Reconsidering Climate Mitigation Policy in the UK

WP/20/268 Reconsidering Climate Mitigation Policy in the UK by Nicolas Arregui and Ian Parry IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. © 2020 International Monetary Fund WP/20/268IMF Working Paper European Department Reconsidering Climate Mitigation Policy in the UK Prepared by Nicolas Arregui and Ian Parry1 Authorized for distribution by Dora Iakova December 2020 Abstract The UK has pledged to cut greenhouse gases 57 percent below 1990 levels by 2030, to be emisisons neutral by 2050, and to phase out internal combustion engine vehicles by 2030. Much progress has been made, but fully achieving these ambitious objectives with the current policy framework will be challenging as it involves multiple and overlapping pricing schemes with significant sectoral differences in carbon prices and may be difficult to scale up on political and administrative grounds. This paper discusses an alternative framework consisting of: (i) a comprehensive carbon price (ideally a tax) rising to at least £60 (US $75) per ton by 2030; and (ii) reinforcing sectoral policies, most importantly feebates for the transport, industrial, and building sectors. This framework could implement mitigation targets, while limiting burdens on households and firms to enhance acceptability, and still raise revenues of 0.8 percent of GDP in 2030. The UK could also leverage its COP26 presidency to promote dialogue on international carbon price floors and pricing of international transport emissions. JEL Classification Numbers: Q48, Q54, Q58, H23 Keywords: Climate change, net-zero, UK climate mitigation, carbon pricing, feebate, international carbon price floor. Author’s E-Mail Address: narregui@imf.org, iparry@imf.org1 We are grateful to Simon Black, Dora Iakova and James Roaf for comments and suggestions. Khamal Clayton and Victor Mylonas provided valuable research assistance, and Ben Park and Rachelle Vega provided excellent production assistance. IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. 2 CONTENTS Abstract .....................................................................................................................................1 I. INTRODUCTION ................................................................................................................3 II. BACKGROUND ON MITIGATION OBJECTIVES, EMISSIONS TRENDS, AND CURRENT POLICIES ............................................................................................................6 A. Emissions Targets .................................................................................................................6 B. Emissions Trends ..................................................................................................................6 C. Current Policy Framework and Obstacles to Scaling it Up ................................................10 III. ASSESSING UK CLIMATE POLICY OPTIONS POST-BREXIT ..........................15 A. Economywide......................................................................................................................16 B. Transportation .....................................................................................................................20 C. Industry................................................................................................................................23 D. Buildings .............................................................................................................................25 E. Other Sectors .......................................................................................................................26 IV. INTERNATIONAL PRICING SCHEMES ..................................................................28 V. SUMMING UP ..................................................................................................................30 BOXES 1. Broader Reforms to the Pricing of Road Transport .............................................................22 2. The Burden on Industry from Carbon Pricing and Feebates ...............................................23 3. Illustrative Impacts of Carbon Pricing and Feebates on Production Costs for Steel and Cement .....................................................................................................................................24 FIGURES 1. UK Greenhouse Emissions ....................................................................................................9 2. Transport Fuel Duties ...........