The distributional effects of pathways to net-zero and the implications for fuel and transport poverty

Ornella Dellaccio, Jennifer Dicks, Michael McGovern and Jon Stenning

Achieving a just transition

A key challenge associated with the transition to net-zero is how to fairly spread the costs and benefits of policies used to achieve decarbonisation across all aspects of society. A so-called ‘just’ transition can be achieved if, at the same time as reducing emissions across the economy, all people, places and communities are supported, benefits from the transition are fairly shared and no-one is ‘left behind’. This report explores whether new inequalities may emerge, or existing inequalities worsen within UK society, because of policies designed to transition the UK to a net-zero economy and society. It specifically considers the vulnerability of different types of representative households to fuel and transport poverty as a result of three different policy approaches to achieving net-zero.

The 2022 cost-of-living crisis has exacerbated fuel and transport poverty

At the time of its publication, the findings of this report are highly relevant; the 2022 cost-of-living crisis, partly driven by rocketing global gas prices, has made the issues of fuel and transport poverty, and the need to address increasing inequalities, ever more pertinent. Much higher proportions of the UK population are expected to fall into hardship and difficult daily decisions about energy and transport will be further exacerbated as household finances are put under increasing pressure.

How should the Government respond?

The 2022 cost-of-living crisis has brought about fresh dilemmas about how best to support households with rising costs, while still achieving other Government priorities including climate goals and levelling up. A challenge now faced by policymakers is how to continue the pathway to net-zero, without further adding to the financial pressures faced by households, particularly vulnerable households who are less ‘able to pay’.

In this report we argue that decarbonisation policies could be used to both partly address the cost-of-living crisis while also delivering progress towards net-zero. It is clear that strategies to decarbonise the UK should not make the incidence of, or degree of, fuel and transport poverty worse. Through the distributional outcomes of hypothetical scenarios of differing policy pathways, this report provides greater understanding of who could be vulnerable to fuel and transport poverty in the UK’s transition to net-zero, to what extent, and why. It unveils societal groups and specific household archetypes who may be at particular risk and considers the implications for developing effective and supportive policy, which reduces inequalities and promotes a fair and just transition.

The objectives of this research

The research presented in this report forms part of the ‘Fuel and transport poverty in the UK’s energy transition’ (FAIR) project, funded by the Centre for Research into Energy Demand Solutions (CREDS) (CREDS, 2022). The overall objectives of the FAIR project are to:

• Examine who and where is vulnerable to fuel and transport poverty in the UK, to what extent, and why.
• Unveil how vulnerability to fuel and transport poverty shapes the UK’s energy transition.
• Propose policies for an energy transition that promotes a more just society.

This research contributes primarily to the second objective by considering whether new inequalities may emerge, or existing inequalities worsen, as a result of policies designed to transition the UK to a net-zero economy. Through a combination of macroeconomic modelling with Cambridge Econometrics’ well-established E3ME model and additional household archetype distributional analysis, the research aims to demonstrate how policies associated with the UK’s low-carbon transition may impact upon vulnerable groups within society.

Macroeconomic modelling

The first stage of the research modelled three core scenarios exploring alternative net-zero pathways for the UK economy, using Cambridge Econometrics’ E3ME model.

Three core modelling scenarios

The three scenarios aimed to explore the impacts of alternative pathways to net-zero for the UK economy. Results for these three scenarios are compared against a ‘business-as-usual’ baseline, in which there is no change to currently implemented policies.

• The first scenario was designed to replicate major climate policies and targets included in the UK Government’s Net Zero Strategy (NZS) (BEIS, 2021c). When the NZS was modelled in E3ME, it did not achieve net-zero emissions by 2050.

Meanwhile, two further scenarios outlined two alternative pathways to net-zero (with both of these achieving higher emissions reductions than the NZS scenario):

• One using a range of regulatory measures to achieve emissions reductions.
• Another relying on a market-based instrument (MBI), to incentivise the decarbonisation of the economy.

