Draft climate change plan: draft third report on policies and proposals 2017-2032

4. Statutory duties and methodologies

4.1 Setting the targets

4.1.1 The Climate Change (Scotland) Act 2009 ^[16] ('the Act') sets targets to reduce Scotland's emissions of the basket of six Kyoto Protocol greenhouse gases ^[17] by at least 42% by 2020 and 80% by 2050, compared to the 1990/1995 baseline. The Act also requires that the Scottish Ministers set, by Order, annual emissions reduction targets for each year in the period 2010-2050, consistent with achieving the long-term targets. These annual targets are set in batches at least 12 years in advance.

4.1.2 Before setting a batch of annual targets, Scottish Ministers must request advice from the Committee on Climate Change ( CCC). The CCC is an independent expert body established by the UK Climate Change Act 2008 to provide climate change advice to the UK Government and devolved administrations.

4.1.3 Following advice from the CCC in March 2016 ^[18] and then again in July 2016 ^[19] , the Scottish Parliament passed legislation setting the third batch of annual targets in October 2016, for the years 2028 to 2032 ^[20] . The targets set an emission reduction pathway to 2032 and in doing so establish a 2032 target that represents a 66% reduction below 1990 levels.

Table 4-1: Annual targets 2017-2032 ^[21]

	Annual target ( tCO 2e)	% reduction year-on-year	% reduction from baseline*
2010	53,652,000		-31%
2011	53,404,000	-0.46%	-31%
2012	53,226,000	-0.33%	-31%
2013**	47,976,000	-9.86%	-38%
2014	46,958,000	-2.12%	-39%
2015	45,928,000	-2.19%	-41%
2016	44,933,000	-2.17%	-42%
2017	43,946,000	-2.20%	-43%
2018	42,966,000	-2.23%	-44%
2019	41,976,000	-2.30%	-46%
2020	40,717,000	-3.00%	-47%
2021	39,495,000	-3.00%	-49%
2022	38,310,000	-3.00%	-50%
2023	37,161,000	-3.00%	-52%
2024	35,787,000	-3.70%	-54%
2025	34,117,000	-4.70%	-56%
2026	32,446,000	-4.90%	-58%
2027	30,777,000	-5.10%	-60%
2028	29,854,000	-3.00%	-61%
2029	28,958,000	-3.00%	-63%
2030	28,089,000	-3.00%	-64%
2031	27,247,000	-3.00%	-65%
2032	26,429,000	-3.00%	-66%

* The percentage reductions against baseline levels are rounded to the nearest percentage point and shown on the basis of the most recent (2014) Scottish greenhouse gas inventory. Revisions to the inventory (which have occurred every year for which Official Statistics are available) have the effect of changing the percentage reduction from baseline figures, as the annual targets remain fixed but the baseline level of emissions is revised.

** The large drop in 2013 reflects Phase III of the EU ETS coming into effect.

4.1.4 The Act requires that, as soon as reasonably practicable after setting a batch of annual targets, Ministers publish a report setting out policies and proposals for meeting those targets. This draft Climate Change Plan is the third report on policies and proposals and lays out how Scotland can deliver annual targets for reductions in emissions from 2017-2032.

Compensating for excess emissions

4.1.5 Based on the 2014 emission statistics ^[22] , there is a cumulative emissions excess of 3.319 megatonnes of carbon dioxide equivalent ( MtCO ₂e) across the annual targets for 2010-2014. In accordance with Section 36 of the Act, this draft Climate Change Plan includes proposals and policies to compensate, in future years, for these excess emissions. The TIMES model pathway includes an additional 3.319 MtCO ₂e of abatement, over and above what is required to meet the statutory annual targets out to 2032.

4.2 Accounting for emissions

4.2.1 All the emissions reduction targets set out in the Act are based on the Net Scottish Emissions Account ( NSEA). The NSEA is defined in the Act as the amount of net Scottish emissions of greenhouse gases, reduced or increased by the amount of carbon units credited to or debited from it. The policies and proposals laid out in this draft Climate Change Plan are designed to reduce the level of the NSEA.

4.2.2 Net Scottish emissions cover all emissions from sources within Scotland plus domestic and international aviation and shipping, reduced by any greenhouse gases removed from the atmosphere by Scottish sinks, such as woodland.

4.2.3 Carbon units can be credited to or debited from the NSEA through the operation of the EU Emissions Trading System ( EU ETS), or credited to it by the purchase of international carbon units by Scottish Ministers.

