Scottish Government

1 Executive Summary

1.1 AEA were commissioned by the Scottish Government to pilot some draft carbon impact assessment guidance, based upon the work of DECC¹, on a selection of policy areas in central government in Scotland and to offer solutions to some of the challenges involved in the attributing of emissions in different policy settings. The findings from the study will be used to inform the development of carbon impact assessment guidance in Scotland.

1.2 The study was organised into two distinct phases; a preparatory phase, followed by an implementation phase. The preparatory phase comprised a review of existing approaches to carbon appraisal within Scottish Government. This culminated in an updated list of issues to investigate in the subsequent implementation phase. During the implementation phase a short-list of policies were used as case studies to pilot the carbon appraisal guidance. The review was also used to inform the selection of the pilots.

1.3 The following policies have been used as pilots for the guidance:

• Edinburgh Glasgow Improvement Programme ( EGIP) - a transport scheme that involves the improvement of the train connections between Edinburgh and Glasgow.
• Energy Assistance Package ( EAP) - a programme that tackles fuel poverty by subsidising the cost of heating systems and energy efficiency measures for eligible households in Scotland, with the aim of elimination of fuel poverty in Scotland by 2016.
• Area-based Home Insulation Scheme ( HIS) - an energy efficiency programme, the HIS aims to improve the energy efficiency of houses through the installation of insulation and other energy saving measures.
• Scottish Rural Development Programme ( SRDP) - the pilot has considered a single renewable energy project (a biomass boiler) funded under the SRDP as an exemplar of how the guidance could be applied more widely.
• Scottish Enterprise R&D Grants ( SEG) - this pilot examined the effects of one of the R&D projects; a project to develop a hybrid (diesel and electric) bus prototype with the potential for large scale production and export.

1.4 The pilots have considered a wide range of methodological issues. Many of these issues are considered within the DECC guidance, and the aim of the pilots was to investigate the importance of these issues from the Scottish perspective, with a view to informing the development of future guidance in Scotland. In addition, the pilots identified areas where the current DECC guidance could be improved, or where aspects of the guidance were unsuitable for use in Scotland.

1.5 The following issues were examined within each of the pilots:

• Screening of the impacts on GHG emissions
• Determination of the policy scenario and baseline
• Dealing with policy overlaps
• Quantification and valuation of changes in energy consumption
• Quantification and valuation of direct rebound effects
• Valuation of the avoided cost of additional renewable generation
• Quantification and valuation of changes in GHG emissions
• Quantification and valuation of changes in air quality emissions
• Sensitivity analysis

1.6 The main recommendations relating to the further development of GHG policy appraisal guidance in Scotland are outlined below.

Overall conclusions and recommendations

1.7 The current DECC guidance is a valuable tool for ensuring that GHG policies and measures are appraised in a consistent way. Whilst not without limitations, the existing guidance provides a strong analytical framework for the appraisal of GHG policies and programmes, providing high level guidance on some of the key methodological issues that need to be considered. On this basis, it is recommended that any new guidance that is developed for Scotland should draw heavily upon the current UK guidance document. This main guidance could then be tailored to take into account Scottish specific circumstances and issues, but would not depart greatly from the core document. This approach has the following benefits:

• Ensures consistency with the UK level appraisal, allowing UK-wide policies to be compared consistently with those in Scotland;
• Allows updates to the UK guidance e.g. likely future changes to the shadow price of carbon, to be reflected in the Scottish guidance without major re-writing of the guidance;
• Allows any generic modification to the guidance to be carried out in conjunction with UK Central Government, reducing the overall cost of the work to the Scottish Government;
• Enables the Scottish Government to deploy their finite resources on the tailoring and dissemination of the guidance, rather than spending large amount of time generating new material.

1.8 It is not recommended that large amounts of 'new' guidance are prepared for Scotland. In addition to creating problems of inconsistency, the development of new guidance can be extremely resource intensive.

1.9 However, there are some areas where the Scottish Government might consider tailoring the current DECC guidance to better reflect Scottish circumstances. This may include changes that relate to reporting requirements, and those that relate to analytical or methodological assumptions.

