A window of opportunity for the UK to build world leading carbon policy

Comment by Dr. Danial Sturge

Carbon Policy Practice Manager - Markets, Policy and Regulation

The next few months – in the build-up to the UK’s hosting of COP26 in November – are rich with opportunity. Now is the perfect time for the UK to act on its ambitious targets, by upping its carbon policy game and building a Net Zero policy framework that is genuinely world-leading.

The UK wants to be a global leader in the fight against climate change, and it can take a massive step forward this year by increasing the ambition of the new UK Emissions Trading System (ETS). This would build on our existing Climate Change Act framework and our globally admired Climate Change Committee (CCC) system of independent oversight and advice.

For a number of years now, we at Energy Systems Catapult have been working on Net Zero Carbon Policy – a shorthand term we use for all policies that, in combination, require or incentivise action to reduce or remove GHG emissions, including pricing, regulation, subsidies, and standards.

Over the coming weeks, we will be setting out our thoughts on the key opportunities and challenges for UK carbon policy development, and global leadership in the run-up to COP26.

In a series of blogs, we intend to pose and offer answers to some of the key questions that policymakers should be considering as they grapple with the implications of adopting a 78% emissions reduction target by 2035. But what are those questions?

The future development of the UK ETS is central to this. UK policymakers have the freedom to develop a world-leading ETS, the first carbon market that is genuinely aligned with Net Zero. But a whole host of challenges and questions will need to be addressed. These include:

  • How could the UK ETS be adapted and aligned with a market framework for zero carbon power?
  • How could the UK ETS help enable zero carbon buildings, including heating?
  • How could the UK ETS work in a way that maintains and even enhances UK industry competitiveness?
  • What are the options and challenges of linking the new UK ETS to the EU ETS in future?
  • Can a Carbon Regulator responsible for monitoring, reporting, verification and accounting help make the UK ETS a success and global exemplar?
  • What does a UK ETS mean for transport, agriculture (and land use more broadly), aviation, and shipping decarbonisation?

Why do we think these are the questions that need answering? In the Government’s Energy White Paper, published just before Christmas, there were bold promises of implementing the “world’s first net zero carbon cap and trade market” and “exploring expanding the UK ETS to the two-thirds of uncovered emissions” – but what does this mean in reality?

Let’s take the first promise – the Government have already set the cap (i.e. the amount of permitted emissions in a given period) to 5% below the UK’s notional share of the EU ETS cap should we have remained participants. Still, this is a far cry from aligning the cap and trajectory with Net Zero. Following the CCC’s Sixth Carbon Budget advice, Government has said it will enshrine into law a 78% emissions reduction target for 2035. Later this year, it will consult how this translates to an appropriate trajectory for the UK ETS cap. The CCC’s advice should make this process fairly straight forward, with little contention from emitters – but the devil is in the details.

The other promise – expanding the UK ETS – is quite a bit more challenging. Economists will often tell you that applying a single carbon price – either through an explicit tax or single emissions trading system – is the most efficient way of dealing with the carbon externality. Our work, however, has shown that the policy practicalities of this approach are far from straight forward over several political cycles. Think about it, abatement options and costs, timelines, support requirements, and distributional impacts already vary widely between existing UK ETS participants – imagine throwing other sectors into the mix.

At Energy Systems Catapult, we think there is significant merit in taking a sector-led approach, with the ultimate aim of creating an economy-wide framework of carbon policies eventually linked (read: in the 2030s) together via carbon credit markets. So, how should the UK aim to develop its new ETS and how should it attempt to develop policy for sectors that are not currently incorporated into it? This is what we will be exploring over the coming weeks, delving into the detail – sector-by-sector.


How can the UK ETS be adapted and aligned with a market framework for zero carbon power?

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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