Comment by Dr. Danial Sturge and Elle Butterworth, Carbon Policy Practice Manager and Energy Policy Advisor – Markets, Policy and Regulation.

A recent Carbon Pulse article highlighted that overlapping carbon capture, utilisation, and storage (CCUS) policies in Canada would likely result in double, even triple, counting of greenhouse gas (GHG) reductions.

At the core of this issue is the complexity in attributing specific GHG reductions to different carbon policies, which economists call the ‘waterbed effect’. In simple terms, this means that an intervention that aims to reduce emissions in one area can lead to increased emissions elsewhere. This is just one example of overlapping carbon policies reducing the overall effectiveness of their intended role, thereby hindering actual emissions reduction in the round. As countries – the UK included – rightfully increase climate ambitions and the number of carbon policies intended to deliver these ambitions, coherent carbon accounting becomes increasingly important.

Carbon accounting refers to the processes used to measure and allocate GHGs emitted within a boundary – spatial (e.g. site-specific installation) and temporal (e.g. over a period of a year) – for the purposes of maintaining GHG inventories, producing corporate environmental reports, or calculating the carbon footprint of a product. It is also crucial for the operation of carbon policy mechanisms to incentivise decarbonisation, including market-based mechanisms such as the UK Emissions Trading Scheme (UK ETS).

To achieve the decarbonisation of the whole energy system, it is important to develop a complete and quantifiable picture of GHG emissions that supports decision makers and track progress towards the UK’s Net Zero target. And do so in way that is transparent enough to identify feedbacks and unintended consequences at different levels of the system.

At Energy Systems Catapult, we see carbon accounting as part of the foundations of effective decarbonisation, together with:

• A sector led approach to carbon policies
• A Carbon Regulator to oversee the implementation of carbon emissions monitoring, reporting, and verification (MRV)
• Digitalisation to make carbon accounting more efficient and effective

We have made the case that a sector led approach should be taken in order to provide the UK with the best chance of achieving Net Zero by 2050. On the face of it, this approach could be seen to result in overlapping carbon policies between sectors. Where our proposal differs, however, is that at the heart of a sector led approach is whole systems thinking. By recognising that the energy system does not and cannot work in silos, we must also recognise that it is equally important to develop policies that complement the different types of complexity inherent to a zero carbon world, rather than implement policies that work at odds with it.

Alongside a sector led approach, we have also proposed a Carbon Regulator is needed to provide economy-wide regulatory oversight and ensure that carbon accounting approaches are coherent and consistent across the economy. This is important, because at the heart of carbon accounting is the requirement for empirically driven MRV to ensure emissions are accurately accounted for and that methodologies support the aims of carbon policies. For example, methodologies should be consistent to allow for meaningful comparisons to be made.

As we are seeing in Canada, accounting on a policy-by-policy basis is very likely to lead to unintended consequences, but a Carbon Regulator can mitigate this. Addressing the waterbed effect can only occur if whole systems thinking is employed to ensure:

• Empirical and scientific methods for measuring or accurately estimating emissions.​
• Reported emissions reduction actually occurs in line with Carbon Budgets and the Paris Agreement.
• Reductions in, and removals of, emissions are accounted and rewarded appropriately through Government implemented policy.

In our forthcoming report on carbon accounting in industry, we found that inconsistencies in MRV methodologies make it difficult to derive meaningful comparisons of emissions across industry sub-sectors, industrial clusters, and regions. Such inconsistencies also increase the administrative burden of reporting on industry and can result in unintended consequences such as double-counting emissions reductions. We also found that the uncoordinated approach to policy design and implementation has led to an equally uncoordinated approach to MRV. This is because policy design often sets the MRV requirements and carbon policies with varying objectives lead to differences in MRV methodologies. It is crucial to take a more consistent and coherent approach to carbon policies and MRV across the economy, including for carbon accounting.

The final piece of the puzzle will be digitalisation. This will support the streamlining of MRV required across the economy (and eventually on imported goods and services), to increase transparency of emissions data for external decision makers, all while facilitating data aggregation and protection of sensitive data. If implemented well, it can also reduce the administrative burden experienced by those who supply the data, yielding more resource to emissions reduction activities.

Consistency and coherency between MRV conventions is fundamental to carbon accounting and is fundamental to true emissions reduction. Without it, there is a real risk that emissions reduction plays out on a spreadsheet, which is meaningless if it is not also happening in the real world.

There is a clear need for a coherent approach to carbon accounting that drives innovation, understands business needs, and adopts a whole systems approach. We will be publishing our report on carbon accounting in industry later in the Autumn.