Climate change policy mechanisms

The 2011 Energy White Paper and the 2011 Energy Act confirmed the need for urgent action in response to climate change. This guide provides a brief introduction to the climate change policy mechanisms that are currently in place in the UK.

The combustion of fossil fuels produces greenhouse gases e.g. carbon dioxide, which contribute to climate change
The combustion of fossil fuels produces greenhouse gases e.g. carbon dioxide, which contribute to climate change

Range of policy mechanisms available

Action on the human contribution to climate change requires a limit on long-term atmospheric greenhouse gas (GHG) concentrations – and possibly even a reduction at some point in the future. This can be done by reducing emissions of GHGs and/or removing GHGs from the atmosphere. Removal of GHGs is not straightforward so the current focus is on reducing emissions. Emission reduction actions fall into two categories:

  • Supply side – reducing or capturing GHG emissions at source (e.g. capturing carbon dioxide emissions from a power station chimney) or switching to lower carbon energy sources (such as renewables and nuclear)
  • Demand side – reducing or substituting the demand for products and services that generate GHGs (e.g. reducing demand for electricity, thereby reducing generation and associated emissions)

Both action categories require both technological and wider behavioural changes for delivery, but for change to occur, global society must be sufficiently motivated. Delivering the policy of working towards a low carbon economy will require a wide range of mechanisms on supply and demand, with technological and behavioural dimensions. In addition, mechanisms can range from purely voluntary to legal obligation, delivered through direct uniform application or through market mechanisms.

This paper signposts the climate change policy mechanisms that have been introduced in the UK to date from the suite of options available. In 2013, carbon dioxide accounted for about 82% of the total UK GHG emissions (DECC, 2013), so the emphasis to date has been on this pollutant. However, many of the mechanisms could be readily extended to other GHGs.

Climate change policy mechanisms - demand side

Energy supplier conservation obligations and the Green Deal

The Energy Act 2011 introduced the combination of a Green Deal for consumers and a new Energy Company Obligation (ECO) for energy suppliers. This replaced the existing Carbon Emissions Reduction Target (CERT) and the Community Energy Saving Programme (CESP) obligations on suppliers, which both expired in 2012. 

Following the 2015 election, the Government is currently reviewing the best way to support demand side measures. The Green Deal has now been closed. ECO will continue until 2017 and may then be extended in a reduced form, possibly focused on the fuel poor. Details of the latest developments can be found on the DECC website.

The DECC website provides further details of ECO and the Green Deal.

Climate change policy mechanisms - supply side

The Climate Change Levy (CCL) & Levy Exemption Certificates (LECs)

The CCL was set up to encourage business sectors to improve energy efficiency and reduce emissions of GHGs through a price based signal on energy usage. It came into effect on 1 April 2001 and applies to energy used in the non-domestic sector (industry, commerce, and the public sector). The levy does not apply to fuels used by the domestic or transport sector, or fuels used for the production of other forms of energy e.g. electricity generation.

Renewables Obligation (RO) and Renewable Obligation Certificates (ROCs)

The RO came into force in 2002, when it replaced the Non Fossil Fuel Obligation as the UK Government’s primary mechanism for supporting the development of the renewable energy industry. It requires all electricity generators to submit ROCs to OFGEM, the regulatory body, to show that a certain proportion of the electricity it provides has been generated from renewable sources.

DECC has now confirmed that the RO will be phased out and closed to new generation on 31 March 2017. It will be replaced by a new support scheme, Contract for Difference (CFD) for low carbon generation. However, generation which is accredited under the RO will continue to receive its full lifetime of support in the “vintaged” scheme after 2017 until the scheme closes completely in 2037.

Contracts for difference for low carbon generation

Under the new CFD scheme, a low carbon generator forms a contract with the government-owned Low Carbon Contracts Company (LCCC). The generator is paid the difference between the strike price – a price for electricity reflecting the cost of investing in a particular low carbon technology, and the reference price – a measure of the average market price for electricity in the Great market. CFDs will be available from late 2014 and will be awarded competitively for some technologies. A CFD is intended to give greater certainty and stability of revenues to electricity generators by reducing their exposure to volatile wholesale prices, while protecting consumers from paying for higher support costs when electricity prices are high. Full details can be found on the DECC website (see also Further Reading section below).

Feed-in Tariff (FIT) for small-scale renewable generation

The FIT scheme was introduced on 1 April 2010. Under this scheme, small-scale (less than 5MW) renewable electricity generators are paid for each unit of electricity produced. Electricity that is not consumed on site and is exported to the local transmission system receives an additional payment. The rates are banded by technology and size and are subject to review and adjustment as the technologies develop. Full details are available on the DECC website.