The macroeconomic modelling findings demonstrate that all the net-zero policy pathways modelled lead to better outcomes for GDP and employment in the UK compared to the ‘business-as-usual’ baseline, with the more ambitious MBI and Regulation scenarios leading to higher GDP and (to a lesser extent) employment than the NZS scenario. The macroeconomic results of the scenario modelling demonstrate two important findings:

• Climate policy generates favourable outcomes for the environment, economy and society as a whole, creating a win-win situation in which emissions are reduced, while at the same time the economy grows, and new employment opportunities are created.
• More ambitious climate action (in terms of emissions reductions) can lead to even greater gains for the environment, economy and society.

The impacts of net-zero pathways on different household archetypes

A set of household archetypes with different socio-economic backgrounds, energy attributes and transport behaviours were then developed to represent UK society, building on the energy consumer archetypes produced by Ofgem in 2020 (Centre for Sustainable Energy, 2020), which segments the population of Great Britain (The archetypes in this report are assumed to represent UK society. While the Ofgem archetypes are based on the population of Great Britain, it is deemed a reasonable assumption that the characteristics of these archetypes may be extended to represent the UK, since the population of Great Britain constitutes approximately 97% of the UK population (see Population estimates for the UK, England and Wales, Scotland and Northern Ireland | Office for National Statistics) into a set of thirteen household archetypes. The household archetypes developed are further enriched with quantitative and qualitative data on transport behaviours, mainly extracted from an extended literature review and from the National Travel Survey (Department for Transport, 2021), that provides data on personal travel patterns by residents of England.

Transport characteristics included in the framework refer to car ownership, main mode of transport, average distance travelled by car and elasticities of demand to fuel price increases (see figure, above).

The household archetypes framework was further expanded by developing a 2035 version of the archetypes, for each of the scenarios considered in this research. This involved estimating how the uptake of heat pumps and electric vehicles (EVs) changes across archetypes as a result of decarbonisation policies, and the potential behavioural responses across different households.

The findings of the deep-dive into the effects of the policy scenarios on a set of UK household archetypes shows that there can be ‘winners’ and ‘losers’ in each of the policy pathways. The three modelled scenarios show that in 2035 (The analysis in this report uses energy prices in line with historical trends, and does not reflect the sharp increase in energy prices that occurred in the late part of 2021 and through 2022 to date. Such high energy prices, if they were to persist into the future, would further tip both the economic and distributional impacts of policy in favour of accelerated decarbonisation, and in particular in favour of measures which do not further increase the energy costs faced by households):

Vulnerable households will be disproportionately affected

• When considering equity-weighted energy bills (As recommended by Green Book guidelines on distributional analysis (HM Treasury, 2022b), our analysis applies ‘equity weights’ to estimate household bills. Equity-weighting places a higher social value on costs or benefits for lower income households than the equivalent costs or benefits for higher income households. The rationale behind this is the economic principle of the diminishing marginal utility of income which says that the value of an additional £1 of income is greater for low-income households than for high-income groups), the highest household bills are paid by low-income households, particularly from ethnic minorities, living in social housing predominantly in urban areas.
• Similarly, pensioners with disabilities and long-term health conditions, with either average or low-incomes, are also expected to pay high energy bills (The term ‘energy bills’ used throughout this report reflects energy use within the household (i.e. for heating and utilities) and the use of transport fuels by consumers outside of the house (i.e. petrol, diesel and electricity). in all the modelled scenarios.
• Historically, low-income groups spend a greater proportion of their income on household energy, and the findings of this research show that this inequality is exacerbated in all three modelled scenarios. As a proportion of income, the archetype spending the most on energy bills is mainly composed of ethnic minority households on a low income and living in social housing. By 2035, these households will spend between 10% and 13% of their income on energy, which is more than double the proportion spent by families on a high income (between 3% and 5%). Similarly, by 2035 young (i.e. age 16–34), low-income renters spend between 9% and 13% of their income on energy bills, which is double the proportion spent by those with similar socio-economic characteristics but earning high incomes. Households comprised of pensioners, typically on disability benefits, also pay a large proportion of income on energy bills.
• In addition, young (i.e. age 16–34) households on a low income, ethnic minorities and pensioners with disabilities tend to have the highest expenditure on motor fuel in all the three modelled scenarios.
• When considering expenditure as a proportion of income, vulnerable households tend to spend a greater proportion of their income on motor fuel expenditure. The policy pathways explored in this analysis all have regressive impacts in terms of motor fuel expenditure. In the medium- term vulnerable groups are likely to be affected negatively by policies aimed at decarbonising the transport sectors, since they are less likely to be able to make the switch to EVs, and therefore benefit from lower fuel costs.

