Industrial decarbonisation policies for a UK net-zero target

Alice Garvey & Peter Taylor

Executive summary

UK industrial greenhouse gas (GHG) emissions must fall by more than 90% over the next 30 years to be consistent with an economy-wide target for net zero GHG emissions by 2050. The impact of current industrial decarbonisation policies is far below what is required for this level of ambition. There is therefore an urgent need to consider how new policies might be designed and implemented to deliver wide-scale and rapid reductions in industrial emissions.

To help inform their recommendations for a 6th Carbon Budget, the Climate Change Committee (CCC) asked the University of Leeds to undertake independent research to evaluate which policies (and combinations of policies) would enable industrial decarbonisation in line with the UK’s net zero target, without inducing carbon leakage. The research has focused on policies applicable to the manufacturing sector, but with some consideration also given to the policies required to decarbonise the Fossil Fuel Production and Supply and Non-Road Mobile Machinery sectors. In this report we:

• Conduct a comprehensive review of existing policies
• Identify future policy mechanisms that address key challenges in decarbonising industry
• Explore how combinations of policies might work together strategically in the form of ‘policy packages’ and how these packages might evolve over the period to 2050
• Evaluate a series of illustrative policy packages, and consider any complementary policies required to minimise carbon leakage and deliver ‘just’ industrial decarbonisation.

Our findings were developed through a combination of literature review and extensive stakeholder engagement with industry, government and academic experts. Our key conclusions include the following.

Policy must address multiple challenges to decarbonisation and go beyond an overarching carbon reduction mechanism

• Sector-wide carbon policies such as pricing, subsidies or standards can provide leading signals for industrial decarbonisation by delivering an overarching incentive or regulatory framework to drive action and investment. To ensure UK competitiveness it is critical to include mechanisms that mitigate carbon leakage in the design of such policies.
• However, such overarching carbon policies alone will be insufficient to achieve net zero. Complementary policies will be required to ‘fill gaps’ in the incentive and penalty structures that these carbon policies provide, as well as mitigating any adverse impacts. Such policies will be needed to address challenges in accelerating innovation, deploying new infrastructure, increasing material efficiency and other areas.

There is no ‘policy panacea’ and policy solutions need to be flexible and adapt over time

• There is limited experience in the UK and internationally with developing and implementing policies for ambitious industrial decarbonisation. Ultimately the effectiveness of a particular policy or policy package is likely to depend both on its specific design and on the broader economic and other conditions within a country.
• Whilst there is no clear ‘policy winner’ in the options evaluated, for many manufacturing sectors a potentially effective approach could be identified as: a sequence of subsidisation and investment, supported by a carbon price signal, followed by increasingly stringent regulation.
• A number of the policies involving standards are reliant on credible metrics being developed, requiring methods such as Whole Life Carbon Assessments. Setting standards for embodied carbon is a significantly more complex process than that for operational efficiency standards. It is essential to have robust and defensible methodologies to conduct such assessments and the development of such data infrastructure is therefore a critical near-term action to facilitate future policy.
• Demand-side measures could also play a critical role in most policy packages, by acting on final demand for materials and products. The multiple benefits and high social acceptability of these policies provides a strong case for their implementation in the near-term.

A number of principles should guide effective policy design

• Policy packages: there is a need for a strategic and coordinated approach to delivering industrial decarbonisation policy for net zero, and a whole systems approach to designing ‘policy packages’ can help to optimise synergies between individual policies and reduce their negative spill-over effects.
• Streamlined policy: policy packages should deliver the required outcome in as lean a way as possible, avoiding any excessive ‘layering’ of policy burden, and reducing inefficiency and duplicated incentives or penalties. The cumulative impact of new and existing policies should be evaluated before implementing any changes.
• Clear signals and incentives: providing consistent policy signals allows industry to plan more effectively. Long-term targets for action, with clearly communicated plans for the phasing of policies, could support this.
• Logical sequencing and built-in flexibility: the timing of policies is critical to their effectiveness and the evolution of policies towards 2050 is a key consideration. The relevance of policies will necessarily change over time, meaning a phased and flexible approach is required in the design of long-term policy. Some policies may need to be ‘front-weighted’ given their longer lead times for realising mitigation benefit. Similarly, incorporating flexibility into policy design is important to allow for continuing adaptation to market responses, and newly available evidence.

There are evidently many uncertainties in planning future industrial decarbonisation policy given the current political and economic environment. This report is only able to provide an initial evidence base to inform such policy development and more detailed work will be needed to inform policy choices, not least on the impact of particular policies on specific industrial sectors. However, the urgency of the climate crisis and the need for industrial emissions reductions to be accelerated in line with the UK’s net zero target demands a rapid policy response. We do not have the luxury of waiting while we design the perfect policy approach; action is needed now and we hope that this report can provide some guidance towards creating a clean and competitive future for UK industry.

Downloads

• Briefing: Industrial decarbonisation policies for a UK net zero target: Report highlights
• Database of existing policiesOpens in a new tab, xlsx (40 KB, may not be suitable for users of assisted technology).

Banner photo credit: Alireza Attari on Unsplash