Presentation by Alison Todd during the SBO meeting Climate Group of the OECD Working Party of Parliamentary, Budget Officials and Independent Fiscal Institutions held on 8 December 2022.

1. The evolving cost of net zero
Alison Todd
Senior analyst,
Energy and climate change
OECD IFI Climate Working Group
8 December 2022

2. Background
• Fiscal Risks Report 2019
– Short review of fiscal risks associated with climate change
• Fiscal Risks Report 2021
– Full chapter dedicated to climate change
– Focus on the fiscal and economic costs of the UK’s net zero transition
– Drew on Climate Change Committee’s analysis of Govt’s new net zero pledge
• Fiscal Risks and Sustainability 2022
– Focus on the economic costs of higher energy prices
– High level assessment of how higher fossil fuel prices reduce the marginal costs of
getting to net zero (by raising cost of high emissions counterfactual)

3. FRR 21: whole economy transition costs
• Used CCC’s net zero pathways
• Based on different assumptions for:
– Technologies
– Behavioural mixes
– Energy requirements
– Associated emissions
• Yielding pathways for whole
economy costs, by year and by
sector.
• Focused on CCC’s “balanced”
pathway
• [Broadly similar assumptions to Bank
of England/NGFS ‘early action’
scenario]
-40
-30
-20
-10
0
10
20
30
40
50
2020 2025 2030 2035 2040 2045 2050
£
billion
(2019
prices)
Vehicles
Buildings
Industry
Power
Removals
Other
Total
Source: CCC balanced net zero pathway
In year costs of the net zero transition to UK economy

4. • Direct public spending costs
estimated via ‘fiscal shares’.
• High-level view of plausible
low/central/high shares by
sector
• E.g.:
– Public buildings = 100%
– Housing subsidy varies by income
– Power sector uses existing
subsidies
• Illustrated delayed transition
as raising unit costs (due to
supply-chain pressures)
0
5
10
15
20
25
30
2020 2025 2030 2035 2040 2045 2050
£
billion
(2019
prices)
Buildings
Vehicles
Power
Industry
Removals
Other
Net cost
Low
High
Source: CCC balanced net zero pathway, OBR
Fiscal costs of the UK transition to net zero, by sector
Cost £bn (2019 prices)
Total Per year
Central 344 11
Delayed 573 18
FRR 21: public spending implications

5. FRR 21: key assumptions in CCC analysis
Marginal cost of getting to net zero depends on assumptions about high and low
emissions prices
On fossil fuel prices, CCC drew on pre-energy crisis assumptions from BEIS (Govt
department):
– Electricity (levelized costs): 2035 £60/MWh; 2050 £50/MWh
– Gas (levelized costs): 2020 £50/MWh; 2035-2050 £60/MWh
– Already seeing lower strike prices for wind projects within next 5 years (e.g.
<£50/MWh by 2027/28 for latest ‘contracts for difference’ funding round)
– Storage costs: not modelled in detail – assumed at the cost of hydrogen
(£100/MWh)
– EVs (batteries): “Expect BEVs to reach upfront cost parity with ICE vehicles in 2030.

6. FRS 22 – Higher gas prices and NZ costs
• This year’s report dedicated a chapter to energy prices – mostly on medium-term
economy risks
• Within this we assessed what the impacts of higher fossil fuels (prices as at our March
2022 forecast) would have on the marginal economy costs of achieving net zero in the
power sector Total cost from 2022 to 2050 (£ billion, 2019 prices)
NZS prices Mar 2022 EFO prices Difference
Carbon-intensive baseline 346 707 360
Net zero pathway 214 458 244
Net zero versus baseline -133 -249 -116
• Everything is more expensive with higher prices, but the decarbonisation pathway
becomes much cheaper in relative terms – an extra £116 bn saving on the cost of NZ
transition
• We didn’t assess the impacts on the fiscal shares, but note that:
– Most of the fiscal costs for the UK are in buildings and heating (currently gas).
– Energy price support measures have come at a huge near-term fiscal cost.

7. Next steps in modelling fiscal risks of net zero
• FRS 22 also discussed other fiscal risks, such as nuclear and battery storage
• Lots of scope for refining analysis to explore endogenous and exogenous fiscal risks:
– Price assumptions of new technologies coming online in a net zero transitioning
world.
– How the price of new technologies varies with the pace of deployment—learning
curves.
– Can Govts influence the price of adopting new technologies by the speed of
deployment?
– Are these all exogenous global learning curves or are there endogenous domestic
ones?
• This would help to illustrate risks and trade-offs in policy choices around the pace of