Rethinking Decarbonisation Incentives for Net Zero policy
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.
The RDI project began by summarising the current pattern of ‘effective carbon prices’ (i.e. the strength of incentive to cut carbon emissions) in the UK for reducing emissions in different sectors. The analysis carried out by Oxford Energy Associates , shows that the UK currently experiences wide variations in effective carbon prices between emitting activities and sectors, as illustrated in this
Following this, Ricardo Energy & Environment, carried out 11 international case studies that explored the policy approaches to decarbonisation (or related objectives). The findings from the case studies were translated into four key determining factors for effective decarbonisation policy design.
From these, Ricardo developed five policy reform options to illustrate the possible ways for reducing the complexity of the current policy landscape, while aligning or setting carbon policies such that coherent incentives for decarbonisation are seen by all sectors.
The carbon policy options were selected so that they represent a combination of quantity and price mechanisms, applied upstream or downstream, and cover 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. As part of RDI, the Institute for European Environmental Policy explored the issues and challenges associated with policy mechanisms in the AFOLU sectors and produced a report.
We explored the links between carbon policy and economy-wide productivity, and the findings of the literature review lend themselves to three conclusions for policy, which bring policy design and productivity measurement to the forefront of the debate about how to ensure carbon policy supports and enhances productivity growth.
Oxford Energy Associates explored some short-term approaches to carbon policy reform that could be taken to increase and align effective carbon prices through adjusting existing measures.
We commissioned Frontier Economics to analyse the design of a carbon intensity standard, which highlighted several key learnings. This is one of a number of policy options the Catapult is exploring to incentivise the decarbonisation of the UK economy.
A carbon intensity standard would set an obligation on suppliers in the energy sector to reduce the carbon content of the energy they sell. 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.
Finally, RDI the final report Future Carbon Policy for Clean Growth made the following set of recommendations:
- Take opportunities to improve the current framework of policies by adjusting existing mechanisms to align incentives to reduce emissions across the economy.
- Consolidate and streamline existing measurement, monitoring, and verification of all emissions and related incentives.
- Take immediate steps to progress a carbon policy driver for residential heat, including detailed design of an enduring framework of carbon standards.
- 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.
- Integrate carbon reduction into the measurement of economic productivity, potentially through the Industrial Strategy Council.
We have worked with a number of collaborators and advisors, which include:
- William Blyth Oxford Energy Associates
- Mark Johnson Ricardo Energy & Environment
- Chris Thorne Energy Technologies Institute (ETI)
- David Joffe Committee on Climate Change (CCC)
- Sam Fankhauser Grantham Research Institute, LSE
- Martin Nesbit Institute for European Environmental Policy (IEEP)
The RDI project produced a number of reports:
- Current Economic Signals for Decarbonisation in the UK – summarised the ‘effective carbon prices’ in different UK sectors;
- 11 International Case Studies – showcasing experience with decarbonisation policies and summarised the key findings;
- Five Policy Reform Options – formulated a selection of possible policy reform options to incentivise emission reductions across the UK economy;
- Sectoral Assessment for Agriculture, Forestry and Other Land Use – explores the issues and challenges associated with policy mechanisms to deliver climate mitigation in the agriculture, forestry and other land use (AFOLU) sectors;
- Carbon Policy and Economy-Wide Productivity – explores the links between carbon policy and economy-wide productivity.
- Near-Term Options to Address Low-Priced Emissions – investigates how to improve the existing framework of carbon policies, with priority placed on under-incentivised emitters in the UK.
- Setting Standards for Carbon Intensity – explores whether setting standards for the carbon intensity of energy supplied could have some advantages as a policy instrument to drive decarbonisation in the residential heat and road transport sectors.
- Future Carbon Policy for Clean Growth – This final report makes 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.
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.
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.