Discussions on carbon pricing are just getting started

Over the last two years Seahorse has been working with the Zero Carbon Campaign (ZeroC) to bring carbon pricing from the fringes of environmental and political debates to the centre of the net zero agenda. Now that the campaign has officially come to an end, where have we got to? What happens next? And what should those enthusiastic about carbon pricing know?

Spoiler alert: we’re still a little way off seeing the introduction of fair and effective carbon pricing across the economy - as ZeroC has been calling for – but the campaign is without a doubt ending on a high.  Policy development has come on leaps and in just two years (a blink of an eye in legislative terms) and there’s lots carbon price advocates can build on.

This will be the first in a series of insights that, touching on the work we have done with ZeroC, will delve deeper into the feasibility of this policy tool in other areas such as agriculture and the marine environment, as well as exploring debates around international carbon markets and article 6, fairness and the net zero transition.

We hope to provide a guide to how the environmental sector can grasp this momentum.

Campaign success: Where is carbon pricing today?

In raising the profile of carbon pricing, campaign achievements include:

• A Parliamentary debate with 108,000 signatures in support of their polluter pays petition

• Over 300 pieces of coverage

• A BEIS select committee inquiry

• Government commitments towards re-balancing carbon costs across electricity and gas, strengthening and extending carbon pricing across more of the UK economy, and a tentative commitment towards exploring the role that Carbon Border Adjustment Mechanisms can play in facilitating the Net Zero transition.

ZeroC has contributed enormous momentum to carbon pricing development, with their research about fair and pragmatic policy design and public opinion having fed into conversations happening across different sectors. To take just one example from the UK, the Government is now openly considering Carbon Border Adjustment Mechanisms (more on this below). The growing global appetite for collaboration was seen at COP26, where rules were finally agreed on how carbon markets would function under Article 6 of the Paris Agreement. International leaders like the World Trade Organisation, the IMF, the World Economic Forum, and Mark Carney have all expressed support for the idea.

As the ZeroC campaign argued throughout, carbon pricing is not a singular solution to all our environmental problems, but it can help rebalance the market towards the “polluter pays” model, counteracting mechanisms that have led to more polluting options being cheaper than they need to be and making greener choices more accessible for all. Moreover, it will need to be adapted to each context, and complemented with additional policies to ensure it is effective and fair.

As carbon pricing could be applied so significantly across the economy, understanding the scale of its impact and where concerns lie before implementation, is key to its success.  Below we’ve provided a brief overview of the status update of the carbon pricing debate in the UK and where opportunities for the near future lie.

The UK ETS consultation

Currently, the UK Emissions Trading Scheme (ETS), the scheme that puts a quantity limit and a price on emissions, only covers about a third of the UK’s emissions, including energy intensive industry, power generation, and aviation. The Government has on multiple occasions committed to exploring the expansion of the UK ETS to include emissions from heat and transport, which release around 19% and 27% of UK greenhouse gasses respectively. However, the recent energy price spike has brought conversations about extending carbon pricing to a halt, despite the Secretary of State for BEIS reiterating the importance of reaching net zero in response. Just last week reports emerged that proposals to extend the UK’s ETS to include fuel and heating have been significantly watered down among fears that they would lead to a rise in consumer costs and consequent political backlash. The consultation will now be published later in the spring and will still include the extension of the ETS to waste incineration and marine shipping, leaving a big question mark looming over how we incentivise shifting away from carbon intensive heating systems and fuel.

Making net zero work for everyone

The question of how consumers will feel the effects of reaching net zero across sectors is yet to be answered by political leaders. We’re yet to see the mechanisms and interventions that will need to be introduced to address potential distributional impacts of the transition, but also  ensure the significant opportunities that will derive from it are shared. Carbon pricing is one of the tools the Government can use to address these impacts – first, by making low carbon alternatives more competitive, and second by using some of the revenue raised by carbon charging to compensate those who need it most, known as a “carbon dividend”. The net zero review included an in depth assessment of the costs of net zero policies would fall across society, and the Government has been reported to be considering carbon pricing as an option for mitigating cost rises for the poorest in society, however little progress has been made since then. This could be partly addressed in upcoming affordability legislation, but it’s unlikely to be far reaching enough to cover the sort of extensive carbon pricing discussed here.

Carbon border adjustments

A Carbon Border Adjustment Mechanism (CBAM) is a tax on imports that have a higher carbon footprint than comparable domestically produced goods. CBAMs have gained in prominence and popularity over the last two years, largely thanks to proposals put forward by the EU and most recently with the EU and US signing a deal on green steel. There is a clear rationale for this: if we expand carbon pricing across the economy (and beyond that third of emissions covered by the ETS), we need to ensure UK businesses are not undercut by cheaper but higher emitting imports.

In the UK the Secretary of State for the Environment, Food and Rural Affairs, recently announced he is considering introducing a carbon border adjustment mechanism on countries failing to act on climate change, including on meat imports, and the Secretary of State for BEIS has discussed the benefits of CBAMs for protecting emission intensive industries like steel with the US and EU. Interest is also growing in Parliament, with the Environmental Audit Committee currently conducting an inquiry on CBAMs. Whilst we are some way off a conclusion on whether the UK intends to introduce one, expect discussions on this to continue in the coming months.

Where does this leave us?

Despite the progress and increased focus on making polluters pay for the damage they cause, there is more to be done. As the recent ETS decision shows, much like the reduction of air passenger duty in the Comprehensive Spending Review, the Government has yet to fully align action with rhetoric on net zero and will hesitate (or backtrack) in the face of any anticipated public backlash. But the solution to this does not lie in delaying difficult decisions, it requires open acknowledgement of the challenges that aligning our economy with net zero will bring and expressing commitment to address them. There is plenty of public support for further ambition (as seen in Green Alliance’s and the Independent’s polling), but that support is crucially underpinned by one thing: fairness. People and businesses want to know their efforts to reduce emissions will not be undermined by free riders and slow movers – whether it’s more polluting businesses or countries.