How we account for the traded sector (the EU ETS)

4.2.4 The EU ETS is a 'cap and trade' system, aimed at mitigating climate change by limiting greenhouse gas emissions from industry sectors and aviation. Participants include more than 11,000 heavy energy-using installations in power generation, the manufacturing industry and airlines across 31 countries in the European Economic Area ( EEA) ^[23] . Participating organisations trade emissions allowances within a decreasing overall cap. This provides an incentive for participants to find the most cost-effective way to reduce emissions. By 2020, the volume of emissions permitted within the system at EU level, will be 21% lower than in 2005.

4.2.5 For accounting purposes under the Act, emissions are split into 'traded sector' emissions covered by the EU ETS and 'non-traded sector' emissions that do not fall under the EU ETS. The approach to accounting for traded sector emissions is defined under the Act's Carbon Accounting Regulations ^[24] , and explained in the Scottish Greenhouse Gas Emissions 2014 publication ^[25] .

Future emissions reduction in the traded sector

4.2.6 The EU ETS continues to be the primary driver of emissions reductions in the traded sector in Scotland. We rely on it to drive emissions reduction from around 95 installations in Scotland (accounting for around 40% of our territorial emissions), by promoting decarbonisation in the power sector, creating price signals for long-term investment, ensuring a level playing field for industry through access to an EU-wide carbon market, and it providing protection for industry against competitors outside the EU who don't bear carbon costs (carbon leakage) through free allocation.

4.2.7 Negotiations on reforms for Phase IV (2021-2032) are currently underway, with the overarching principle of delivering a 43% reduction on 2005 EU emission levels by 2030. ^[26]

Text box 4-1: How TIMES deals with the EU ETS

How TIMES deals with the EU ETS

In the years to 2020 an ETS cap is imposed on the traded sector in Scotland that has been calculated using the same methodology that is employed in the Scottish Government's Greenhouse Gas Statistics. Our whole systems energy model TIMES searches for the least cost way in which this cap can be met by the sector. In the years after 2020 our modelling includes actual emissions from the traded sector as Scotland's notional share of the EU ETS phase IV cap is yet to be determined. The EU ETS is, however, expected to continue to contribute to Scotland's emission reductions post-2020. This approach is consistent with that taken in RPP2. ^[26]

The domestic effort target

4.2.8 The Act places a duty on Scottish Ministers to ensure that reductions in net Scottish emissions of greenhouse gases account for at least 80% of the reduction in the NSEA in any target year. Carbon units surrendered by participants in the EU ETS are counted as part of domestic effort for the purpose of this target, in line with international practice.

4.2.9 The Climate Change (Limit on Use of Carbon Units) (Scotland) Order 2016 ^[27] means that international carbon units purchased by Scottish Ministers cannot be used to help meet targets over the period 2018-2022. In line with previous commitments, we also have no proposals or policies to purchase such carbon units across the remainder of the period of this draft Climate Change Plan, although this does remain an option for consideration. Our focus is on measures that seek to reduce our emissions at source and for the long term. We intend, therefore, that the policies and proposals will be consistent with meeting the domestic effort target in each target year.

Revisions to the baseline

4.2.10 The Scottish Greenhouse Gas Inventory provides the source of data from which the Official Statistics on Scottish emissions are compiled. The inventory is the key tool for understanding the origin and magnitudes of emissions. The inventory is compiled in line with international guidance on national inventory reporting from the Intergovernmental Panel on Climate Change ( IPCC).

4.2.11 The Inventory is updated every year to reflect technical improvements in the underpinning science, data and modelling. These updates result in successive revisions to the entire time-series of Scottish emissions for all years back to 1990 and the baseline period.

4.2.12 At the time the Act was passed, the most up-to-date inventory covered the years from 1990-2008. This is the inventory upon which the long-term targets in the Act and the first two batches of fixed annual targets covering 2010-2027 were set. Subsequent revisions to this inventory, resulting from improved science and international reporting requirements, have shown that Scotland has historically been emitting greater amounts of greenhouse gas than was understood to be the case at the time. These revisions have had a substantial effect on the level of emissions reduction required to meet the fixed annual targets.

