Price paid to cut carbon emissions varies by up to £700/tCO2 in UK

Bringing together a group of leading thinkers from government, business and academia, the Energy Systems Catapult (ESC) is seeking to explore options and expand the debate around incentivising the most cost-effective ways to cut carbon across the UK economy. The projects has released an initial scoping study: Current Economic Signals for Decarbonisation in the UK. The project’s initial scoping study, delves into the economic signals for decarbonisation across different sectors, including both: the taxes and subsidies explicitly applied with climate change policy goals in mind (e.g. renewable energy subsidies in power generation), and those in place for other reasons (e.g. reduced VAT rates on domestic electricity and gas consumption). The study looked at the ‘effective carbon prices’ for both upstream (i.e. electricity generation and oil/gas production) and downstream activities (i.e. transport, business/residential, agriculture and waste) and compared them against the level calculated by Government as being required by 2030 to keep the UK on track to achieve 2050 decarbonisation targets – a carbon price target range of between £40‑£119/tCO₂. The study found that the price paid to cut a tonne of carbon varies widely between sectors (and takes into account the range of opinions/assumptions about which taxes and subsidies should be included):

• Subsidies for rail transport effectively price carbon at a rate between £139/tCO₂ and £568/tCO_2, (if we view their objective as being to reduce emissions from road transport)
• The rewards for Solar PV closely straddle the BEIS target range, between £45 and £130/tCO₂
• Nearly half of all current carbon emissions (48%), including gas usage and agriculture, face effective carbon prices which are clearly too low to meet legally binding carbon targets.
  • Gas use in residential homes has a low effective carbon price, between -£33/tCO₂ and £4/tCO₂ due to reduced VAT rates and the “taxes” on low-carbon electric heating alternatives
  • Farm subsidies result in negative effective carbon prices of up to -£45 /tCO_2.

ESC Head of Markets, Policy and Regulation, George Day, has said that “clarity on carbon price, or putting a value on low carbon, will be critical to unlocking the innovation that the energy system transition.”