If we are to achieve our ambitious climate targets then innovating to Net Zero is a necessity, but it requires more than just technological innovation – it’ll need to encompass innovations in consumer propositions and business models, and the markets that allow them to happen. The implementation of robust and enduring policies and regulation will be essential to building the necessary confidence with innovators to invest in low carbon products and services.

It was very encouraging to see the far more Net Zero focused Budget delivered on Wednesday, especially the £800m for Carbon Capture and Storage (which our analysis says is a crucial technology for whole system decarbonisation) and the doubling of the energy innovation budget. It was also important to see some tentative steps towards improving the mess of carbon incentives across the economy, although much more remains to be done – including a simplification of the array of interventions across the power and wider energy system – if we are to encourage the scale of innovation we need.

What needs to happen during this Parliament?

In our ‘Innovating to Net Zero’ report we set out an extensive programme of policy and regulatory reforms we think are necessary to unlock innovation that our modelling analysis shows is required. This builds on the policy work ESC has carried out to date, including our economy-wide carbon policy project, Rethinking Decarbonisation Incentives (RDI), which highlighted the imbalance of carbon-related policy signals across different sectors:

In addition, it draws on our Rethinking Electricity Markets project, and policy framework to decarbonise buildings. For transport, it applies the findings and recommendations of the EV Energy Taskforce and Consumers, Vehicles and Energy Integration (CVEI) project.

Our policy recommendations for Government to introduce in the near-term to support the developing of an economy-wide carbon policy framework for Net Zero include:

1. Developing a balanced, economy wide framework of low carbon economic incentives (comprising a mix of market, pricing and regulatory interventions) to shape market incentives for actors throughout emitting sectors of the economy.

2. Urgent development and gradual introduction of an enduring set of policies to fully decarbonise energy in buildings, crucially including regulatory incentives to promote adoption of low or zero carbon heating and changes to regulation of energy networks.

3. To reflect the different mix of low carbon solutions needed in different parts of the UK, introduce a consistent and robust approach to Local Area Energy Planning, potentially with the backing of a statutory framework. This will help identify the low carbon infrastructure and investment needed at a local level, and shape decision making by network companies, developers, and planners.

4. Direct support for innovation and early deployment of CCS and hydrogen production in industrial clusters, including the development of investable funding mechanisms for CO₂ transport and storage infrastructure.

5. Fundamental reform of power markets to improve the efficiency of the system and unlock the potential of flexibility and distributed low carbon technologies. This includes providing more accurate time-of-use and locational signals, thus strengthening incentives for supply and demand to match user needs and local system circumstances.

6. Creation and adoption of an open energy data and digitalisation governance framework in line with recommendations of the Energy Data Taskforce. This can maximise the potential of digitalisation to enable tailored consumer-focused innovation, business models, market designs, and consumer protections in the transformation of the energy system ahead.

7. Development of tradable instruments such as carbon credits, and associated market arrangements, to enable capital to flow to sectors where emissions reductions are being delivered most efficiently. This approach could unlock greater pathway flexibility and increase the scope for markets to reveal least-cost

What next?

2020 is a crucial year for carbon policy: the Committee on Climate Change will be publishing their recommendation on the level of the Sixth Carbon Budget in September; HM Treasury will be carrying out their Spending Review; and closing out the year the UK will be hosting COP26.

We will be picking up where RDI left off with our new project, Net Zero Carbon Policy. Our first publication will be coming out before the summer, where we will look at the next steps to improve effective carbon prices across key sectors of the economy.