Just how costly will the Climate Change Act prove to be for businesses?

Yesterday, the Daily Telegraph’s Christopher Booker accused the Department for Energy and Climate Change (DECC) of a rather basic error when calculating the cost of the Act.

The Claim

In his piece Mr Booker says that if new Energy Secretary Chris Huhne persists with the Climate Change Act he will be burdening the economy with costs far greater than those previously estimated by the DECC – all due to a simple mathematical point.  

He writes: “Britain already stands alone as the only country in the world committed by law – the 2008 Climate Change Act – to cutting its emissions in the next 40 years by a staggering 80 per cent, at a cost estimated by Mr Huhne’s energy department at £18 billion every year until 2050. (The ministry claims that this would amount to £404 billion, but it can’t do its sums properly: 40 times 18 is not 404 – the total is £734 billion.)”

Given that the figure as calculated by Mr Booker amounts to a more than 80 per cent higher figure, it is worth checking whether DECC calculations simply add up to a load of hot air.

Analysis

At first glance, there would appear to be a discrepancy between the two figures. Information released by the Department give an annual cost range for the Climate Change Act of between £14.7 billion and £18.3 billion, and a total cost range of £324 billion and £404 billion.

Clearly, the upper figures for the two estimates do not correspond based on the 43 year timescale used in the estimates.

Full Fact put this to the Department, and we were told the figures were not comparable in the way set out by Mr Booker, due to the way the total figure was calculated.

As a DECC spokesperson told Full Fact: “The reason that they aren't comparable is that the total figure is 'discounted' - i.e. calibrated to today's values (a rate of 3.5% per year) - whereas the annual figure is not. This type of discounting is common practice when looking at a figure that combines costs over a number of years.”

This is based on the assumption that a cost of £18 billion today cannot be considered the equivalent of a cost of £18 million in twenty or thirty years time.

Therefore simply multiplying an estimated annual figure in today's terms, by the number of years would not give the right figure for the total cost.

A more detailed explanation of how discounting is built into future cost estimates is included in Annex Six of the Treasury's Green Book.

Conclusion

There is not the basic mathematical error in the DECC calculations that is suggested by Christopher Booker.

The costs may indeed prove higher than the £404 billion estimate, but this would be to due to the inclusion of one-off transitional costs, not basic arithmetical oversight.

There may be a debate to be had about how fair the estimates will prove, particularly given the £1020 billion benefit it is estimated that the Act could accrue. But in terms of the simple sums, the Government does not appear to have got it wrong.