Energy Systems Catapult aimed to encourage broader strategic debate about how the UK could improve carbon policy to stimulate innovation and clean growth through the Rethinking Decarbonisation Incentives (RDI) project.
The UK has clear, legally binding targets to reduce carbon emissions to Net Zero by 2050, but the current policies in place to encourage emissions reduction are complex and often changing. Current policies comprise of different taxes, subsidies, contracts and regulations, which has resulted in the reward for cutting carbon emissions to vary across different sectors of the economy and is generally much lower than it needs to be. This makes it very difficult to promote long-term investment and innovation.
The Government has published a Clean Growth Strategy, but unlike other jurisdictions (e.g. California and Canada) there is relatively little strategic debate or commitment regarding:
The RDI project began by summarising the current pattern of ‘effective carbon prices’ (i.e. the strength of incentive to cut carbon emissions) across different sectors of the UK economy.
Summarised the ‘effective carbon prices’ in different UK sectors. The analysis carried out with the support of Oxford Energy Associates, showed that the UK currently experiences wide variations in effective carbon prices between emitting activities and sectors.
This was followed by an exploration of the leading decarbonisation policies from jurisdictions around the world.
Figure 1: Effective carbon prices and emissions in the UK by sector
To help inform thinking about UK policy options, we commissioned international case studies to explore the policy approaches to decarbonisation (or related objectives).
The case studies include examples of standards, subsidies, tradeable certificates and interacting suites of policies, as well as the carbon pricing instruments ‘carbon tax’ and ‘cap and trade’.
Delivered by Ricardo Energy & Environment.
From these learnings, five carbon policy reform options were developed offering possible ways for reducing the complexity of the current policy landscape, while aligning or setting new incentives for decarbonisation across all sectors.
Represented a combination of quantity and price mechanisms, applied upstream or downstream, and covered a broad range of entities and general policy approaches.
However, it was challenging to include all sectors within these options, in particular agriculture, forestry and other land use (AFOLU) sectors, which have seldom been covered by policies to date.
Exploring the issues and challenges associated with policy mechanisms to deliver climate mitigation in AFOLU sectors.
Delivered by Institute for European Environmental Policy,
Next we explored how carbon policy design could support and enhance economy-wide productivity growth.
Explored the links between carbon policy and economy-wide productivity.
We then decide to explore some near-term approaches to carbon policy reform that could be taken to increase and align effective carbon prices through adjusting existing measures.
Investigated how to improve the existing framework of carbon policies, with priority placed on under-incentivised emitters in the UK.
Delivered with Oxford Energy Associates.
Following consultation with key industry bodies, we commissioned analysis on the design of a carbon intensity standard – the preferred Policy Reform Option of the five.
Explores whether setting standards on carbon intensity could place an obligation on energy companies to reduce the carbon content of the energy they supplied. Obligated parties could meet the standard either by reducing the emissions intensity of their activities, or by buying credits from parties who are supplying energy with a carbon intensity below the standard.
Delivered by Frontier Economics.
This is one of a number of policy options the Catapult is exploring to incentivise the decarbonisation of the UK economy.
Finally, RDI delivered a final report that made the following set of recommendations:
The Rethinking Decarbonisation Incentives project has helped us to better understand the nature and scale of challenges to improve carbon policies.
The Climate Change Committee’s (CCC) response to the UK government on the The future of the EU’s Emissions Trading System (EU ETS), was backed by a technical report by Vivid Economics: The Future of Carbon Pricing in the UK.
This report cited RDI a number of times, including: our summary of the current pattern of economic signals in the UK for reducing emissions in different sectors; insight on policies and regulations that can be aligned to a carbon price level, without pricing carbon directly; evidence of UK policies with objectives that are broader than climate change mitigation yet still indirectly reflect a carbon price; and insight into how to price carbon to reach net-zero emissions in the UK.
Ofgem’s annual State of the Energy Market 2019 report, includes an assessment of competition in retail and wholesale energy markets, affordability and vulnerability, progress in decarbonisation, the security of our energy supplies, and how energy networks are performing.
RDI provided evidence for the decarbonisation section with the Carbon Policy and Economy-Wide Productivity report and effective carbon pricing and emissions in the UK by sector from our Current Economic Signals for Decarbonisation in the UK report.
Zero emissions goal: The mess of Britain’s carbon taxes – Financial Times
By Chris Giles and Leslie Hook
The Climate Change Committee’s (CCC) cited the RDI on Reducing UK emissions Progress Report to Parliament, stating: “many sectors of the UK economy not currently facing the full costs of emitting greenhouse gases., with a wide variation in effective carbon prices across emitting activities and sectors, but these prices are generally much lower than required.
“Setting or raising carbon prices for these sectors could help incentivise the actions and investments required, as well as raising revenue.”
Rethinking Decarbonisation Incentives Future Carbon Policy for Clean Growth
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The RDI project team continue to work on themes focused on practical steps to promote clean growth, innovation, and investment across the whole energy system and economy. Potential themes include:
Independent thought leadership that combines expertise in clean technology, economics, and energy policy design, informed by cutting-edge modelling and evidence-based analysis.
Find out moreFind out more about how Energy Systems Catapult can help you and your teams
Find out more about how Energy Systems Catapult can help you and your teams