Energy Systems Catapult’s Rethinking Decarbonisation Incentives (RDI) has explored how UK policies can promote clean growth by taking a whole system approach to carbon policy.

The UK has a complex mix of policies (including taxes, subsidies, standards, and regulations) which give rise to uneven and incomplete incentives to reduce greenhouse gas (GHG) emissions across the economy.

This is far removed from the textbook ideal of economy-wide carbon pricing and constrains low carbon innovation. However, it is clear that such an ‘ideal’ faces immense practical challenges. This report takes account of these challenges and explores further options to improve the broader framework of economic incentives for decarbonisation (‘carbon policy’).

Key points

The Rethinking Decarbonisation Incentives project has shown that the UK can achieve a balanced economy-wide carbon policy framework to boost innovation and deliver clean growth, consistent with a net zero target in 2050.

This does not necessarily require relying on a single ambitious economy-wide instrument, such as a carbon tax or economy-wide trading system. Rather it is possible for the UK to develop a pathway towards more coherent incentives for emissions reduction across the energy system and the wider economy by developing a complementary mix of policies. Carbon standards offer potential to play a key role in this pathway.

To help policymakers put the UK on course for meeting its legally binding targets to reduce emissions in a cost-effective way, the report makes the following set of recommendations:

1. Take opportunities to improve the current framework of policies by adjusting existing mechanisms to align incentives to reduce emissions across the economy.
2. Consolidate and streamline existing measurement, monitoring, and verification of all emissions and related incentives.
3. Take immediate steps to progress a carbon policy driver for residential heat, including detailed design of an enduring framework of carbon standards.
4. Develop a pathway towards a coherent set of interlocking sectoral instruments covering all emitting activities throughout the economy, with a linked market for greenhouse gas removals.
5. Integrate carbon reduction into the measurement of economic productivity, potentially through the Industrial Strategy Council.