Policy

UK Government Review of Net Zero: call for Evidence

by
Ben Rattenbury
Polly Thompson
October 27, 2022
UK Government Review of Net Zero: call for Evidence
UK Government Review of Net Zero: call for Evidence

Notes

  • Chris Skidmore MP invites evidence on the government’s approach to delivery of its net zero target, as part of an Independent Review of Net Zero.
  • The review will consider how our approach to net zero can:
  • deliver maximum economic growth and investment, driving opportunities for private investment, jobs, innovation, exports, and growth right across the UK
  • support UK energy security and affordability for consumers and business and the need to rapidly increase and strengthen UK energy production and supply
  • minimise costs borne by businesses and consumers, particularly in the short-term
  • Response below and here, version as sent here.

Points to land

  1. Offsetting / BVCM will be crucial - provided there are quality standards. Benefits to the UK include smoothing the transition, strengthening international position, cost effective, co-benefits, climate finance
  2. Support for regulatory push for transparency - ensure high integrity, encourage scaling of investment, new opportunities
  3. Support for fast-growing, new businesses - develop a high-ambition pathway that recognises the unique constraints faced while supporting the decoupling of growth and emissions

Questions

Questions are numbered to call for evidence question list.

1. How does net zero enable us to meet our economic growth target of 2.5% a year?

There are significant costs of failing to act on climate change, primarily the costs of adaptation to more severe climate change and missed transition opportunities - each of which is likely to sum into the £trilllions. In short, net zero is the only growth story in the remainder of this century is a net zero.

Research from the IMF shows that although there is a short term growth cost of a rapid transition to low-carbon technologies (0.05 - 0.2% / year), this will be dwarfed by the longer term costs of a failure to act (which Lord Stern estimated at 5-20% of GDP - with subsequent estimates even higher). Furthermore, the slower governments act, the greater the costs become, and so immediate action is the safest way to protect continued economic growth. 

There are also many opportunities for climate tech and other new sectors, with the greatest benefits for the first movers. Sylvera is a great case study, having capitalized on growth of voluntary carbon markets (VCMs) with increased focus on climate transitions. In this context we have raised $35+ million in capital, creating 150 jobs and growing fast.  As the world’s first carbon credit ratings agency with global growth potential, Sylvera is evidence of the potential for a wide ecosystem around VCMs, promoting UK business and innovation. 

2. What challenges and obstacles have you identified to decarbonization?

See responses to questions 3, 5 and 9 below.

3. What opportunities are there for new/amended measures to stimulate or facilitate the transition to net zero in a way that is pro-growth and/or pro-business?

Following the emissions mitigation hierarchy is essential: avoid, reduce, offset and remove. However, we highlight in this response that an essential step is currently being overlooked: offsetting (also referred to as ‘beyond value chain mitigation’ (BVCM) by organisations such as SBTi).

Offsetting, which could be delivered domestically or through effective global carbon markets, can deliver faster global emissions mitigation at a lower cost. Research by the International Emissions Trading Association (IETA) suggests that, at the global level, the costs of Paris Agreement aligned decarbonization could be reduced by $250bn a year, purely by channelling investment to where it can have most impact. This is why more than two thirds of countries include a role for carbon markets in their plans to meet their nationally determined contributions (NDCs).

Carbon markets are an essential tool in the net zero toolkit as they are where a large proportion of the world’s most cost-effective abatement is to be found. However in many circles they are currently treated with undue scepticism. While this scepticism has its roots in the well-documented shortcomings of the carbon markets of the late 2000s and early 2010s, it fails to recognise the much higher integrity of the carbon markets today.

Rapid technological advances in recent years mean that many of these problems are now solved. For example, it is now possible to independently verify the effectiveness, including permanence risks, of forest projects, with a very high degree of certainty. This was not possible five years ago.

The UK has been a global leader on many aspects of climate policy and green finance strategy, for example with the early adoption of TCFD recommendations. However, this is a rapidly changing field, and the UK is no longer at the forefront of international green finance regulatory frameworks, as evidenced by the recent draft requirements for the Enhancement and Standardization of Climate-Related Disclosures for Investors from the US Securities and Exchange Commission (SEC). To maintain its position as a global leader the UK must ensure to continue to proactively update regulation on a regular basis, and coordinate with regulators from other jurisdictions to ensure international operability.  

The UK has the potential to once again be the global carbon trading capital. We enjoy a number of inbuilt advantages regarding the hosting of VCM activity, given the wider market infrastructure in hubs such as the City of London. Globally this topped $1bn on an annual basis, for the first time, in 2021, and continues to be a huge potential growth area. However, poor understanding of the role it plays alongside internal decarbonisation, and a lack of support from government and regulators, has reduced confidence and discouraged the scaling of VCMs, in particular in the UK. 