1.10 In general, where Scottish-specific circumstances e.g. the Climate Change (Scotland) Act 2009, require different reporting requirements then this can probably be added to the existing guidance relatively easily, and so long as the original UK reporting requirements are also fulfilled, this will not create any inconsistency with UK wide appraisals.

1.11 Where Scottish specific circumstances require changes to the underlying methodology e.g. the requirement within the Climate Change (Scotland) Act to include emissions arising outside of the UK, then this may create greater scope for inconsistency. It might therefore be most appropriate to consider methodological changes that consider Scottish specific issues as a sensitivity analysis.

1.12 In addition to refinements to better reflect Scottish specific circumstances, further modifications could be made to improve the general guidance. Since these issues are not specific to Scotland then it might be more efficient to address these gaps through the current UK Government's Interdepartmental Analysts Group. We therefore recommend for the Scottish Government to work the UK Government (via the IAG) to address the main gaps in the current guidance. This will further ensure consistency, and avoid duplication of resources.

1.13 The pilots have also provided an important understanding of what can and cannot be achieved from an Individual (policy/programme) Level Assessment ( ILA), and therefore how an ILA approach can support the Scottish Government in meeting its requirements under the Scottish Climate Change Act.

1.14 The outputs of carbon impact assessments will be used to build an evidence base concerning the Scottish Government's role in achieving emissions reductions through expenditure and regulation - and along with other evidence will inform the development of the approach to delivering the Scottish emissions reduction targets - as well as those at the UK level, as set out in the UK Climate Change Act 2008.

1.15 The main benefit of the ILA approach is that it provides data to enable the effectiveness of government policies to be appraised on a consistent basis ensuring that resources are allocated efficiently, that the contribution of government policies to emissions targets can be measured, and that targets can be delivered at least cost. The main limitation with the ILA approach is that it can be resource intensive requiring data to be collected for each of the individual polices that are appraised. Whilst this can, in most cases, be justified for those policies that explicitly target greenhouse gas emissions, or have a material impact on emissions, it is less appropriate for those policies and programmes where the emissions impact is more limited.

General improvements to the DECC guidance

1.16 The current guidance does not provide emissions factors associated with non-energy related emissions, or non-CO2 greenhouse gases. We recommend that the Scottish Government consider the inclusion of additional guidance on the emissions arising from non-energy sources, including non-CO2 greenhouse gases. Whilst the uncertainty in emissions factors from these sources is generally greater than for combustion related emissions, in the absence of any guidance then it is difficult to compare policies on a consistent basis.

1.17 The current emission factors within the DECC guidance only take into account direct combustion emissions. Additional guidance on the accounting for other indirect emissions within the policy appraisal would be beneficial. The current guidance could potentially be improved by making reference to established sectoral data sources on indirect or lifecycle emissions. Referencing these existing tools would at least ensure that lifecycle impacts, where considered an important part of the policy appraisal, are quantified on a consistent and comparable basis. As an interim measure, it would therefore be useful for the Scottish Government to perform a review of existing sectoral tools that can be used to support the current guidance in this way.

1.18 The current guidance provides limited information on how direct rebound effects are defined or the existing evidence on the potential levels of rebound. Whilst this is a detailed issue, further explanation would provide greater awareness of the issue, and increase understanding of the circumstances where rebound effects are potentially important. Further reference could be made to existing research in this area, including the factors used in existing policy appraisals.

Scottish specific improvements to the guidance

1.19 The Climate Change (Scotland) Act 2009 outlines targets for the reduction of greenhouse gas emissions in Scotland. These targets are more stringent than the UK wide targets under the UK Climate Change Act and are associated with different reporting requirements. This suggests that the reporting of carbon savings in any future guidance would need to consider both the reporting requirements at a UK level, but also reporting of progress with the targets set under the Scottish Climate Change Act.

1.20 Further work to allocate the Scottish share of UK policies, including the underlying assumption with respect to the energy savings, or other activity data, would be useful to ensure a consistent baseline, and avoid double counting. Such information would also be valuable for adjusting UK wide estimates of policy savings to account for more detailed data on policy impacts in Scotland. Such adjustment would be necessary should the carbon appraisal of Scottish policy assume different baseline assumptions to the rest of the UK.

