Only thirty years remain before the UK must legally reach Net Zero carbon emissions. All major emitting sectors – transport, heating, manufacturing, power generation, and farming – will need to change radically to get as close as possible to zero emissions by 2050. Our Rethinking Decarbonisation Incentives project, however, found that the UK’s current carbon policy framework is not fit for purpose to deliver such ambitions.
Our work showed that the current incentives (i.e. the ‘effective carbon price’ paid per tonne CO2e) arising from UK policies vary wildly across different sectors, even though the value of emissions reductions for mitigating climate change is the same. In simple terms, this suggests we may be over-rewarding some kinds of emissions-reducing activity while under-rewarding it in other activities or sectors.
The chart below shows the effective carbon prices and emissions in the UK by sector – the chart can be downloaded here, along with the underlying assumptions and data.
Figure 1: Effective carbon prices and emissions in the UK by sector
A Sector Led Approach to an Economy-Wide Carbon Policy Framework
We have proposed that a sector led approach, which recognises the importance of sector specific barriers to change, provides the best opportunity to develop an economy-wide carbon policy framework pursuant with Net Zero.
By avoiding reliance on an overarching carbon pricing mechanism, policy can be designed at a sectoral level to address sector specific challenges, for example mitigating competitiveness impacts in industrial decarbonisation or enabling energy suppliers to create attractive consumer propositions for home energy services and heat decarbonisation.
Similarly, transitional and distributional impacts often have sector specific characteristics that require sector specific policy responses (e.g. targeted fuel poverty interventions).
Explore and make the argument for taking a sector led approach that can accelerate progress during the 2020s from the incomplete and unbalanced pattern of current carbon policies towards a more coherent economy-wide carbon policy framework in the 2030s.
Focus on the UK context of international competitiveness impacts that arise directly from carbon policies and evaluate their ability to enable deep decarbonisation of industry in line with Net Zero pathways, while simultaneously mitigating carbon leakage and competitiveness impacts.
But carbon pricing – either through a tax or a trading scheme – is not enough on its own to deliver that revolution. Getting the incentives rights is about a delicate balance between innovation support, regulation, and carbon pricing.
The UK ETS currently omits natural gas (and other fuels used for heating). If the scope of the UK ETS were expanded to cover buildings, specifically heating, we potentially introduce 27 million – mostly unwilling and uninterested – participants.
If UK industry is to lead the green industrial revolution towards Net Zero, Government will not only have to incentivise deep decarbonisation of industry, but also ensure that UK industrial competitiveness is not unduly impacted.
The UK left the world’s largest carbon market – the European Union Emissions Trading System (EU ETS) – at the end of 2020. But with the UK holding its first auction of allowances recently, should we starting to think about linking the smaller UK market to its larger and older European cousin?
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. But how do we incentivise nature-based greenhouse gas removals and does the UK ETS have a role to play?
If the UK can make genuine progress to align its new UK Emissions Trading System with its legislated Net Zero target, then it can claim to be a global leader in carbon policy. This blog focuses on the many areas where UK experience has international relevance.
Throughout developing our thought leadership work we have received feedback from a range of expert advisors, including from the Department for Business, Energy and Industrial Strategy; Department for Environment, Food & Rural Affairs; HM Treasury; Climate Change Committee; Scottish Forestry; Confederation of British Industry; Vivid Economics; Grantham Institute on Climate Change and the Environment, London School of Economics; E3G; Green Alliance; Conservative Environment Network; Children’s Investment Fund Foundations; Drax; SSE; High Value Manufacturing Catapult.
We will be continuing to develop our thought leadership work over the coming years, including:
Further exploring the role of UK carbon pricing, including improvements to the UK ETS.
Deeper dives into the role of an economy-wide carbon regulator.
Leading on the international stage in the run up to COP26
Linking sectoral carbon policy packages for power, buildings, and industry.
Exploring the role of carbon policy for industrial decarbonisation, including clusters, and the role of CCS, hydrogen, and greenhouse gas removals.
In addition, we hope to leverage our expertise to support UK industry and advise other jurisdictions (e.g. Malaysia) in achieving their Net Zero ambitions.
Markets, Policy and Regulation
Independent thought leadership that combines expertise in clean technology, economics, and energy policy design, informed by cutting-edge modelling and evidence-based analysis.