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Climate change policies could offset fossil fuel price spikes

Green policies could halve the negative impact of spikes in fossil fuel prices by 2050, according to a new report.

The Department of Energy and Climate Change (DECC) said that the negative effects of increases in global oil, gas and coal prices have on the UK could be reduced by using low-carbon forms of electricity generation.

Analysis produced by Oxford Economics showed how the UK’s sensitivity to oil and gas price shocks could be reduced by using green energy like renewables and new nuclear, and also through increasing energy efficiency.

“Every step the UK takes towards building a low-carbon economy reduces our dependency on fossil fuels, and on volatile global energy prices,” said Energy Secretary Edward Davey.

“Only last year, the impact of the Arab Spring on wholesale gas prices, pushed up UK household bills by 20 per cent.

“The more we can shift to alternative fuels, and use energy efficiently, the more we can ensure that our economy does not become hostage to far-flung events and to the volatility of market forces.”

Energy prices have been trending up over the past decade and are becoming increasingly volatile.

The report said that once the UK fully transitions to a low-carbon economy, the negative impacts of energy price volatility on these four factors will be halved:

  • Halving the impact of energy price volatility on disposable household income, and therefore reducing amount households would have to put aside to spend on energy bills.
  • Halving the negative impact on the level of business investment.
  • Halving the impact on inflation
  • Halving the impact on levels of unemployment, which could rise through increased economic inactivity caused by high energy prices.

    The DECC said climate change policies have the potential to mitigate against the volatility of fossil fuel prices, by reducing the UK’s reliance on fossil fuels.

Out to 2050, as the UK economy becomes less energy-intensive through improved energy efficiency and through reforms to the electricity market, these impacts will be more than halved.

The government will publish the draft Energy Bill next week which will set out in detail how the UK’s electricity market can be reformed in order to keep the lights on, bills down and the air clean.

The DECC said the reforms will allow the UK to meet its climate change targets, an 80 per cent reduction in emissions of greenhouse gases by 2050, whilst incentivising the construction of a balanced mix of renewables, new nuclear and CCS.

Further information:

Download the Fossil fuel price shocks and a low carbon economy report.

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