1.21 It is understood that in the near future the Shadow Price of Carbon values will be updated to reflect 'target consistent' marginal abatement costs values. Depending upon how these values are updated, and how the UK budgets align with the requirements of the Climate Change (Scotland) Act, this may require that updated SPC values be developed to reflect the marginal cost of abatement in Scotland. However, until further details on the proposed updates to the SPC are provided, it is difficult to make firm recommendations on this issue.

1.22 The Scottish Government has set out an objective of 20% renewable energy ², as a proportion of final energy consumption, by 2020. This is more stringent than the target for the UK, therefore, the value that is put on reductions in final energy demand, to reflect the avoided costs of additional renewable energy, may need to be adjusted accordingly. Ideally, this would involve determining specific marginal cost estimates for Scotland. However, this will require additional work. In the interim the guidance should be clear on how impacts on renewable energy targets should be valued in Scotland and how this relates to the Scottish target. This would involve explaining that the renewable target is based on final energy demand, so differs for the electricity generation target.

1.23 Scottish specific circumstances may mean that the impacts of policies and measures in Scotland may differ from the rest of the UK. This may relate to issues around the activity data, e.g. differences in the building stock, or fuels consumed in Scotland, but may also relate to other geographic factors such as the colder climate driving higher level of energy consumption. Therefore, as part of the development of guidance for Scotland it is also useful to consider how the guidance would be applied and what Scottish specific data/evidence exists to support the appraisal of policies in Scotland, and what further evidence is required.

1.24 In the short-term, this may mean relying upon UK wide data and assumptions. In the medium term this may involve the development of models, and the further development of the evidence base, for policy development in Scotland. This should focus on those areas where the emissions-causing activities in Scotland are considered to be materially different from the rest of the UK, where the current evidence base is weak, or where the scope of the Scottish targets under the Climate Change (Scotland) Act differs from the UK Act.

Other considerations for the further development of carbon appraisal guidance in Scotland

1.25 A specific issue related to the development of guidance in Scotland is the structure of the guidance i.e. what should the guidance look like. This should consider who the respective audience are for the guidance, and how the information can be best disseminated.

1.26 Overall, we consider the current DECC guidance has struck a reasonable balance in presenting often complex issues in a simplified manner. However, we make the following suggestions with respect to potential modifications of the structure of the guidance in Scotland.

• Improve the clarity of where an issue is relevant and not relevant. For example, if rebound effects need to be considered or not. This could be illustrated by providing an example of where it is applicable, or perhaps include a screening question.
• Provide access to more detailed description/information on key issues outside of the main guidance document. In doing so, the main guidance could be simplified slightly.
• Provide linkages to more detailed sectoral guidance or research where available. This would relate specifically to any guidance on the quantification of energy savings or greenhouse gas emissions. It would also include linkages to established tools relating to the quantification of indirect or lifecycle impacts.
• Make case studies available on how certain calculations should be carried out and on how issues should be considered within the guidance. This could draw upon the pilot reports produced during this study. It would also be beneficial to collate all completed carbon appraisals within a central repository, so the results and assumptions can be easily accessed.
• Consider the development of an alternative front end to the guidance that would assist policy makers in analysing the relevance of the guidance. This may include, for example, a series of screening questions that can be used to identify the key attributes of the policy in question. Importantly it would consider the likely magnitude of the policy on GHG emissions, and therefore whether it is appropriate to complete the guidance, and to what degree.

1.27 It is important that consideration is also given to how any Scottish specific guidance should be disseminated. This may include consideration of who within Scottish Government should be made aware of the guidance, but also the mechanism(s) for dissemination. For example, the dissemination of the guidance could be supported by a series of briefing or training sessions. As a minimum this should cover what is new in the guidance, and what differences exist to the UK guidance, and why. It may also be necessary to provide some ad-hoc support to analysts, at least when the guidance is first issued.

1.28 Finally, consideration should be given to ensuring that the requirements of the guidance are included within current and future models that are used for policy appraisal. This would require close communication between the analytical team within the Scottish Government responsible for the guidance, and the respective modellers.