Developing an innovation-friendly, economy-wide carbon policy framework for Net Zero.
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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 Net 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 energy.
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).
Carbon leakage can occur if the competitiveness impacts that arise from carbon policies lead to emissions reduction from domestic organisations combined with increases in emissions in other jurisdictions, where carbon policy is either less ambitious or does not exist. This can lead to a net increase in global emissions. Carbon Leakage will remain a risk while there is a disparity between the strength of domestic and international carbon policies.
In this report, which also serves as our response to the government’s consultation, we focus on three carbon policy approaches: Pricing, Standards, Increasing Demand.
The report, produced as part of the Innovate UK-funded cross-Catapult Carbon Accounting programme, proposes a carbon accounting framework to overcome the complexity and limitations of the existing regulatory ecosystem by considering options for robust monitoring, reporting, and verification (MRV).
The report calls for a common-sense approach to carbon accounting with standardisation where it makes sense and flexibility where it is necessary, including the standardisation of emissions disclosures and the creation of a distributed digital systems architecture.
In this report, we review options for policymakers to support a more consistent and coherent approach to the monitoring, reporting and verification (MRV) and accounting of greenhouse gas (GHG) emissions in industry, drawing on insights from industry stakeholders in South Wales.
In this report we respond to the key questions in the Government’s Developing the UK Emissions Trading Scheme (ETS) consultation, as well as highlighting opportunities for future sector expansion of the UK ETS not covered by the consultation.
Highlights key themes for policymakers to consider in developing industrial clusters as a key component of a broader national strategy and policy framework to drive industrial decarbonisation across the economy.
Focuses 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.
Explores and makes 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.
The Commission for Carbon Competitiveness, a cross-party and cross-industry group, has published their inaugural Green Paper, ‘Fixing the Carbon Leak’. The Commission ran its own mini consultation alongside the government’s consultation process, receiving twenty written submissions as well as conducting four oral evidence sessions, in which Energy Systems Catapult participated.
Kicking off the summer, the UK Government and devolved administrations published their long awaited response to last year’s ‘Developing the UK Emissions Trading Scheme (UK ETS)’ consultation. For those of us who spend a considerable amount of time thinking about carbon pricing and carbon markets, this much anticipated document not only lays out where the UK ETS is heading for the remainder of this decade, but what its role might be out to 2050.
Carbon Border Adjustment Mechanisms (CBAM) are in vogue. A CBAM can be used by a country or trading bloc to address asymmetric carbon policies between jurisdictions as a way of mitigating carbon leakage.
The ability to exchange, compare, track and trace emissions data through supply chains will be fundamental to the UK’s future low carbon economy. Complete and accurate data will support innovations relating to carbon intensive products and processes. Data will also support Government and consumers to make informed, low carbon, decisions.
Carbon accounting refers to the processes used to measure and allocate Greenhouse Gases emitted within a boundary – spatial (e.g. site-specific installation) and temporal (e.g. over a period of a year) – for the purposes of maintaining GHG inventories, producing corporate environmental reports, or calculating the carbon footprint of a product. It is also crucial for the operation of carbon policy mechanisms to incentivise decarbonisation, including market-based mechanisms, such as the UK Emissions Trading Scheme (UK ETS).
The Government recently announced that it will consult later in the year on carbon leakage mitigation options, including whether a carbon border adjustment mechanism (CBAM) could be appropriate tools in the UK’s policy mix. For those of us who have been thinking about this stuff for a while, this is good news.
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 meeting 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.
In July 2023, Energy Systems Catapult kicked off a two-year project that aims to set out how the concept of a Carbon Regulator could be brought to life. As part of the cross-Catapult Carbon Accounting Programme, funded by Innovate UK and led by the High Value Manufacturing Catapult, we are aiming to answer the question: What does regulatory oversight for carbon accounting and emissions data look like in a Net Zero economy?