Rethinking Decarbonisation Incentives for Net Zero policy

Published: 17 January 2020

Introduction

Rethinking Decarbonisation Incentives (RDI) explored how UK policies can promote clean growth by taking a ‘whole systems’ perspective on carbon policy.

Through the project, Energy Systems Catapult aimed to promote broader strategic debate about how the UK could improve carbon policy to stimulate innovation and clean growth.

The Challenge and Opportunity

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 of economic drivers for decarbonisation,
  • Creating an enduring framework for carbon reduction across the whole economy.

Our Approach

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. 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 jurisdications around the world.

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.

  • Five Policy Reform Options – 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.

Next we explored how carbon policy design could support and enhance economy-wide productivity growth.

Oxford Energy Associates helped us explore some short-term approaches to carbon policy reform that could be taken to increase and align effective carbon prices through adjusting existing measures.

Following consultation with key industry bodies, we commissioned Frontier Economics to provide analysis on the design of a carbon intensity standard – the preferred Policy Reform Option of the five. This is one of a number of policy options the Catapult is exploring to incentivise the decarbonisation of the UK economy.

  • Setting Standards for Carbon Intensity – 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.

Final recommedations

Finally, RDI delivered a final report that made 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.
  • Future Carbon Policy for Clean Growth – a final report with recommendations to policy-makers on how 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.

Impact

The Rethinking Decarbonisation Incentives project has helped us to better understand the nature and scale of challenges in improving carbon policies. Examples of the impact that the RDI project is beginning to have in influencing thinking about how UK policies can promote clean growth by taking a ‘whole systems’ perspective on carbon policy, include:

  • The Committee on Climate Change’s 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 (August 2019), which 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, the UK’s progress in reducing greenhouse gases, the security of our energy supplies, and, for the first time, how energy networks are performing. RDI provided evidence for the decarbonisation section on Carbon Policy and Economy-wide Productivity; Effective carbon pricing and emissions in the UK by sector.

Next Steps

The RDI project team hplan to continue working on themes focused on practical steps to promote clean growth, innovation, and investment across the whole energy system and economy. Potential themes include:

  • Further developing carbon standards for low/zero carbon residential heat.
  • Understanding the features of carbon policy that work best for industry and innovation.
  • Examining strategic interactions with wider policy challenges (e.g. vehicle electrification, air quality, congestion, and motoring taxation).
  • Improving the empirical basis for policy and incentives through more integrated greenhouse gas emission measuring, monitoring, and verification.
  • Long-term policy to promote investment in options for greenhouse gas removals.