Consumption emissions

4.2.13 Consumption-based emissions are all emissions attributable to the goods and services we consume in Scotland (as opposed to the domestic emissions on which our targets are based). The Act requires that Scottish Ministers report, in so far as is reasonably practicable, the emissions of greenhouse gases (whether in Scotland or elsewhere) which are produced by, or otherwise associated with, the consumption of goods and services in Scotland. These reports on consumption emissions must be laid before the Scottish Parliament in respect of each year in the period 2010-2050, and can be accessed on the Scottish Government's website ^[28] .

4.3 The TIMES model

4.3.1 TIMES is a Whole System Energy Model ( WSEM). These models aim to capture the main characteristics of an energy system and are particularly useful for understanding the strategic choices that are required to decarbonise an economy. The Scottish TIMES model is a high-level strategic model, covering the entire Scottish energy system and containing many thousands of variables covering existing and future technologies and processes.

4.3.2 The model combines two different, and complementary, approaches to modelling energy: a technical engineering approach and an economic approach. The model uses this information to identify the effectiveness of carbon reduction measures in order to provide a consistent comparison of the costs of action across all sectors. The aim of the model is to capture the main characteristics which affect the deployment of technologies, their costs and associated greenhouse gas emissions for Scotland as a whole given a range of policy and other constraints. This allows consideration of the strategic choices which Scotland faces as it seeks to decarbonise its energy system.

How TIMES has been used

4.3.3 The development of the draft Climate Change Plan draws significantly on the Scottish TIMES model. By constraining TIMES with the annual emissions reductions targets, the model helps us understand least-cost ways of achieving emission reductions by assessing how effort is best shared across the economy, taking account of both individual sectors and how those sectors interact. This approach allows us to develop an optimal pathway for meeting Scotland's statutory climate change targets. The pathway contains a carbon envelope, or budget, for each sector along with suggested policy outcomes needed to live within the carbon envelope. Examples of policy outcomes include the introduction of new energy technologies or the penetration of electric vehicles. Policies and proposals are then developed to realise the outcomes.

4.3.4 Because the model interacts with non-energy sectors such as land use and waste, TIMES is able to provide a system-wide view of how we can most effectively deliver our targets.

A new approach from previous reports on policies and proposals

4.3.5 Previous reports on proposals and policies ( RPP1 and RPP2) were produced using a bottom-up approach that identified abatement for individual policies and proposals from sector specific emissions projections. We have taken a different approach from this by using TIMES.

4.3.6 The consequence of employing TIMES is that it does not present annual emissions abatement for individual policies and proposals as was the case in the two previous reports on proposals and policies. In order to calculate emissions abatement, we would have to deduct emissions from a projected business as usual path. TIMES does not work on the basis of sector projected business as usual paths, so there is no counterfactual from which to describe abatement.

4.3.7 In addition to the absence of sector business as usual projections, attributing abatement to any one sector is problematic when considering the whole energy system. For instance, does a reduction in electricity demand in one sector equate to abatement for that sector or for the electricity generation sector? Similarly does an increase in electric vehicles result in emissions abatement from transport, an increase in demand from the generation sector or a reduction in emissions from refineries? TIMES addresses this challenge by taking a system-wide view.

4.3.8 In accordance with the Act, this draft Plan presents the proposals and policies for meeting the annual targets. However, for the reasons described above, the link between policy action and meeting the annual targets is different to that of the previous RPPs. In the absence of abatement numbers, the verification of the projected emissions consequences of a particular policy or proposal will be provided by the results of the monitoring framework and the greenhouse gas inventory. The monitoring framework will thus describe if the policy outcome has occurred (from the policy package) as projected and the inventory has to show if overall emissions have reduced for the relevant sector as anticipated. This approach is stronger, and more transparent, than the previous one:

• The system-wide approach allows a whole system perspective on cost enabling us to identify the least cost emissions pathway for the Scottish economy.
• The system-wide approach of apportioning emissions envelopes, or budgets, to each sector avoids the additional uncertainty inherent in projecting future sectoral greenhouse gas emissions.
• When combined with sector evidence and models, the approach provides a clear picture of the policy outcomes that need to be delivered across sectors over the 15-year period, in order to meet the statutory targets.
• Specifying the policy outcomes that need to be delivered supports the design, costing and delivery of polices.
• Providing a concrete set of policy outcomes (such as penetration rates of low emissions vehicles or carbon intensity of energy generated at fixed time points) provides a direct link to Scottish Government action. This means it will be possible to take informed and timely corrective action to ensure the Climate Change Plan stays on track following publication.
• The presentation of measurable policy outcomes improves transparency and accountability as well as enabling the public to have a better understanding of what we will achieve 'on the ground'.

