The case for a ‘Carbon Regulator’

Published: 29 April 2021

Energy Systems Catapult is calling for the creation of an economy-wide ‘Carbon Regulator’ to oversee monitoring, reporting, and verification (MRV) of greenhouse gas emissions reduction and removal across the economy.

In a new report, the Catapult found that a carbon regulator could play a pivotal role in ensuring:

  • Robust empirical and scientific methods for measuring or accurately estimating emissions.
  • Emissions reduction actually occurs in line with Carbon Budgets and the Paris Agreement.
  • Reductions in, and removals of, emissions are counted and rewarded appropriately by policy support measures and other incentives.

Dr Danial Sturge, Practice Manager for Carbon Policy at Energy Systems Catapult, said: “Verifying carbon emissions can be straight forward when measured directly from a factory flue or when proxied through energy use, but challenges arise for sectors such as agriculture and land use where such measurements are not possible.

“Consumption-based emissions, such as those embodied in imported goods and services yield additional complexity due to the supply chain life cycle analysis required.

“Currently, investor confidence is dampened – in part – by uncertain shifts in policy and incoherent practices domestically and internationally in monitoring, reporting, and verification of emissions.

“A suitably empowered carbon regulator that implements robust, economy-wide practices can improve this, removing barriers to innovation, and ensuring that incentives drive technologies and processes that genuinely reduce emissions across all major emitting sectors.

“This in turn can provide a robust basis for policy design, standard setting and reporting, and incentive mechanisms to drive investment and operational decisions aligned with Carbon Budgets and Net Zero.

Energy Systems Catapult explored three possible options for the regulator:

  1. A single economy-wide body – the “California model” is a single body with MRV and administrative responsibilities across all carbon policies. Given current UK market arrangements, this option is likely to be politically unpopular and complexity could lead delay necessary action.
  2. A single economy-wide body with devolved administrative responsibilities – similar to Option 1, but with key devolved authority bodies taking on the administrative aspects (such as environment agencies in England, Scotland, Northern Ireland and Natural Resources Wales. Given the broad remit of these agencies, this approach could simplify decision-making, but it would require significant restructuring of people and governance.
  3. A single economy-wide body with devolved and policy specific administrative responsibilities – this options builds on existing MRV arrangements, utilising policy (or sector) specific expertise, but supported by an economy-wide governance framework that ensures consistency in MRV practices across the UK.

Dr Sturge continued: “Any devolved or policy specific administrative responsibilities should sit alongside this addition of economy-wide oversight. This carbon regulator could also enforce civil financial penalties to emitters, as well as be independent and able to hold Government to account if necessary.

“An example of a similar body is the Financial Reporting Council, which is an independent regulator responsible for regulating auditors, accountants, and actuaries. This regulator sets UK Corporate Governance and Stewardship codes and seeks to promote transparency and integrity in business by monitoring and enforcing audit quality. But crucially it does not itself carry out the audits.”

 

The carbon regulator would also be responsible for developing the measurement and accounting framework (and where applicable, methodologies) required to ensure MRV is carried out accurately (as far as possible) and consistently across all sectors.

In addition, responsibilities should extend beyond the UK’s territorial emissions to include consumption-based emissions. There are difficult technical areas and conventions for carbon accounting still to be defined and agreed internationally. A UK carbon regulator would play a key role in unlocking the global debate around robustness of emissions reduction claims, as well as enabling and agreeing Article 6 of the Paris Agreement.

This report follows on from in-depth work carried out by Energy Systems Catapult over the last few years, including the ‘Accelerating to Net Zero’ report last year. This proposed that a sector-by-sector approach provided the best opportunity to develop an economy-wide carbon policy framework pursuant with Net Zero, because there were sector specific challenges to overcome.

But underpinning this approach is the need for monitoring, reporting and verification of emissions that are robust, transparent, and accurate to ensure sectors can be linked and to potentially enable expanded scope of the UK Emissions Trading System.

The introduction of an economy-wide carbon regulator – either by extending the powers of an existing regulator or setting up a new body – should consider the following recommendations:

  1. Explore the economic upsides and downsides of introducing an economy-wide carbon regulator. Such a study could seek to help guide Government in developing a governance structure that not only enables Net Zero in the UK, but also continues to place the UK as a leader on the international stage.
  2. Convene expert advisory groups across all major emitting sectors to carry out initial studies on the monitoring, reporting and verification requirements for their respective sectors pursuant with achieving Net Zero.
  3. Seek to expand the roles and responsibilities of the Climate Change Committee or set up a similar advisory body, to encompass developing the necessary measurement and accounting methodologies for emissions reduction and removal.
  4. Work with the Climate Change Committee to understand what is required to account for consumption-based emissions and include appropriate reduction targets as part of the Carbon Budget process.