Comment by Dr. Danial Sturge, Carbon Policy Practice Manager at Energy Systems Catapult. 

Last month (October 2024), we saw Rachel Reeves give Labour’s first Budget since taking office. While the headlines focused on the £40 billion in tax rises, there were also some nuggets on carbon policy.

Carbon price signals remain uneven across our economy

The current effective carbon prices continue to tilt in favour of the high carbon option in many cases. The cost between electricity and gas use in our homes is yet to be addressed, for example. The incentive to continue with high carbon heating remains, minimising our ability to transition to low carbon alternatives.

The cost of high carbon travel has got a little bit more expensive, however, unless you’re driving. From 2026-27, Air Passenger Duty (APD) will increase, amounting to £2 more for short-haul flights and £12 for long-haul destinations. If you’re flying private, APD will rise by a further 50%. Fuel Duty – on the other hand – has been frozen once again; there hasn’t been an increase since 2010.

We published our effective carbon prices chart in 2018, but a lot has changed in the intervening years. The shift to a Net Zero target by 2050, along with wider macro-economic impacts, such as the pandemic, inflation, and war in Ukraine, have resulted in increased energy prices. We are looking for help to update the backend data to support in future policy design.

The enabling carbon policy framework is taking shape

The most recent UK Emissions Trading Scheme (ETS) auction cleared at £36.72. Not quite an all-time low, but not far from it. While there will be scope expansion to domestic maritime and waste, can we expect government to commit to more? We think the UK ETS has an important role to play in decarbonising people’s homes, specifically supporting the transition from gas boilers to heat pumps. The biggest challenge the new government will face is how to deal with the inevitable distributional impacts and do so in a way that works in the reality of politics.

The UK Carbon Border Adjustment Mechanism (CBAM), which is being led by Reeves’ HM Treasury, received a paragraph in the Budget, largely repeating the government’s proposals in their March 2024 consultation. The only substantive change is that the glass and ceramic sectors will not be in scope when the UK CBAM is implemented from 2027. The government’s reasoning is that while products from these sectors give rise to the risk of carbon leakage, they are, on average, less emissions intensive than other sectors within scope, and therefore less exposed to the carbon leakage risk.

As both of these key carbon policies continue to develop, they will need to be underpinned by coherent monitoring, reporting, and verification (MRV) of emissions. We are in the process wrapping up our Carbon Regulator project, and we intend on making recommendations to government in the new year, including on governance and timelines for implementation.

There’s more around the corner

The state of carbon policy in 2024 is strong. Government is forging ahead with UK ETS expansion and the design of a UK CBAM. Yet, there remains a significant amount more to be done, despite the continued trend in the right direction.

Next year the Climate Change Committee will publish their Seventh Carbon Budget Advice, and we will see a new Industrial Strategy.

Our focus will also shift to industrial decarbonisation – enabling the right framework for clusters and dispersed sites to meet their emissions reduction targets, while supporting growth and innovation for UK manufacturing. If you’re interested in working with us on this, please do reach out and get in contact.