OBR Falls for Fake CCC Numbers

OBR uses fake CCC Numbers to estimate cost of Net Zero

Yesterday, the Office for Budget Responsibility (OBR) released its fiscal risks report (FRR). Many commentators have focused on the overall dire state of the public finances and how vulnerable we are to economic shocks. Some like Matt Goodwin have highlighted the cost to the public purse of the cost of Net Zero as £803bn out to 2050.

This refers to Chart 4.11 of the OBR report (see below), where the total cost of lost tax revenue and extra public spending out to 2050 adds up to £803bn.

This equates to 21% of GDP by 2050-51, but this is less than the total cost of 29% in their previous FRR from 2021. The public expenditure of 6% of GDP is some 5% percentage points lower than their previous estimate. The OBR explains that much of the reduction in extra public spending is driven by “the CCC’s downward revisions to the whole-economy costs of transition.”

This huge cost to the public purse even assumes carbon taxes rise from £42/t to a staggering £328/t in 2050/51, reflecting the cost of Direct Air Carbon Capture (DACCS), or sucking carbon dioxide out of the air. They say:

As the future carbon price is highly uncertain, we adapt an NGFS scenario in which carbon prices in the UK and EU rise progressively to reduce emissions and keep temperature increases below 2°C.

As though whatever the UK, or indeed the EU, does will affect global temperatures when global carbon dioxide emissions are still rising.

Much of the lost revenue cost to the public purse comes from the loss of fuel duty, which is a tax on petrol and diesel. The change over to electric vehicles (EVs) reduces fuel the take from fuel duty. This leaves the door open to charging for road use on a pay-per-mile to maintain tax revenue, which will of course negate the supposed cheaper fuel benefit of EVs.

The OBR also looks at the whole economy cost of Net Zero. However, they simply parrot the numbers from the CCC. This shows the overall net cost of Net Zero for the whole economy to be just £116bn by 2050 with overall benefits from 2041 onwards.

They do not quite explain how the whole economy costs can be so much lower than the cost to the public purse, especially when so much of the cost is supposed to be borne by private investors and billpayers. However, what is more worrying is that they do not seem to have challenged the numbers from the CCC. Yet, the OBR has admitted that it is the CCC numbers that have driven most of the reduction in public expenditure estimates.

As we have covered before, the CCC has only published costs expressed as the difference between their Balanced Scenario and some mythical baseline level of spending. They have not published the gross costs of the pathway, nor the baseline making it extremely difficult to unpack the numbers and check their reasonableness.

From the numbers they have published, we know the CCC made some highly implausible assumptions about the shifting the costs of renewables on to gas bills as well as the cost and take up rates of heat pumps. However, the most obvious egregious errors are in the CCC’s erroneous estimates of the cost of renewables.

They assume that offshore wind in 2030 will cost less than half the value of contracts awarded for fixed bottom offshore wind in last year’s Allocation Round 6. They totally ignore the need for floating offshore wind that cost six times more than their 2030 estimate. The CCC estimates for the cost of solar for 2030 delivery were less than half the prices awarded in AR6 too. They did not even bother to estimate the cost of onshore wind, despite needing to more than double the installed capacity by 2050.

The OBR is supposed to be an independent fiscal watchdog. It should be challenging the CCC and running its own due diligence, not simply carrying out a cut and paste exercise. It does not take much effort to compare CCC assumptions to the reality of auction data. The OBR estimates of the cost of net zero have carried forward the errors embedded in the CCC’s Seventh Carbon budget. The OBR is asleep at the wheel and our fiscal position is even worse than the dire straits they describe.

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