‘Effective carbon price’ varies by up to £700 per tonne

The price paid by consumers and taxpayers to cut carbon emissions in the UK varies by up to £700 per tonne, a new report from the Energy Systems Catapult has revealed.

The study examined the “effective carbon price” which has emerged in different parts of the economy due to a complex web of taxes, subsidies, contracts and regulations.

If viewed as incentives for reducing emissions from road vehicles, subsidies for rail transport have created some of the highest prices for emissions reductions in the country at between £139 and £568 per tonne of carbon dioxide (/tCO2).

Some of the lowest figures were uncovered in the agricultural sector, where farming subsidies have led to negative prices of as much as -£45/tCO2.

The Department for Business, Energy and Industrial Strategy (BEIS) has said a carbon price of between £40 and £119/tCO2 will be needed by 2030 if the UK is to remain on course to meet its 2050 decarbonisation targets.

The report found the carbon price paid for gas used to heat homes is well below this range at between -£33/tCO2 and £4/tCO2 as a result of reduced VAT rates and taxes on low-carbon alternatives. It also concluded that coal and gas generation are “under-taxed”, whilst nuclear generation is “over-subsidised”.

Subsidies for solar generation were closely aligned with the BEIS target, creating a carbon price of £45 to £130/tCO2.

Effective carbon prices and annual emissions in different economic sectors

Source: Energy Systems Catapult

Energy Systems Catapult head of markets, policy and regulation, George Day, said although many of the relevant policies were not introduced with climate change in mind, the effect has been that “we are paying different prices to cut carbon emissions in different sectors of the economy, even though the harm in terms of climate change doesn’t discriminate by sector.”

“Clarity on carbon price, or putting a value on low carbon, will be critical to unlocking the innovation that the energy system transition,” he added.

“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 overall price to cut emissions, because we are buying emissions reductions that are not necessarily the cheapest available, and because we are paying investors to bear unpredictable policy risks.”

Day said the study will be used as the foundation for further work to assess options for improving market incentives.