This hesitancy has allowed other nations to catch up with the UK and make their own claims to leadership in this area. And this competition will only grow - given the highly-strategic, recession-proof nature of the clean tech and climate tech sectors, the UK will face ever stiffer competition to maintain its position, and so must keep pushing the envelope for innovation and champion this sector at senior levels of government.

By regaining the initiative, and taking a more ambitious, innovative and science-based approach to offsetting, the UK could simultaneously:

  • Boost the potential of the financial sector to hit net zero;
  • Seize a larger slice of the rapidly growing global carbon trading pie;
  • Bolster demand for the wider UK-based carbon markets ecosystem, including legal and advisory services;
  • Lead the global debate on high quality offsets, building on important UK-sponsored initiatives such as the VCMI and IC-VCM; 
  • Preserve and promote its position as an intelligence and advocacy hub for the carbon sector, with a strong presence of climate and energy think tanks and research institutions with a global focus and large data and market information services firms.

4. What more could government do to support businesses, consumers and other actors to decarbonize?

The critical actions government could take would be

  • A cast-iron guarantee on the UK’s direction of travel and intent to stick to the net zero goals previously set out;
  • Clear signals on the expansion of carbon pricing;
  • A rethink on the role of carbon markets within the UK’s policy mix, in a way that facilitates innovation and climate ambition.

5. Where and in what areas of policy focus could net zero be achieved in a more economically efficient manner?

While the UK has many strengths as a global hub for carbon markets, in particular in the sophistication of the financial regulators, other centres are progressing faster. The two major inhibitors for the UK’s progress in this area are (1) limited demand, and (2) missed opportunities for innovation. These issues could be addressed through a range of measures including:

  • Regulation of VCMs and net zero strategies

Regulation, guidance and market incentives would be optimised for 1.5 degrees if they incentivized a more dynamic, situation-specific approach to balancing in-house decarbonization with the use of carbon credits. This should be based on the marginal cost of abatement (MCOA). Where the MCOA for a given company, activity or industry is particularly high, for example, £50/tCO2, then buying multiple high-quality carbon credits, which currently trade at roughly £10 to 20/tCO2, would have a significantly greater impact on global emissions. However, in this scenario, the use of credits must be accompanied by a comprehensive investment plan to ensure each individual company, activity or industry can reach (in-house) net zero on schedule. With this dynamic approach, the use of VCMs can help ensure maximum emissions reductions in both the short-term and within the net zero timeframes, in many cases, by 2050, both of which are essential in order to keep 1.5 degrees in reach.

In order for VCMs to achieve their full potential impact, integrity of both the credits and the claims made by corporate buyers must be ensured. These points are closely linked: regulators play a key role in defining the requirements for credits that can be used to make certain claims, and ensuring that these standards are comprehensive, high-integrity and evidence-informed. For example, we see a role for credits in net-zero claims: to offset the hardest to abate value chain emissions, to ensure the fastest possible emissions reductions at a global scale. These credits should only be used once all abatement possibilities have been thoroughly considered, and alongside research and investment in value-chain emissions reductions. Extensive due diligence should also be conducted to ensure the credits deliver the carbon impacts, and are additional and permanent. This approach could build on the current plans to develop a market for greenhouse gas removals (GGRs), but should be expanded to also include high quality avoided emissions projects, such as avoided deforestation activities.

Regulators also have a role in ensuring the transparency of carbon markets. Information on who is buying, selling and retiring which credits and for what purpose should be disclosed and that information should be easily accessible. Any environmental claims, for example, "carbon neutral" products, should be backed up by a disclosure of how many of which credits were retired to compensate for the relevant emissions, what price was paid, and what independent third party quality assurance was used. (This is a similar set of disclosure criteria set out by the SEC in its draft climate disclosure rule earlier this year.)

As hinted above, any activity in the carbon markets must be high integrity, and on this the UK has shown real leadership. Sylvera is a part of this leadership - as the world’s first carbon credit ratings agency, we have driven transparency and quality in the market since our founding in early 2020. Our cutting edge technology, combining machine learning and deep learning algorithms with multispectral satellite and ground-based lidar data, our ratings frameworks allow rigorous comparisons of a wide range of nature-based and technological projects, spanning both avoided emissions and removals. In this we are working closely with and complementary to the IC-VCM and the VCMI.

