Only thirty years remain before the UK must legally reach Net Zero carbon emissions. All major emitting sectors – transport, heating, manufacturing, power generation, and farming – will need to change radically to get as close as possible to zero emissions by 2050.

Our work last year on Rethinking Decarbonisation Incentives showed how current policies are too uneven and weak to achieve this (see, for example, the Financial Times coverage in the lead up to this year’s Budget). This means we need major new policy reforms to drive both the supply of, and demand for, low, zero, and negative carbon technologies across the whole economy.

In our new thought leadership project, Net Zero Carbon Policy, we use the term ‘carbon policy’ for any policies that require or incentivise action to reduce or remove greenhouse gas emissions, including pricing, regulation, subsidies, and standards.

The sector led approach that we propose:

• Recognises the importance of sector specific barriers to change;
• Avoids relying on an overarching carbon pricing mechanism;
• Enables carbon policy to be designed at a sectoral level to address sector specific challenges (e.g. mitigating competitiveness impacts in industrial decarbonisation or enabling energy suppliers to create attractive consumer propositions for home energy services and heat decarbonisation).

A sector led approach (see summary below) can also be combined with complementary policies and co-ordination mechanisms (such as infrastructure regulation or multi-vector local energy planning tools) to enable a whole systems approach to the energy transition.

Our other thought leadership projects – Rethinking Electricity Markets and Zero Carbon Buildings – are developing further detailed sector policy proposals, as components of an integrated economy-wide carbon policy framework.

Recommendations for Policymakers

We argue that there is significant merit in taking a sector led approach to build an economy-wide carbon policy framework to accelerate the transition to Net Zero.

The UK now has a historic opportunity, through creating its own emissions trading system and its forthcoming leadership of COP26. Key first steps to seize this opportunity include:

1. Key departments including BEIS, Defra, DfT, and HMT should work with the CCC, to clarify options for aligning the UK ETS, sectoral carbon standards, and sectoral policy packages with carbon budgets, in particular the Sixth Carbon Budget.
2. Develop the required scientific and regulatory oversight to ensure that sectoral carbon standards and decarbonisation incentives are driving genuine emissions reduction, including removals, particularly in agriculture, forestry and other land use sectors.
3. For industry, develop policy options to improve or replace allocation of free allowances within a UK ETS to mitigate carbon leakage and competitiveness impacts for energy-intensive, trade-exposed industries, including both performance standards and border carbon adjustments.
4. For electricity, design a sectoral decarbonisation obligation to reinforce, complement, or potentially replace a UK ETS in driving complete decarbonisation of the sector in line with the Sixth Carbon Budget pathway. Policy design work needs to be completed as part of the consultation on the appropriate trajectory for the UK ETS’s cap, which the Government plans to complete within nine months of the CCC’s advice on the Sixth Carbon Budget.
5. For negative emissions, develop a marketplace for nature-based greenhouse gas removals using the proposed framework provided by the Environmental Bill 2020. In addition, explore options for future integration of such a marketplace with a UK ETS.
6. For road transport, bring forward the end to the sale of new petrol, diesel, and hybrid cars and vans to at least 2035 as part of a comprehensive phase-out plan that enables earlier phase out for targeted vehicle/user categories.
7. For buildings, phase in minimum carbon performance requirements for all buildings and introduce a building carbon credit scheme to reward low and zero carbon choices through energy bills.
8. For carbon markets, develop the necessary regulatory requirements to enable linkages between sectoral policies within the UK and use COP26 to progress agreement of Article 6 rules to better enable international linkages.

What Next?

During 2020-21, through the Net Zero Carbon Policy thought leadership project, we will be carrying out deeper dives into:

• Industrial Decarbonisation – Advisory work for the Committee on Climate Change, focusing on carbon policy options to mitigate carbon leakage and competitiveness impacts.
• Developing Carbon Credit Markets – Exploring how tradeable carbon credit market mechanisms could provide a pathway to a more coherent economy-wide effective carbon price.
• The Case for a Carbon Regulator – Discussing how to improve emissions monitoring, reporting, and verification to provide a firm basis for emissions reduction regulation and incentives.

If you want to work with us or discuss any of the topics described above, then please contact Markets, Policy and Regulation.