Rethinking Decarbonisation Incentives: those for aviation are ineffective and too low
A recent paper called “Rethinking Decarbonisation Incentives: Future Carbon Policy for Clean Growth” looks at the UK’s current economic framework for encouraging decarbonisation. It finds it is uneven and incomplete. ‘Effective carbon prices’ are a measure of how much a firm or an individual is paid or rewarded per tonne of carbon (or CO₂e) saved when they make a choice that lowers emissions. These are too low in the UK to be effective in cutting carbon. For aviation, they are particularly weak. APD would need to be reformed to align aviation taxation with a target level, and make it more reflective of the actual emission impacts of journey/flight choices. APD is unrelated to the quantity of emissions and outweighed by the lack of VAT and fuel duty. In the short-term, air passenger duty could be increased to cover the gap. The duty could also be reformed to be more reflective of actual emissions. The report says if aviation proves impossible to fully decarbonise by 2050, then the cost of flying (or frequent flying) could include the costs of offsetting GGRs (greenhouse gas removal).
Rethinking Decarbonisation Incentives: Future Carbon Policy for Clean Growth
By the Energy Technologies Institute
The UK’s current economic framework for decarbonisation is uneven and incomplete
The UK has a complex mix of policies (including taxes, subsidies, standards, and regulations) which give rise to uneven and incomplete incentives to reduce greenhouse gas (GHG) emissions across the economy. This is far removed from the textbook ideal of economy-wide carbon pricing and constrains low carbon innovation. However, it is clear that such an ‘ideal’ faces immense practical challenges. This report explores further options to improve the broader framework of economic incentives for decarbonisation (‘carbon policy’), recognising those challenges. ‘Effective carbon prices’ are a measure of how much a firm or an individual is paid or rewarded per tonne of carbon (or CO₂e) saved when they make a choice that lowers emissions. The UK’s current mix of policies creates ‘effective carbon prices’ across most of the economy that are too low to bring forward sufficient investment and innovation to reduce emissions (see full report for more detail). Effective carbon prices also vary widely across different sectors and activities (see Figure 2).¹
A net zero target means that, unlike the 80% target, no part of the economy can be exempt from investing in fundamental change and innovation to fully eliminate or offset emissions. Applying a polluter pays principle would imply that any sectors or activities with residual emissions in 2050 should bear the cost of offsetting greenhouse gas removals (GGRs) (i.e. negative emissions technologies). For example, if aviation proves impossible to fully decarbonise by 2050, then the cost of flying (or frequent flying) could include the costs of offsetting GGRs.
Reforming air passenger duty to align aviation taxation with a target level, and make it more reflective of the actual emission impacts of journey/flight choices.
• All sources of emissions need to be addressed, including difficult to abate industries, aviation, and agriculture and land use. • A number of key sources of emissions currently face effective carbon prices which are much too low, including residential gas usage, agriculture, and aviation. • Greenhouse gas removal options will require long-term investment, and there are currently no incentives to bring this forward.
Introducing policies to require or reward action to capture carbon from the atmosphere. Net zero will require action on all sources of emissions, including difficult to abate industries, aviation, and agriculture and land use. A more coherent set of incentives for decarbonisation will therefore need to apply to these areas
Air transport (7% of emissions): An air passenger duty is applied, but this is unrelated to the quantity of emissions and outweighed by the implicit subsidy from the zero VAT rating on air tickets. International flights make up the vast majority of UK aviation emissions. Flights within the EU are covered by the EU ETS, but the corresponding effective carbon price is low.
Air transport sector
1. Increase air passenger duty and improve design 2. Work towards international pricing.
1. There is no effective carbon price signal for air travel emissions. No VAT is charged on tickets, and this is not offset by the application of air passenger duty. In the short-term, air passenger duty could be increased to cover the gap. The duty could also be reformed to be more reflective of actual emissions. 2. In the longer-term, it will be important to work with the international community to work towards a common carbon pricing/ carbon policy approach for aviation emissions.
See full report at
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 more than 200 staff based in Birmingham and Derby 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.
Rethinking Decarbonisation Incentives is a major Energy Systems Catapult thought leadership project exploring how UK policies can promote clean growth by taking a whole systems perspective on carbon policy