UK climate policy can curb energy price shocks - report

LONDON Fri May 18, 2012 1:11am BST

A petrol tanker driver makes a delivery as drivers queue for fuel in Loughborough, central England March 28, 2012. REUTERS/Darren Staples

A petrol tanker driver makes a delivery as drivers queue for fuel in Loughborough, central England March 28, 2012.

Credit: Reuters/Darren Staples

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LONDON (Reuters) - Britain's climate policies can help shield the economy from oil and gas price shocks triggered by external factors such as the Arab Spring, an analysis commissioned by the government showed on Friday.

Energy price spikes can often dent economic growth, business investment and employment, as witnessed during the global financial crisis in mid-2008 when oil rose to nearly $150 (95 pounds) per barrel, research group Oxford Economics said in a report.

Yet the negative impact on economic growth could be halved if the UK's climate policies manage to reduce the country's demand for coal, gas and oil, it said.

The Department of Energy and Climate Change (DECC) revealed the report ahead of the government's draft Energy Bill that is due to be published next week.

The bill will set out in detail how to reform the UK's electricity market, as well as how it can attract 110 billion pounds of needed investment to build new low-carbon plants.

"The more we can shift to alternative fuels, and use energy efficiently, the more we can ensure that our economy does not become hostage to far-flung events and to the volatility of market forces," Ed Davey, secretary of state for energy and climate change, said in a statement.

For instance, Davey cited last year's Arab Spring for spiking wholesale gas prices and pushing up UK household bills by 20 percent.

"Of course, there are costs to building more low-carbon plants, but the gains are so much greater, and crucially they are lasting," he said in a statement.

The energy reforms will enable the UK to meet its climate goals, an 80 percent cut in greenhouse gas emissions by 2050, and pave the way for new renewable and nuclear power plants and technology to capture and store carbon emissions, DECC said.

ECONOMIC BENEFIT

The study by Oxford Economics assessed the economic impact of a jump in oil and gas prices under a low-carbon scenario where demand for coal, gas and oil is reduced by 90, 70 and 30 percent by 2050 against 2010 levels.

It showed that a 50-percent rise in oil and gas prices would have reduced gross domestic product by 1.0 percent in 2010.

By 2050, the negative economic impact would be 0.7 percent under a business-as-usual scenario and less than 0.4 percent under the low-carbon one with less energy demand.

"Our modelling results therefore indicate the UK's sensitivity to oil and gas price shocks could be reduced by around 60 percent in 2050 through the introduction of such climate change policies," the report said.

Despite the stagnating economy and tough austerity measures, the UK should continue to strive to reach its climate goals because it makes more economic sense, said Mike Landy, senior policy officer at the Renewable Energy Association (REA).

While fossil fuel price rises added more than 160 pounds to the average energy bill last year, support for renewables accounted for 20 pounds of the average energy bill, he said.

"There is no doubt the targets are ambitious, but if we don't think this is achievable then we shouldn't even embark on it," he told Reuters.

(Editing by James Jukwey)

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