4.4 Our approach to addressing costs, benefits and wider impacts

4.4.1 This draft Climate Change Plan presents policies and proposals to meet Scotland's annual targets out to 2032. Based on the most recent Scottish greenhouse gas inventory (2014), these annual targets represent an emissions reduction of 66% compared to baseline levels by 2032. This level of transformational change presents Scotland with significant challenges and opportunities, and we have explored these through the development of the draft Plan.

Global economic impacts of a changing climate

4.4.2 The Intergovernmental Panel on Climate Change's ( IPCC) Fifth Assessment Report ^[29] makes clear that 'business as usual' is not an option: either significant action is taken on a global scale to limit climate change, or economic activity will have to adjust to the costs imposed by a changing climate.

4.4.3 Such costs could be significant. The Stern Review on the economics of climate change ^[30] estimated that, if policies are not put in place to reduce emissions, the impacts would be equivalent to losing 'at least 5% of global GDP, now and forever'. This rises to as much as 20% when wider impacts, such as flooding or impacts on wellbeing, are included. On the other hand, the Review found that strong and early action to tackle climate change would outweigh the costs, pricing the cost of mitigation in the range of -1% to 3.5% of global GDP by 2050.

Wider impacts in Scotland

4.4.4 There is increasing recognition and acceptance that policies designed to reduce greenhouse gas emissions not only mitigate the risks of climate change but also impact on other societal objectives such as improved air quality and health outcomes. Developing a more detailed understanding of such potential wider impacts has been an important part of the development of this draft Plan.

4.4.5 The Scottish Government commissioned three evidence reviews of the potential wider impacts of climate change mitigation options, focusing on: agriculture, forestry, waste and related land use; the built environment; and transport. The reviews highlighted the potential for positive social, economic and environmental impacts to result from the draft Plan. A summary of the findings from the reviews is provided in Annex E, and the full documents are published alongside this draft Plan.

4.4.6 We have used these evidence reviews to assess the potential wider impacts of policies within this draft Plan. These assessments inform the development and implementation of policies in order to maximise potential positive impacts and mitigate any potential negative impacts. For example, in the residential sector, there is evidence that improving the energy efficiency of people's homes can improve their health, both physical and mental, particularly among households affected by fuel poverty. As such, Scottish Government energy efficiency grants will continue to target low-income and fuel-poor households, whose occupants have the greatest potential to benefit. In the transport sector there is evidence that increasing the uptake of electric vehicles will improve air quality in towns and cities, resulting in reduced levels of illness caused by pollution.

4.4.7 As proposals within the final Climate Change Plan are developed into policies, they will be informed by assessment of their wider impacts.

Scotland's economy

4.4.8 Meeting our climate change targets will change the Scottish economy by moving the economy's competitive advantage to low carbon sectors. It is essential that this transition be managed to minimise any adverse impacts and maximise the benefits of decarbonisation.

4.4.9 Our Review of Enterprise and Skills recognises we need to do things differently and take a simpler, more flexible and cost-effective approach if we are to reach our goals for productivity and inclusive growth,

4.4.10 We are already seeing the benefits of Scotland's ongoing transition, with around 43,500 people directly or indirectly employed in the low carbon and renewable energy economy in Scotland. In sectors such as low carbon heating the combination of ambitious targets and high consumption in Scotland, coupled with the supportive policy environment, has allowed Scottish-based companies to compete globally. Such opportunities are likely to increase in future years, with low carbon innovation benefiting sectors across the economy, and resulting in the development of key expertise in Scotland, which could potentially be exported to the rest of the word.

4.4.11 Driven by the same ambition, the publication of this draft Plan and the draft Energy Strategy reinforce our position in the vanguard of international momentum towards a low carbon future.

4.4.12 They will shape action to deliver:

• a modern, integrated, clean energy system, delivering reliable energy supplies at an affordable price, in a market that treats all consumers fairly; and
• a strong, low carbon economy - sharing the benefits across our communities, reducing social inequalities and creating a vibrant climate for innovation, investment and high value jobs.

4.4.13 The approach set out in these documents contains transformational outcomes in transport, heat, electricity generation, and energy efficiency along with increased natural carbon sinks and more efficient agricultural practices.

