Risks around the estimates of climate change mitigation costs

As with climate change damage, there is considerable uncertainty around the economic and fiscal costs associated with climate change mitigation. The significant 65 per cent downward revision to the CCC’s estimates of the costs of net zero between their Sixth and Seventh Carbon Budgets illustrates this uncertainty. The CCC provides high and low scenarios for the share of whole-economy costs that will fall to the public sector. This box explores wider upside an downside risks around the CCC’s central estimates of the whole-economy costs of the net zero transition. It also considers the impact that the net zero transition could have on the productive potential of the UK economy, where there are also downside and upside risks.

The main factors that create risk to the estimates of the costs of climate change mitigation are:

• Fossil fuel costs: Whether a renewable energy system is cheaper than the fossil fuel energy it replaces is in large part dependent on the cost of fossil fuels. As a price-taker in the global market for gas, the UK’s main current source of fossil fuel energy, this is a key source of both upside and downside risk to the cost of the transition.
• Technology costs and advances: The costs of key transition-enabling technologies could all faster than assumed in the CCC pathway, as has been the case historically for many key technologies, such as solar panels, batteries, and EVs. There could also be advances in technologies that could make net zero energy generation cheaper, for example if nuclear fusion is successfully scaled. But there is downside risk that key technologies turn out to be unviable at scale. For example, carbon capture and storage is little-developed and not yet scaled in the UK. International projects have cost more than expected, while the efficiency of the technology has failed to meet target levels of CO2 capture.^a
• Network costs: Renewables provide variable energy, unlike the dispatchable power provided by fossil fuel energy sources such as a gas-fired power plant. This means greater generation capacity is needed alongside additional sources of energy storage. Additionally, renewable energy generation is geographically dispersed, with many more generators, and therefore more connections to the grid. While the CCC has included network costs in its estimates, some evidence suggests the costs could be higher.^b
• Delays to the transition: This could increase the costs of transition if it leads to a rush in later years to meet the 2050 target over a shorter period, which pushes up labour and capital costs due to supply constraints. However, it is also possible that a delayed transition could have cost advantages if there is a faster-than-expected decline in the cost of key technologies in future, or the discovery of new lower-cost technologies.c
• Health savings: Renewable technologies emit fewer air pollutants than fossil fuel counterparts. Air pollution is a significant cause of mortality and ill-health in the UK, particularly in cities. In 2019, around 4,000 Londoners died prematurely from air pollution,^d and there are an estimated 25,000 new cases of disease attributable to air pollution in London each year.^e Reducing pollution could therefore lead to healthcare cost savings that are not incorporated in the central mitigation cost estimates.

The impact of the net zero transition on economy-wide productivity

The analysis in this chapter suggests that damage from climate change is likely to have a material impact on UK productivity and GDP growth. However, we assume in this analysis that the transition to net zero itself has no direct impact on the productivity of the economy. There is a range of views among economists on whether the latter impact would be positive or negative, and there are few studies which have attempted to rigorously quantify the impact either way.

Factors which could lead the transition to affect productivity include:

• Energy costs: If it is necessary to tax or regulate carbon-emitting activity during the transition period to incentivise the switch to renewable energy, then this will raise its effective cost. Other things equal, this would likely result in less output than would otherwise be produced, reducing economy-wide productivity.^f On the other hand, a shift in the energy mix could, over time, raise productivity if renewable technologies are ultimately cheaper than the fossil fuel energy sources they replace.^g; There are a range of views on the relative current and future costs of renewables compared to fossil fuel energy, for example reflecting different assessments of the importance of the network costs mentioned above.^h In addition, as set out above, the uncertain and volatile cost of fossil fuels means these relative costs could vary significantly over time.
• Investment: Investment involves foregoing consumption in the present to create an asset that produces a flow of services in the future. More net zero investment today could lead to a larger capital stock per worker and higher productivity in the future. But if we scrap fossil-fuel based assets before they retire, this would have the opposite effect. Therefore, the impact on effective capital per worker over the transition period is uncertain.
• Spillovers: Productivity will be lower if new assets created as part of the net zero transition are less efficient than the technologies they replace, or are disruptive to install. But public investment in the range of new and often large-scale technologies required for the transition could provide a boost to productivity by crowding in additional investment in the domestic economy and by providing new export opportunities.ⁱ
• Other channels: Structural change as large as the net zero transition is likely to have wider consequences on the level and composition of activity. For instance, the greenhouse gas effect is not the only externality caused by fossil fuel use. The health impacts of particulate pollutants, mentioned above, could also have consequences for hours worked and hourly productivity.^j If labour and capital were underutilised in some parts of the economy, the increased demand for investment goods required for the net zero transition could bring the economy closer to its productive capacity. However, our March 2025 analysis estimated that the economy-wide output gap was only -0.4 per cent, suggesting this is unlikely in the near term.