BEIS sets new much higher prices for the valuation of greenhouse gas (GHG) emissions in policy appraisal

Introduction

This document sets out a revised approach to valuing greenhouse gas (GHG) emissions in policy appraisal, following a cross-government review during 2020 and 2021. It replaces the previous guidance on carbon valuation.

What are carbon values?

Greenhouse gas emissions values (“carbon values”) are used across government for valuing impacts on GHG emissions resulting from policy interventions. They represent a monetary value that society places on one tonne of carbon dioxide equivalent (£/tCO2e). They differ from carbon prices, which represent the observed price of carbon in a relevant market (such as the UK Emissions Trading Scheme).

The government uses these values to estimate a monetary value of the greenhouse gas impact of policy proposals during policy design, and also after delivery.

Why value GHG emissions in policy appraisal?

The fundamental purpose of assigning a value to the GHG emissions impacts that arise from potential government policies is to allow for an objective, consistent and evidence-based approach to determining whether such policies should be implemented. Carbon values are used in the framework of broader cost-benefit analysis to assess whether, taking into account all relevant costs and benefits (including impacts on climate change and the environment), a particular policy may be expected to improve or reduce the overall welfare of society.

To reach net zero in 2050 and meet our 5-yearly carbon budgets, a robust approach to valuing emissions is vital to ensure that government takes full account of climate change impacts in appraising and evaluating public policies and projects, whether those policies are intended to reduce emissions or are likely to have the effect of increasing emissions. Such policy decisions often involve making choices between competing policy objectives.

Assigning a value to carbon helps to ensure that such choices are made in a transparent fashion and in a way that seeks to be cost-effective for UK society as a whole.

Valuing emissions impacts explicitly when making policy decisions helps to:

• ensure the climate impacts of policies are fully accounted for
• ensure consistency in decision making across policies
• improve transparency and scrutiny of decision making

Valuing emissions impacts robustly is important, however it is often the case that some of the most strategically important benefits of climate policy cannot always be quantified. For example; strengthening of decarbonisation supply chains; or increases in the UK’s resilience to deal with extreme climate events. As a result, quantified benefits of carbon saving policies can underestimate the true benefits. Therefore, policy makers and decision makers should consider all qualitative and quantitative evidence in the round as set out in the Green Book, even if a project has a low estimated benefit-cost ratio.

Greenhouse gas emissions should be valued for all policies that may have an impact on emissions, whether these impacts are positive or negative. This includes policies whose primary objective is not related to progressing the net zero target, but where there are indirect impacts on emissions.

It should be stressed that the carbon values discussed in this paper apply to all types of policy, providing there is some impact on emissions. It is not the aim of this document to discuss how these policies should be designed but rather to provide carbon values to be used in the economic appraisal or evaluation of these policies. Detailed practical guidance for analysts on how to apply the carbon values in appraising policies is available in the Green Book Supplementary Guidance: Valuation of Energy Use and Greenhouse Gas Emissions for appraisal.

Rationale for reviewing and updating carbon values

BEIS’s current approach to carbon valuation for appraisal purposes was set out in the 2009 publication Carbon Valuation in UK Policy Appraisal: A Revised Approach.

Since 2009, a ‘target consistent’ approach has been used to estimate the values, where these are calculated as the marginal abatement cost of meeting targets.

BEIS has conducted a review and update of the carbon values because several factors have changed since the last review, the most significant of which are the following.

Changes in international targets

The UK signed the Paris Agreement in 2016, which sets out a more ambitious goal – to keep global temperature rise well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5°C.

Changes in domestic targets

In June 2019, the UK adopted in law the recommendations of the Climate Change Committee, to achieve net zero GHG emissions by 2050 (compared to the previous target of an 80% reduction by 2050 on 1990 levels).

EU Exit

The UK has left the EU Emissions Trading System (EU ETS) and from January 2021 introduced a UK Emissions Trading Scheme (UK ETS).

New understanding of technology costs and availability

Some of the key technologies for decarbonisation such as renewable power generation and batteries have seen larger-than-predicted price reductions over the last 10 years which should reduce abatement costs in relevant sectors.

Previous reviews of the value of carbon

In 2009 the government conducted a review of the approach taken to developing carbon values. The conclusion of the review was to move to a “target-consistent‟ or “abatement cost” approach to carbon valuation rather than a “social cost of carbon” (SCC) approach. The main rationale for moving away from the SCC is further outlined in the 2009 publication of Carbon Valuation in UK Policy Appraisal: A Revised Approach.

Under the target consistent approach, the appraisal of individual policies is based on target-consistent values of carbon. Previously these were be based on a “traded value of carbon‟ for appraising policies that affected emissions in sectors covered by the EU ETS and, in the short term, a “non-traded value of carbon‟ for appraising policies that affected emissions in sectors not covered by the EU ETS. In the long term (post-2030), a single series of carbon values was used covering emissions across the economy based on global abatement cost estimates.

Since 2009, the government has ensured that the values remain fit-for-purpose, by taking the following actions:

• the values were updated annually to update the real terms price base year and also reflect developments within the EU ETS
• policy analysis used high and low ranges as part of sensitivity analysis to account for uncertainties
• in 2011, BEIS produced guidance on valuing emissions post-2050. This ensured that policies with a longer time horizon correctly accounted for their emissions impact during the appraisal stage