4.4.14 As described in section 2.2 on the pathway, in the 2030s we expect to see dramatic reductions in emissions from all buildings through energy efficiency measures, the decarbonisation of heat and technology and business process innovations that we can shape together. In electricity we expect to have almost decarbonised by 2025 through the use of renewables and other low carbon technologies. And for the industrial sector, our plans are broadly consistent with existing regulatory frameworks for industrial emissions with reductions delivered through a combination of fuel diversification, cost saving energy efficiency and heat recovery.

4.4.15 Taking this action now will position our economy at the forefront of the low carbon future that the world economy needs to move towards, and the solutions our businesses develop to address these challenges in Scotland will have export potential. Scotland's Energy Efficiency Programme, for example, will support thousands of jobs, creating a substantial domestic market and supply chain for energy efficiency and renewable heat services and technologies and related expertise which can transfer to international markets. Millions of pounds should be saved in fuel bills.

4.4.16 We will work with business to deliver this transformation over time. This is a huge opportunity and will set a course to modernise and transform the economy over the next 15 years while setting us up for almost complete decarbonisation by 2050. This long-term approach enables investors, businesses, communities and households to plan changes well in advance. The Climate Change Plan must be supported by and owned by the people of Scotland: it will touch on all our lives and build Scotland's future economic capacity and competitiveness.

4.4.17 The draft Climate Change Plan and draft Energy Strategy set out very challenging but achievable goals which will boost Scotland's productivity, and foster a vibrant climate for innovation, investment and high value jobs. We are committed to working even more closely with business to finalise and implement these plans and secure sustainable economic growth driven by investment, innovation, exports and inclusion.

System costs

4.4.18 The net present system cost of meeting the Scottish Government climate change targets can be estimated using TIMES. This is done by calculating the net present cost of delivering the system described in the draft Plan relative to the cost of delivering a reference scenario with no climate change constraints. The system cost represents the capital and operating costs for Scotland as a whole of running the energy system described by TIMES.

4.4.19 According to Scottish TIMES, the cumulative discounted system resource cost to 2050 has been estimated to be equivalent to around 2% of the cumulative Scottish GDP.

4.4.20 These are broadly in line with other estimates. For example, as stated previously, the Stern Review found the annual cost of climate change mitigation to the global economy to be in the region of -1% to 3.5% of annual global GDP by 2050.

4.4.21 Tackling climate change also has significant potential benefits that are not considered in TIMES. These would include the potential co-benefits of taking action to reduce greenhouse gases, such as improvements in life expectancy as a result of cleaner air.

4.4.22 Finally, TIMES does not take into account the potential costs avoided by taking action to tackle climate change. The Stern Review estimated that business as usual emissions (in the absence of climate change policies) and the resulting impact of climate change, taking into account the risk of catastrophic events on a populations welfare, would be equivalent to permanently losing 5% of global GDP, with an upper estimate of as much as 20% of global GDP.

4.4.23 It is not possible to disaggregate the system cost into individual sector costs given the interdependence between sectors.

The Strategic Environmental Assessment

4.4.24 The Environmental Assessment (Scotland) Act 2005 sets out statutory requirements for the preparation and publication of Strategic Environmental Assessments ( SEA). SEA is a process of identifying significant environmental effects that may arise from the implementation of plans, programmes or strategies and documenting these in an open and transparent way at a number of distinct stages.

4.4.25 Screening and scoping are two initial preparation stages of the assessment process. Consultation on the joint screening and scoping report commenced in September 2016. The screening and scoping report set out information such as the likelihood of significant environmental effects arising from the policies and proposals within the draft Climate Change Plan and draft Energy Strategy, the proposed assessment methodology and the evidence base to be considered in the assessment process. Due to a number of common elements within the development of these two documents, a combined approach to the assessment has been undertaken. This provides an opportunity to consider key issues relevant to both within a single Environmental Report.

4.4.26 The findings of this assessment process have been set out in the Environmental Report. This includes the identification of the likely significant environmental effects that are likely to arise from the implementation of the policies and proposals in the draft Climate Change Plan and draft Energy Strategy. The identification of any mitigation measures to reduce or prevent significant adverse effects and/or enhance positive ones has also been included, in addition to the consideration of any reasonable alternatives to these.

4.4.27 The Environmental Report will be published imminently for consultation.

• Comments on the Environmental Report in relation to the draft Climate Change Plan should be submitted within the 60-day parliamentary process so that they can be taken into account.
• The draft Energy Strategy will be subject to a 12-week consultation. Comments on the Environmental Report in relation to it should be submitted within that time period.