Rethinking Decarbonisation Incentives: Current Economic Signals for Decarbonisation in the UK

Published: 22 May 2018

In this first report for the Rethinking Decarbonisation Incentives project, we have summarised the current pattern of economic signals in the UK for reducing emissions in different sectors.

The aim is to quantify and compare the effective carbon prices which arise from current tax, subsidy and other policy instruments across the economy. This provides a baseline from which to assess in more detail the different sector drivers, and future options for policy reform.

NOTE: Chart amended 18/07/2018: a) values corrected to 2016/2017 prices, b) low carbon power generation figures only include new or recently built plant, c) include feed-through of Carbon Price Support (CPS) and EU ETS Allowance (EUA) prices to electricity prices.

Click below for an overview of the ‘Effective Carbon Prices in the UK by Sector’:

Key points

The report shows how decarbonisation incentives (i.e. the price paid per tonne CO2e) arising from current 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.

Some big sources of carbon emissions, including natural gas usage and agriculture, have effective carbon prices which are too low.

The table summarises how effective carbon prices for emitting activities (and low carbon alternatives) compare against the government’s estimated range for carbon prices consistent with meeting targets.Carbon pricing diagram

Sectors where current effective carbon prices are broadly aligned with expected target prices for 2030 include:

  • Solar PV and the most recent offshore wind bids of CfD auctions
  • Possibly road transport (if the value of congestion and other externalities is offset against tax receipts)

The report’s findings suggest there is significant scope to improve the current framework of price signals for decarbonisation.

Next steps

For the next phase of the project, we commissioned 11 international case studies to explore the policy approaches to decarbonisation (or related objectives) to help inform thinking about UK policy options.