Five options to tackle carbon pricing

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Creating a new trading scheme for all UK carbon emissions, setting standards for the carbon intensity of energy or taxing carbon like VAT, these are some of the options being explored by the Energy System Catapult for tackling decarbonisation in a post-Brexit Britain.

As part of the Catapult’s mission to unleash innovation, the Rethinking Decarbonisation Incentives (RDI) project is exploring how UK policies can promote clean growth by taking a ‘whole systems’ perspective on carbon policy.

The recent Cost of Energy Review by Oxford academic Dieter Helm found: “the cost of energy is significantly higher than it needs to be” and recommended “setting a universal carbon price on a common basis across the whole economy, harmonising the multiple carbon taxes and prices currently in place”.

The RDI project has worked up five options for reforming how the UK puts a price on carbon emissions.  The options vary from relatively minor changes to more radical new approaches:

  1. Aligning Sectoral Policies for Carbon – Adjusting existing policies/taxes to ensure that the resulting ‘effective carbon prices’ is broadly consistent across the economy and high enough to meet carbon targets.
  2. Taxing Carbon Upstream – Replacing current policies with a near economy-wide carbon tax at upstream level on all fuels (at point of production or import), and direct sources of emissions from industry, waste and agriculture (alongside complementary measures to stimulate efficiency and investment).
  3. Introducing a UK Emissions Trading Scheme – Replacing existing policies and membership of EU ETS with a UK emissions trading scheme, covering a wider span of fossil fuel use, including: industrial emitters, and power generators (alongside complementary measures on efficiency and investment).
  4. Setting Standards for Carbon Intensity – Setting carbon intensity standards (emissions per unit of energy) that tighten over time. These could potentially cover all forms of energy including electricity generation, and fuels for transport and heating, or be applied progressively to particular energy uses or sectors. Energy suppliers can buy or sell credits to meet the standard (those below the carbon intensity standard generate credits that can be sold to suppliers who are above it (i.e. in deficit).
  5. Taxing Carbon at Point of Consumption – Applying a carbon tax on goods and services at the point of consumption, maximising consumer-visibility (through carbon labelling) and taking account of full lifecycle emissions for both imported and domestic production.

For the full report, visit: Reform Options for Rethinking Decarbonisation Incentives

The Rethinking Decarbonisation Incentives project has reviewed how carbon emissions are currently taxed or priced across the UK economy, and analysed case studies of the most advanced carbon pricing regimes from around the world, before developing five potential reform options for the UK market.

George Day, head of policy at Energy Systems Catapult, said: “There is little argument that better carbon pricing would deliver economic benefit – by allowing the market to find the lowest cost way of cutting carbon emissions.

“Currently we have a complex combination of taxes, subsidies, contracts and regulations, that means the price we are paying to reduce carbon emissions in different sectors of the economy varies by hundreds of pounds per tonne of CO2.

“While there is also uncertainty about future UK participation in the EU Emissions Trading Scheme.

“Energy Systems Catapult has taken a comprehensive look at how to improve incentives for decarbonisation across the UK economy.

“Firstly, we reviewed the current situation across the UK, analysing how different policies in different sectors create ‘effective’ carbon prices that are vastly different.

“Secondly, we cast the net wider and explored the most interesting and relevant attempts to introduce carbon pricing around the world, from California to New Zealand, Sweden and South Africa.

“Finally, we developed five reform options, which vary from: simply bringing existing policies from different sectors into alignment through to more ambitious reforms.”

All five reform options could strengthen the decarbonisation incentive across the economy and improve the prospects of delivering emission reductions at least cost. However, they raise significant challenges in terms of their economic impacts, feasibility, and effectiveness.

The next phase of the project will explore the challenges associated with each at a sectoral level and to refine understanding of the practicability of different design choices.

Day continued: “Our ultimate aim is to stimulate and inform a wider and more active debate on how the UK can move towards a coherent set of policies to drive decarbonisation efficiently across all sectors of the economy.”

“Twenty-five years ago, the UK lead the world in privatising the energy market, 10 years ago we lead the world by introducing Climate Change legislation. Could we lead the world again by pioneering economy-wide carbon pricing?”