Rethinking Decarbonisation Incentives for Net Zero policy

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 Challenge

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 Solution

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.

Current Economic Signals for Decarbonisation in the UK

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.

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Figure 1: Effective carbon prices and emissions in the UK by sector

Figure 1: Effective carbon prices and emissions in the UK by sector

11 International Case Studies 

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.

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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.

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Sectoral Assessment for Agriculture, Forestry and Other Land Use

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.

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Carbon Policy and Economy-Wide Productivity

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.

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Near-Term Options to Address Low-Priced Emissions

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.

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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.

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.

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Final recommendations

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.

The Impact

The Rethinking Decarbonisation Incentives project has helped us to better understand the nature and scale of challenges to improve carbon policies.

Impact update: August 2019

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.

Impact update: October 2019

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.

Impact update: March 2020

Zero emissions goal: The mess of Britain’s carbon taxes – Financial Times

By  and 

This full page spread in the Financial Times broaden the reach of the Rethinking Decarbonisation Incentives project and in particular the work surrounding ‘Effective carbon prices and emissions in the UK’.

Impact update: June 2020

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.”

Read the Report

Rethinking Decarbonisation Incentives Future Carbon Policy for Clean Growth

Next Steps

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:

  • Further developing carbon standards for to achieve Zero Carbon Buildings.
  • Understanding the features of carbon policy that work best for industry and innovation.
  • Examining strategic interactions with wider net zero 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.

Markets, Policy and Regulation

Independent thought leadership that combines expertise in clean technology, economics, and energy policy design, informed by cutting-edge modelling and evidence-based analysis.

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