Rethinking Decarbonisation Incentives

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Reform options to promote clean growth and efficient economy-wide decarbonisation

The UK has very clear targets to reduce carbon emissions by 2050. But the policies currently driving this profound change in our economy are a complex combination of taxes, subsidies, contracts and regulations, which have been frequently changed by successive administrations.

In effect we are paying different prices to cut carbon emissions in different sectors of the economy, even though the harm in terms of climate change is the same. For investors the rewards for investing to reduce emissions depends on future policy decisions which are difficult for anyone to predict. This means that we end up paying a higher price, because we are buying emissions reductions that are not necessarily the cheapest available, and because we are paying investors to bear policy risks.

All of this is a long way from the textbook ideal of a reliable, economy-wide carbon price which allows markets to drive efficient decarbonisation effort and change across the economy.

Why is ESC working on Rethinking Decarbonisation Incentives?

Over the past ten years the Energy Technologies Institute (ETI) has built a set of tools for understanding and analysing the full set of options to cut carbon emissions across the whole energy system. This ‘whole system perspective’ encompasses electricity, heat, transport, industry and infrastructure, and covers the overwhelming majority of carbon emissions. Energy Systems Catapult (ESC) is now the vehicle for taking forwards this unique capability.

ETI and ESC’s ‘whole system’ analysis underlines the potential economic advantages of building a coherent and enduring set of price signals or incentives for decarbonisation. The estimated savings from investing efficiently in decarbonisation run into hundreds of £billions over the period to 2050. Conversely, the analysis and evidence points to the high potential economic cost of poor choices and failure to incentivise innovation and efficiency.

So, if we want to enjoy these economic gains, the question of what policies and price signals we need to put in place naturally follows:

  • How can we create an enduring framework of economic incentives to reward emissions reduction where they are most cost-efficient?
  • How can we do this in a way that goes with the grain of wider societal and consumer aspirations for better homes, health, social welfare, changing lifestyles and mobility needs?
  • And how, can our policies ultimately support a productivity-enhancing approach to decarbonisation across the economy?

The Gap the project aims to fill

The Rethinking Decarbonisation Incentives (RDI) project aims to take a fresh look at the range of options to improve the framework of economic drivers for decarbonisation across the UK economy. The project will adopt a whole-system perspective (building on Energy Systems Catapult’s extensive experience and capabilities in strategic analysis), placing this in the wider context of the Industrial Strategy and Clean Growth.

This involves stepping back to look at:

  • The current framework of economic incentives for investing in decarbonisation across different sectors of the UK economy,
  • Learning lessons from case studies of policies used in other countries,
  • Developing credible options for market and incentive design for emissions reduction and/or carbon prices or trading.

The aim is to develop options which are credible over a medium-term time-frame (i.e. capable of initiation within five years), taking account of the practical challenges associated with reform.

We will use these options to promote a broader strategic debate among stakeholders about how the UK could move towards a more coherent and enduring economic policy framework for decarbonisation.

Rethinking Decarbonisation Incentives – Project Phases

Phase one of Rethinking Decarbonisation Incentives (RDI) delivered its report in May 2018, summarising current economic signals for decarbonisation in the UK.  The report shows that the rewards for cutting carbon emissions currently vary widely from one sector to another in the UK economy.

Rewards are much higher than the government’s target carbon price range for some activities, while much lower for others. The report also shows how these varying economic signals arise from a complex mix of taxes, subsidies, contracts and regulations.

 

 

The RDI is working with a number of project collaborators and advisers, which include:

Contact for more information

policy@es.catapult.org.uk

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