Renewable Heat Incentive (RHI)

The RHI provides long-term financial support to renewable heat installations to encourage the uptake of renewable heat. The scheme has been introduced in two phases. The first phase began in November 2011 with long-term tariff support targeted at larger heat users in the non-domestic sectors, including the industrial, business and public sectors. The first phase started in November 2011. The second phase was launched in April 2014, expanding the range of technologies, and is open to homeowners, private landlords, social landlords and self-builders. Full details are available on the DECC website.

REGOs (Renewable Energy Guarantees of Origin)

REGOs are electronic certificates issued as evidence that the electricity was generated from a renewable source with one REGO representing one Kilowatt/hour of electricity. They were introduced across Europe by the Renewables Directive. The main use for REGOs is to enable electricity suppliers to confirm the proportion of renewable energy supplied to their customers.

Emissions trading and related measures

European Union Carbon Emissions Trading Scheme (EU ETS)

The EU ETS is a key instrument in the drive to reduce GHG emissions within the European Union. It seeks to ensure that emission reductions take place where the cost of reductions is lowest by enabling emissions allowances to be freely traded. Full details can be found on the DECC website and the European Commission website.

Organisations not covered by the scheme are able to open an account on the registry enabling them to trade allowances. This allows exchanges, banks and other financial institutions to trade carbon emission certificates, so increasing the numbers of participants in carbon trading, and helping to provide depth and liquidity to what could otherwise become a series of limited bilateral transactions.

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During 2014 there was extensive debate over the need to amend the design of the EU ETS, due to a sustained surplus of allowances and a resulting low price. Details of the latest developments can also be found on the European Commission website.

Carbon Reduction Commitment (CRC)

The CRC was introduced in an introductory phase running from 2010-14. It is a mandatory “cap and trade” emissions trading scheme designed to reduce end-use emissions (direct and indirect) from large non-energy intensive organisations in the private and public sectors. The threshold for inclusion is for an organisation to have mandatory half-hourly (HH) metered consumption >6GWh per annum.

There are fixed price auctions of allowances in the introductory phase at a price of £12 per tonne of carbon dioxide. The latest details of the CRC are available on the DECC website.

Kyoto mechanisms - JI and CDM

Joint Implementation (JI) is a Kyoto Protocol programme under which GHG emissions reduction projects can be implemented jointly between two or more developed countries. One country can carry out a project to reduce the emissions of a host country, the reductions can then be quantified (compared to a business-as-usual scenario) and an appropriate amount of credits transferred from the host country to the sponsor in the form of Emission Reduction Units (ERUs). The sponsor country gets extra allowances while the host country has its allowances reduced by an equal amount to the allowances transferred.

The Clean Development Mechanism (CDM) is a Kyoto Protocol flexibility mechanism that oversees emission reductions in projects carried out in developing nations (nations that are not subject to binding greenhouse gas emission caps under the Kyoto Protocol). Under the CDM, investors from Annex I (i.e. developed) states receive Certified Emissions Reduction units (CERs) for the actual amount of GHG emissions reduction achieved (relative to a monitored baseline), subject to host country agreement and the CDM adaption charge.

A key component of the CDM is the requirement of additionality. CERs generated under the CDM will only be recognised when the reductions of GHG emissions are additional to any that would occur in the absence of the certified project activity.

The Kyoto Protocol views CDM projects as a useful way of contributing to sustainable development by providing developing countries with investment and access to advanced technology.

Other measures

The UK has already implemented climate change policy measures on both the supply and demand sides. However, these do not cover all categories of emissions. In particular, transport emissions are not currently addressed by any direct measures, with the exception of various specific measures such as company car taxation. However, other policy initiatives (for example, to reduce road traffic levels) will have the consequence of reducing emissions.

In additional, domestic emissions (e.g. from gas heating boilers) are not directly addressed at present. However, indirect measures (such as the Building Regulations for energy use – Part L) are in place and are being progressively tightened. Details can be found on the UK Government website.

Further reading

The DECC website provides a wealth of information on the UK Government’s policy mechanisms. The following publications are especially informative:

For an overview: Electricity Market Reform – Contract for Difference: Contract and Allocation Overview (August 2013)

For specific information relating to renewables: Electricity Market Reform: Contract for Difference – Allocation Methodology for Renewable Generation(August 2013)

For proposed strike prices for renewables: Investing in renewable technologies – CfD contract terms and strike prices (December 2013)

References

DECC (Department of Energy & Climate Change) (2013) 2013 UK Greenhouse Gas Emissions, Provisional Figures and 2012 UK Greenhouse Gas Emissions, Final Figures by Fuel Type and End-User. London, UK.

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