How could incentives for land use be linked to future developments of the UK ETS?
Comment by Dr. Danial Sturge
Carbon Policy Practice Manager - Markets, Policy and Regulation
Land use was always going to play an important role for emissions reduction, but Net Zero has upped the ante for the sectors directly impacted – agriculture and forestry. Farming is considered a ‘hard to abate’ sector, but now it must also reduce its emissions along with the rest of the economy. Indeed, the National Farmers Union has called for the agriculture sector to become carbon neutral across GHG inventories by 2040. But even if we all went vegan tomorrow, achieving this will require some level of greenhouse gas removals (GGR) or negative emissions.
This is where the other side of the land use coin comes into play. Growing trees or biomass crops can act as ways to capture carbon from the atmosphere delivering value for not just farmers, but the whole economy too. But how do we incentive these nature-based GGRs and does the UK ETS have a role to play?
In our recent work on developing carbon credit markets, we proposed the development of a GGR marketplace. Such a marketplace could provide a source of revenue for land owners and farmers in return for capturing carbon from the atmosphere. In effect, farmers and land owners could start providing a greenhouse gas removal service for other emitters where abatement is either difficult or very expensive (in the near-term at least) such as heavy industry, aviation, and livestock farming. This would help them to achieve Net Zero, while not removing the incentive for them to develop less carbon intensive methods, while also incentivising the development of new climate friendly ways to farm and use land.
Such a GGR marketplace would need to sit separate from the UK ETS whilst it was developed and matured into a liquid market for nature-based – and eventually engineering-based – negative emissions technologies. In time, however, there could huge advantages in linking the two via the trading of carbon credits (see figure below). If this were the case, sectors like industry and aviation, where direct abatement of emissions is likely to be tough to achieve, can use negative carbon credits to meet their portion of the ETS cap. There may be a case to place limits on the use of credits to also maintain incentives to progress direct abatement of emissions. But it could provide a level of flexibility for UK industry that provides protection against competitiveness impacts while providing revenues to drive investment and innovation in a range of GGR technologies and value chains. A win-win.
Offering land owners and farmers an additional source of revenue for adopting practices that contribute to our emissions reduction goals could become a key part of our carbon policy framework for Net Zero. Ensuring everyone is taken along the low carbon transition ride not only requires it to work for the environment, but it should also provide the economic opportunities to sustain the UK’s key sectors.
At this point, it’s worth stressing that we do not believe agriculture should be covered by the UK ETS – at least not any time soon. The sector does, however, require sectoral carbon policies supported by a package of complementary policies to enable this crucial part of society to achieve Net Zero. Our proposals for building the GGR marketplace are part of this, and could provide another step along the way to a coherent economy-wide carbon policy framework, as proposed by our sector led approach.
The investability and credibility of this approach to incentivise the role of climate friendly farming and land use would also crucially rely on a coherent and consistent framework of MRV and accounting for emissions across the economy (and likely internationally). This underlies our view about the importance of a new regulator for emissions MRV and accounting, as covered in last week’s blog. This is an area where UK can play a leading role in developing global thinking and best practice on delivering Net Zero.
In the next blog, we will be covering the domestic aspect of transport, focusing on road transport, the interplay between aviation and rail, and what role the UK ETS has for all of it.
What is the UK ETS?
The UK Emissions Trading System (UK ETS) came into operation on 1 January 2021 following the UK’s departure from the European Union’s ETS – covering electricity generation, heavy industry, and domestic flights. Under the ‘cap and trade’ principle, an upper limit of emissions is set – the cap – for all participating installations. Allowances for emissions within the system are auctioned off or allocated for free. Trading of allowances between installations can occur if an installation exceeds or outperforms its limit. In this way, installations are able to achieve emissions reduction in the most cost-effective way that meets their business needs. Government have said the emissions cap will soon be aligned with the UK’s 2050 Net Zero commitment.
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