  • Limited inclusion of high quality carbon credits into the ETS

One of the most direct ways to inject significant demand for carbon markets in the UK would be to follow other jurisdictions, most recently Singapore, in permitting a small proportion of the emissions liabilities captured within the national compliance mechanism (in our case, the UK ETS) to be compensated for by the use of high-quality international carbon credits. 

Allowing for the limited inclusion of high quality carbon credits into the ETS would boost market stability by providing price stabilisation opportunities, reduce overall decarbonization costs, channel climate finance to the Global South, and would also provide wider benefits towards the UK’s ambitions to be a global centre for carbon trading. 

A strong demand signal from the UK ETS would clearly be a major boost to the UK’s VCMs, both internally and internationally. Among other things, this move would boost the development of technologies and expertise essential for this market, capabilities which would then be in high demand around the world, giving the UK a strong competitive edge.

  • UK government engagement in Article 6

UK participation in the new mechanisms for international cooperation in the Paris Agreement, most notably Article 6.2, would signal that the UK is willing to take a proactive leadership role on the global stage, and present more opportunities for the UK to encourage global-scale decarbonization. As above, this would reduce overall decarbonization costs (for the UK and the world), boost the UK as the global carbon trading centre, as well as bolster bilateral relations with strategic international partners. A number of other countries, such as Switzerland, Norway and Singapore, have all moved in this direction already and are seeing the benefits. 

Focusing explicitly on high quality trading agreements, with the highest environmental integrity, would underpin the UK’s reputation as a climate policy leader, cement the legacy of COP26 (where the breakthrough on Article 6, on carbon trading, was a signature achievement) and give the UK a strong voice in the setting of the norms and rules governing this critical area of global cooperation. 

7. What export opportunities does the transition to net zero present for the UK economy or UK businesses?

Beyond the obvious demand for skills and hardware for clean tech, the transition to net zero will also create a lot of demand for new services around carbon accounting, risk-reporting, beyond value chain mitigation (offsetting) etc. 

For example, as the demand for high integrity nature-based carbon credits grows, there is a growing need for emerging digital monitoring, reporting and verification. Sylvera is leading on the development of machine learning and deep learning  algorithms to interpret satellite data, and the integration of multi-scale lidar to calibrate these models. We have had a lot of interest from host jurisdictions, project developers, supporting multilateral organisations, and public and private-sector credit buyers. 

Questions for businesses

8. What growth benefits/opportunities have you had, or do you envisage having, from the net zero transition?

Our business model relies on businesses being willing to make large investments in their net zero transition. Organisations buying carbon credits pay to access our carbon credit ratings, to ensure they are buying high quality credits. Sylvera would not exist without the rapidly scaling investment in the voluntary carbon market, driven by both public pressure for businesses to decarbonise and the risks businesses see of failing to act.

We have also benefited from support from Innovate UK, including in the development of our lidar capabilities, which have since proven to be commercially viable including with customers such as a large multilateral development bank.

9. What barriers do you face in decarbonizing your business and its operations?

As a rapidly growing start-up, we are focussed on decoupling our growth from our emissions. This is very possible for our scope 1 and 2 emissions, as is required for SMEs to set a science-based net zero target with the SBTi. However, the fact that SBTi does not recognise the additional challenges faced by fast growing or recently founded companies means that startups face additional barriers to setting and meeting SBTs. Additionally, reducing scope 3 emissions is more challenging as small companies have much less leverage when dealing with suppliers and customers. We are somewhat dependent on every company in our value chain setting their own net zero targets and meeting them.

10. Looking at the international market in your sector, what green opportunities seem to be nascent or growing?

  • Any organisation supporting the scaling of VCMs e.g. developers, brokers, and ratings agencies.
  • MRV (monitoring, reporting, and verification) and data service providers, i.e. deploying emerging tech such as machine learning and high resolution Earth observation data to improve scrutiny of nature-based carbon crediting projects. 

11. What challenges has the net zero transition presented to your business?

None, beyond our effort to decarbonize (see q9).

12. What impacts have changing consumer choices/demand had on your business?

The impacts have almost exclusively been positive. Consumer demand is a big driver of demand for companies to buy credits and for scrutiny of the quality of those credits, therefore increasing interest in our services

13. What impacts have decarbonization/net zero measures had on your business?

Coordinated decarbonization across many industries is continuing to help us reduce our scope 2 and scope 3 emissions.

Questions for academia and innovators

29. How can we ensure that we seize the benefits from future innovation and technologies?

The UK government should continue to invest in research and development (such as through UKRI grants) to promote these opportunities and ensure British companies continue to compete in this field. 

30. Is there a policy idea that will help us reach net zero you think we should consider as part of the review?

See responses to questions 3 and 5 above.

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