Rethinking Decarbonisation Incentives: Reform Options (Initial Thinking)

Energy Systems Catapult’s Rethinking Decarbonisation Incentives (RDI) project is exploring at how UK policies can promote clean growth by taking a ‘whole systems’ perspective on carbon policy.

We have summarised the current pattern of ‘effective carbon prices’ in the UK and carried out a range of international case studies.

We are now exploring policy options to improve decarbonisation incentives across the economy, recognising uncertainty about future UK participation in the EU ETS, and the wider context of the Clean Growth Strategy.

Five Stylised Reform Options

In this report, we have developed five stylised reform options to illustrate and explore the implementation challenges.

  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 wider span UK emissions trading scheme, covering all fossil fuel use, industrial emitters, and power generators (alongside complementary measures on efficiency and investment).
  4. Setting Standards for Carbon Intensity – Setting an economy-wide carbon intensity (emissions per unit of energy) standard that tightens over time and covers all forms of energy including electricity generation, and fuels used in transport and heating. Energy suppliers that are below the carbon intensity target generate credits that can be sold to suppliers who are unable to meet the intensity standard (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.

Click below for an overview of the Reform Options report:

Next Steps

All five reform options could improve incentives to reduce emissions at least cost across the economy. However, they all raise detailed design, practicability and impact management challenges. The next phase of RDI will explore the challenges associated with each option at a sectoral level.