Roundtable: Rethinking decarbonisation incentives

At a recent roundtable in London, industry leaders met to mull over research by the Energy Systems Catapult into how best to promote economy-wide decarbonisation.

The first output from the Energy Systems Catapult’s “Rethinking ­decarbonisation incentives” project was an analysis published in May of the current pattern of “effective carbon prices” in the UK for decarbonisation in different economic sectors and activities. This showed a range of prices, with a number of areas that appear “under-taxed”, including coal and gas generation and energy consumption in homes and businesses.

From this baseline, leading industry figures took part in a roundtable discussion at the Department of Business, Energy and Industrial Strategy (BEIS), hosted by the Energy Systems Catapult and Network, a sister publication of Utility Week.

The discussion focused on three topics:

• Implications of the current pattern of “effective carbon prices” for energy and economic policy, including the Industrial Strategy, the Clean Growth Strategy and innovation.

• What we can learn from the approach of other countries to carbon pricing and incentives for decarbonisation.

• How far the UK can go in moving towards a more coherent set of carbon price ­signals and incentives.

The first part of the Catapult’s work highlights significant variation in the effective carbon prices across different parts of the economy. Participants were asked to discuss how important this was and how important it was for getting the right technology mix to decarbonise the economy and deliver the Clean Growth Strategy.

One participant said that whether transport fuel duty is called a carbon price or not, it is working as a carbon price in that electric vehicles (EVs) have become cost-competitive on a whole-cost of ownership basis. They added that the UK was “at a precipice” where EVs are going to take off “largely because of this effective carbon price on fuel”.

Brexit was also discussed.

With the UK’s impending departure from the European Union, participants were asked to consider whether Brexit would open up any specific opportunities to improve the current picture.

One participant said they believed there are areas of EU policy that are not particularly well designed, one of them being the common agricultural policy (CAP). “Through the CAP we are subsidising forms of agriculture that are environmentally damaging,” one attendee said.

As well as looking at the implications of carbon prices in the UK, the discussion explored what could be learnt from the approach of other countries to carbon pricing and the incentives for decarbonisation.

The Catapult has produced a set of 11 case studies around carbon policy, with examples looking at a range of approaches such as standards, subsidies, tradeable certificates and interacting suites of policies.

One participant said they did not believe any country had a model that the UK could “pick off the shelf”.

One cited South Africa as an example of where policy had been “watered down” to appease different sectors.

The third and final discussion point for the afternoon was about what the opportunities are for the UK to improve carbon policy now.

The Catapult says it recognises how difficult it is to do far-reaching, radical reforms but that people should be thinking about how to move from where the UK is now to something that offers a more durable, economy-wide framework for incentivising decarbonisation.

Five stylised reform options were mooted as a basis of discussion:

• Aligning sectoral policies for carbon.

• Taxing carbon upstream.

• Introducing a UK emissions trading scheme.

• Setting standards for carbon intensity.

• Taxing carbon at the point of consumption.

One participant said they did not think the points “captured innovation funding” and expressed concerns that this was a missing category.

Another said they believed carbon taxation was an “important but not sufficient” condition to drive innovation. It was also important to examine areas where there are problems or gaps in carbon pricing, and to analyse this in a more coherent way to get a better signal across the economy.

Changing behaviour

Price, one delegate argued, is one of several mechanisms to achieve decarbonisation. Behaviour change is another such mechanism. They cited the example of the plastics debate, which has completely changed not just through issues surrounding price but though alignment of different measures. “That would be a really important criteria for looking at how you assess the different options,” they said.

Discussing prices is almost missing the point, one attendee warned. They added that the most successful UK decarbonisation policies “did not involve the official setting of prices”.

As the roundtable drew to a close, delegates were asked to summarise one thing they thought needed to be done within the next year to achieve distinct decarbonisation incentives in all sectors.

One participant proposed that the Industrial Strategy be used as a vehicle to engage with a broader swathe of business sectors, while another suggested an economy-wide approach needed to be taken. Another wanted to see the UK work with other countries, because climate change is a worldwide issue.

Andy Limbrick, environmental consultant, Energy UK

“I think we need to establish a clear post-Brexit baseline for carbon pricing and make sure we maintain strong cross-party agreement on the need to tackle climate change.”

George Day, head of markets, policy and regulation, Energy Systems Catapult

“Whole systems can sound abstract and long term – if you want to develop a market, and want to innovate and sell hybrid heat pumps, then your market is going to be affected by the imbalance between gas electricity prices that we have now. Taxing gas when people haven’t got an alternative is a problem, but the alternative will not emerge unless something is done about the framework of incentives.”

Matt Rooney, engineering policy adviser, the Institution of Mechanical Engineers

“You can learn from Australia on what not to do. What political instability does to carbon pricing where they had a plan for ETS, then they had a tax, then they withdrew the tax all in the space of a few years. It is an interesting case study to look at.”

David Joffe, acting head of carbon budgets, the Committee on Climate Change

“I’d like to see increased focus on how we can use cheap renewables to accelerate the electrification of the transport and heat sectors during the 2020s, and not just wait until the 2030s and 2040s. What are the mechanisms by which we can pull that through?”

Simon Virley, partner and head of energy at KPMG and former director general for energy at the Department for Energy and Climate Change

“The system of long-term contracts for difference we introduced in the power sector has helped reduce the costs of decarbonisation by providing greater certainty for investors and thereby reducing the costs of capital. Theoretically, the government could increase carbon taxes to achieve the same end result, but investors know that tax levels can be changed each year in the Budget. Grandfathered private law contracts tie government’s hands and could prove a useful tool as we seek to decarbonise the heat and transport sectors.”