Expanded UK ETS can accelerate net zero, if progressively designed and accompanied by complementary sector-specific policies
- New report draws on expert input† from the heat and buildings, greenhouse gas removal (GGR) and road transport sectors to make recommendations for extending UK ETS.
- Carbon markets and pricing should be at the core of a net zero compatible policy framework, but the question of ‘when’ carbon pricing should be extended is critical.
- “Polluter pays” principle must be managed sensitively in heat and buildings to avoid adverse impact on low-income households already facing cost of living crisis.
A new report from Energy Systems Catapult and the Grantham Research Institute on Climate Change and the Environment has found that while the UK Emissions Trading Scheme (ETS) could provide the backbone of an enduring economy-wide framework for reaching net zero, expanding it too early to sectors not yet covered risks undermining the scheme.
The report – The future of UK carbon policy: how could the UK ETS evolve to help achieve net zero? – draws on views from three expert roundtables† examining the implications should the UK ETS be expanded to include three further sectors beyond those already covered by the scheme.
According to the report, for these sectors – heat and buildings, greenhouse gas removal (GGR) and road transport – government should focus on delivering a complementary set of policy packages, building on existing sector strategies to introduce tailored carbon markets which could later be linked together.
More progressive introduction of carefully-designed carbon markets to new sectors would help avoid price uncertainty and volatility – which could inhibit investment and innovation – ensure a fairer system for all, and set a pathway to a future economy-wide UK ETS.
After leaving the European Union’s ETS, the UK ETS was introduced in 2021 as the country’s mechanism for capping and reducing the carbon emissions from power generation, industry and aviation.
The report identifies near-term challenges in expanding the scheme to each of the three additional sectors, notable barriers being the already complex policy landscape in road transport; lack of economically viable low carbon alternatives in heat and buildings; and the relative immaturity of GGR technologies.
Recommendations from the report include (see report for full recommendations and insight):
- If the UK government were to eventually expand the UK ETS to heat and buildings, it must be developed as part of a wider package of complementary policies that address specific challenges, including fuel poverty and distributional impacts.
- The UK ETS requires wider system architecture changes to be able to incorporate GGR techniques: for example, expanding sectoral coverage to include sectors where achieving net zero is likely to require GGR (due to difficulty of reducing emissions) or setting the cap to net negative.
- Including road transport within the UK ETS offers an opportunity for policymakers to enact broader fiscal reform of transport taxes, most notably fuel duty (supported by policies that encourage a move away from private internal combustion engine vehicles).
- Introducing well designed sector-specific markets, with eventual linking to the UK ETS, could be a pathway to an economy-wide UK ETS in the future. Therefore, policy capacity in the near term should focus on delivering a complementary set of policy packages for the three sectors considered, building on existing sectoral strategies.
The report notes that introducing a carbon price on energy fuels (the “polluter pays” approach) without implementing compensatory policies would hit low-income households particularly hard, since they’re less able to change consumption behaviour – or invest in low carbon alternatives – in response to higher prices.
To ensure fairness and support the improvement of low carbon consumer propositions such as a market for heat pumps, the report recommends the UK ETS compliance requirement in the heat and buildings sector could be the responsibility of energy suppliers.
Dr Danial Sturge, carbon policy practice manager at Energy Systems Catapult, said:
“An economy-wide UK ETS that forms the backbone of a net zero policy framework is achievable if government focuses on developing sectoral carbon policies rather than a one-size-fits-all approach.
“While extending the UK ETS will remain challenging in the near term, by creating sectoral policies and new carbon markets designed to link together gradually can avoid price volatility, and yield a way that is fair and protects low-income households.”
Josh Burke, senior policy fellow at the Grantham Research Institute on Climate Change and the Environment, said:
“The extension of carbon pricing to sectors not previously covered by the UK ETS would significantly expand the application of the polluter pays principle.
“However, the policy must be underpinned by equity and fairness as without compensatory policies, expansion may risk entrenching inequality given that energy costs constitute a higher share of expenditure for lower-income households. This could be achieved through the creation of a ringfenced fund with the carbon pricing revenues used to reduce the impact of higher energy and fuel costs.”
Last month the government set out proposals for changes to align the UK ETS cap and trajectory with the country’s net zero target, and called for early views on the incorporation of GGR into the scheme. It also set out proposals to expand the scheme to the domestic maritime sector, and opened a consultation seeking views on including waste incineration and energy from waste.
On Monday a report from the Environmental Audit Committee (EAC) concluded that a UK carbon border adjustment mechanism (CBAM) – which would impose a levy on imports of carbon-intensive goods – could help the country meet its net zero targets.
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Notes to Editors
† Participant organisations at the sector roundtable discussions include:
- Climate Change Committee
- Department for Business, Energy and Industrial Strategy
- Department for Transport
- Green Alliance
- HM Treasury
- National Infrastructure Commission
- Policy Exchange
- Resolution Foundation
- SMMT
- Stonehaven
Full list of participants in Appendix B of the report.
The full report will be available from the Grantham Research Institute’s website and Energy System Catapult’s website from 00.01 Wednesday 6 April.
About Energy Systems Catapult
Energy Systems Catapult was set up to accelerate the transformation of the UK’s energy system and ensure UK businesses and consumers capture the opportunities of clean growth.
The Catapult is an independent, not-for-profit centre of excellence that bridges the gap between industry, government, academia and research. We take a whole systems view of the energy sector, helping us to identify and address innovation priorities and market barriers, in order to decarbonise the energy system at the lowest cost.
We have around 200 staff based in Birmingham with a variety of technical, commercial and policy backgrounds. We work with innovators from companies of all sizes to develop, test and scale their ideas. We also collaborate with industry, academia and Government to overcome the systemic barriers of the current energy market to help unleash the potential of new products, services and value chains required to achieve the UK’s clean growth ambitions as set out in the Industrial Strategy.
About the Grantham Research Institute on Climate Change and the Environment
The Grantham Research Institute on Climate Change and the Environment was established in 2008 at the London School of Economics and Political Science. The Institute brings together international expertise on economics, as well as finance, geography, the environment, international development and political economy to establish a world-leading centre for policy-relevant research, teaching and training in climate change and the environment. It is funded by the Grantham Foundation for the Protection of the Environment, which also funds the Grantham Institute – Climate Change and the Environment at Imperial College London.
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