The UK recently signed into law the world’s most ambitious climate goal of net-zero by 2050. For the UK electricity sector this most certainly means they must reach close to zero carbon emissions by this deadline. Several engineering and economic hurdles must be overcome for such an ambitious goal to be met.
The engineering hurdles can be embodied in the number of years required to erect infrastructure and progress new technology to scale. The economic hurdles include i) under-priced carbon emissions; ii) barriers to entry for clean energy technologies; iii) insufficient research and development in clean energy solutions; and iv) incomplete information – represented by the uncertainty around future electricity demand, carbon and fuel prices. Providing enough incentives for investment in research and development, and protection for the early deployment of new technologies is certainly key for overcoming engineering constraints. In the presence of multiple economic market failures, a “second-best” policy strategy involving multiple interventions might prove the most efficient approach. Thus, relying purely on a carbon price to achieve the UK’s new ambitious climate goals could prove not only politically but also technically difficult given the uncertainties about future fuel prices and energy demands. Incentivising investment in capital intensive clean technologies, such as nuclear and carbon capture and storage, could provide some baseload certainty but will require particularly rapid increases in the carbon price to incentivise and create path dependencies that might prove expensive in a switch to more ambitious goals. The most cost-effective and politically feasible solution might instead be to begin with net-zero targets and manage the transition by replacing existing carbon-intensive plants as they become more cost-effective with more flexible clean energy solutions, so that only a mid-range carbon price is required to ensure the new clean capacities are sufficiently utilised to achieve the UK’s emissions goals.
This talk is organised by the Institute for New Economic Thinking at the Oxford Martin School.