas where the UK has a clear competitive advantage’. The Scottish Government committed to their own Green Industrial Strategy in the 2023 Programme for Government, publication of which is expected in summer 2024. There is a commitment to supporting the offshore wind supply chain in Scotland with £67m allocated to support in the 24/25 Budget. Other assessments of a potential ‘Scottish Green Industrial Strategy’ have suggested that the higher education sector should be supported in order to generate spin-out enterprises.
A recent report commissioned by the Scottish Government via ClimateXChange on the ‘Economic opportunities in Scotland’s net zero and climate adaptation economy’ highlighted some of Scotland’s strengths as being ‘strategic oil and gas infrastructure, innovative companies and a highly skilled workforce’ whilst weakness included a limited manufacturing base, insufficient domestic demand, infrastructure capacity, and shortages in planning skills and resources. Meanwhile ‘threats on the horizon’ included:
- ‘fierce international competition and the impending retirement of a significant segment of the workforce within the oil and gas sector – an essential source of labour for many emerging sectors such as offshore energy and CCUS.’
The relevance of climate change to the EFW committee
The EFW committee consider and report on matters falling within the responsibility of the Cabinet Secretary for Economy. The Committee’s remit incorporates a focus on different areas of government policy and the Table below gives some examples of how each of these areas connects to climate change and net zero policy.
Part of the EFW Committee’s stated focus is on the Scottish Government’s ‘economic policy and strategy, including a just transition to a net zero economy’. The Committee has recently carried out inquiries directly or indirectly related to climate change policy in Scotland. The most obvious of these are the ongoing inquiries in to the Just Transition, one for the Grangemouth area and the other for the North East and Moray.
Alongside these the Committee has taken evidence on the National Strategy for Economic Transformation (NSET). In the NSET, the Scottish Government are clear that climate policy does not just relate to reducing emissions but also the economic opportunities that may result from decarbonisation:
- ‘The transition to net zero is not just an environmental imperative but an economic opportunity – one where Scotland will become world leading and secure first-mover advantage.’
The NSET section on New Market Opportunities, has three areas of climate policy at the top of the list; ‘renewable energy’, the ‘hydrogen economy’ and the ‘decarbonisation of transport’. The Scottish Government are currently refreshing NSET, with an update expected in the summer of 2024.
Also, within the EFW committee’s remit is the Scottish National Investment Bank (SNIB). One of the three Missions of the SNIB is ‘achieving a Just Transition to net zero by 2045’ and between its foundation in November 2020 and the end of 2022, half of the Bank’s ‘total investment portfolio contributed to the shift to a net zero economy’. Alongside this, from financial year 2023/24, all companies supported by the Bank will be expected to develop a Carbon Management or Net Zero Plan.
The 2009 Climate Change (Scotland) Act requires Scottish Climate Change Plans (CCP) to ‘explain how the proposals and policies set out in the plan are expected to affect different sectors of the Scottish economy’. Climate legislation was amended in 2019 and the next CCP is now required to include both the quantification of the costs and benefits of achieving emission reductions targets. From correspondence between the Cabinet Secretary for Net Zero and the NZET committee in July 2023:
- ‘Cost and benefits assessments for the draft Climate Change Plan are well underway, and will continue alongside further policy development currently taking place. The final analysis will assess policies based on a variety of quantitative and qualitative criteria and set out estimates of impacts, as well as setting out how the policies will affect different sectors of the Scottish economy and different regions in Scotland.’
This level of detail would introduce a new dimension to the scrutiny of the CCP, with discussion of the cost and benefits of different approaches as well as to the veracity of the underlying assumptions. Previous CCPs have been divided in terms of key areas of emission reduction. Two chapters which are of particular interest to the EFW Committee are Industry, and Negative Emissions Technologies. A new Climate Targets Bill is expected to be laid in the Scottish Parliament in autumn 2024, it is not currently clear what (if any) impact this will have on current requirements for the CCP.
The Scottish Government and Parliament’s Joint Budget Review in relation to incorporating climate change in budget decisions, concluded in December 2022. An update on the three strands of work that came from the Review was recently sent to the conveners of the NZET and FPAC Committees:
- The inclusion of an enhanced climate narrative within budget documentation was discharged through the 2023-24 Scottish Budget cycle
- A revised approach to undertaking a climate impact taxonomy of budget lines, including expansion from solely capital to both capital and resource is currently in development
- We are considering options for delivery of a net zero assessment which will be suitable for Scottish Government’s policy making process and expect to run a pilot by the end of Quarter 4 of 2023
Finally, the work that is going on across the Parliament ‘Developing a model for parliamentary scrutiny of climate change’ is also relevant. The Conveners Group has identified climate change and net zero as key strategic cross-committee issues, with this work aiming to facilitate more coherent scrutiny of climate legislation. Conveners Group proposals to strengthen cross-cutting scrutiny of climate change and net zero include annual updates from the Climate Change Committee and to commission research on how climate change impacts on policy areas across subject committees.
Niall Kerr: Senior Researcher, SPICe