The distributional impact of Net Zero policies

The distributional impact of Net Zero policies

How do different households fare?

A major transformation of residential buildings and surface transport is required to meet the Climate Change Committee’s (CCC) Sixth Carbon Budget and to ensure that the UK is on track to meet Net Zero.

This transformation will significantly affect household energy and transport costs. For example, there is likely to be an increase in costs from the required investment in energy efficiency of buildings and low-carbon heating, but in other areas, such as the shift in transport to EVs, large savings are available for households. Understanding the distribution of these costs and benefits between households is therefore crucial to developing effective policy.

With that in mind, Frontier Economics has developed the ‘Net Zero Distributional Model’ (NZDM) for the CCC. This model allows users to assess the distributional costs to households of meeting Net Zero under different low-carbon heat and transport policies. In this article, we explore our approach to building the NZDM and the types of questions it can answer.

Our approach

We took a three-step approach to developing the NZDM:

  • Step 1: Using clustering analysis, we developed 15 household archetypes that represent distinct groups in the UK population that are differentiated by the main drivers of their home energy and transport costs. These archetypes vary across a broad array of characteristics, including income, heating technology, building type, tenure, and the number and type of cars.  
  • Step 2: We then modelled 24 different policies (e.g. grants for heat pumps or road pricing charges) that could be implemented in residential buildings and surface transport to meet Net Zero. This includes modelling their costs and revenues, whom they target (e.g. low-income households) and how they might be funded (e.g. via progressive taxation).
  • Step 3: Based on the CCC’s different pathways, we then include projections of the take-up and cost and benefits of a wide range of technologies for heating (e.g. heat pumps), insulation and low-carbon surface transport (e.g. electric vehicles) for each of the 15 household archetypes in five-year intervals out to 2050.

What does the model show?

Combined, these three steps allow the user to test the impact of different combinations of policies, including how they are funded and targeted, as well as various other assumptions across the 15 household archetypes.

The costs and benefits borne by each archetype for a given policy combination and CCC pathway are then compared against a ‘no-decarbonisation’ baseline where no further policy action is taken to meet Net Zero. Users can consider the net effect on energy costs (e.g. electricity and gas), upfront capital costs and retrofits, ongoing non-fuel costs (e.g. maintenance) and additional costs / benefits due to policies.

Where to next?

This work will feed into the CCC’s wider research on the allocation of costs and benefits of different decarbonisation delivery mechanisms. The NZDM aims to enable users from the policy community and beyond to explore questions around the distributional impacts of different Net Zero policies.