While at the same time:

• Retired couples and families on average incomes, as well as young households (i.e. age 16–34) and middle-aged households (i.e. age 45–64) on a high income tend to pay substantially lower annual household energy bills (when equity-weighting is taken into account, and a proportion of income) compared to vulnerable households.
• Wealthy and less vulnerable groups are expected to benefit widely from the transition to electric vehicles (EVs).
• In the NZS and Regulation scenarios, regulatory policy leads to sales of new internal combustion engine (ICE) vehicles being phased out by 2030 (NZS) or 2022 (Regulation), which results in a substantial shift to EVs, particularly amongst high- income households who can afford the up-front costs. While both scenarios lead to savings in motor fuel expenditure for all household archetypes, the results are regressive since the largest savings are achieved by the least vulnerable households.

The findings of this research are consistent with earlier work in the FAIR project which identified the groups most vulnerable to fuel and transport poverty (see Figure 1.1 in Chapter 1), as well as other work carried out by CREDS (See Curbing excess: high energy consumption and the fair energy transition). Households on a low income, households with children, ethnic minority households and households with health and/or mobility difficulties are all predisposed to experience energy and transport poverty combined, and our research shows that, without appropriate support, these groups are indeed vulnerable to financial hardship when it comes to paying their energy and transport costs in the UK’s energy transition.

When the modelling findings point towards any savings in 2035 (i.e. the NZS and Regulation scenarios lead to savings on motor fuel expenditure), the largest savings are made by the least vulnerable archetypes. Without appropriate policy that recognises the potential ‘winners’ and ‘losers’ of the transition to net-zero, worsening inequalities may emerge.

What kind of policy could be used to support vulnerable households, and alleviate fuel and transport poverty?

The following policies could be effective and supportive measures to achieve both progress towards net-zero, while reducing inequalities, thereby promoting a fair and just transition:

• Speed up the pace at which:
  • The UK decarbonises its energy system (with the dual benefit of reducing the cost of generating electricity and increasing the UK’s energy security) and;
  • The UK prioritises electrification and reduces its demand for energy. In practice this means that at the same time as greater deployment of renewable energy sources, the focus should be on the mass retrofit of homes and improving the energy efficiency of the UK’s housing stock through installing insulation, double-glazing and low- energy heating technologies such as heat pumps. While greater deployment of renewable energy sources and moving away from expensive fossil fuel powered sources should reduce the costs of generating electricity, the other aforementioned energy efficiency and low-carbon measures together reduce energy demand, allowing for warmer, more comfortable homes at more affordable running costs.
• A mass retrofit programme should be targeted first towards the societal groups most vulnerable to fuel poverty, often living in the most inefficient homes and who are least ‘able to pay’.
• Investing in a high quality, low-cost, integrated public transport system will not only help to address transport poverty, particularly for vulnerable households such as those in rural areas who have difficulties accessing convenient and affordable public transport, but also increase connectivity and economic growth through increased investment.
• Policy should take account of the intersectional vulnerabilities certain groups face. Best available evidence and enhanced data on household composition and spatial characteristics could be used to better target those who are vulnerable.
• Broader taxation and spending policies associated with the climate transition will have significant distributional impacts. Fiscal decisions will have important distributional effects on consumption, and therefore on fuel and transport poverty. If tax revenues raised through decarbonisation were used to promote energy efficiency in fuel-poor households, the Government could drive a progressive transition, while still generating wider economic benefits for the UK, and also ensuring continued reductions in emissions.

Banner photo credit: Alireza Attari on Unsplash