UK Emissions Trading Scheme (UK ETS) Consultation

What’s new?

The UK ETS Consultation, issued at the end of March, seeks views on implementing a consistent net-zero cap for the UK ETS, revisiting the policy in relation to fee allocation of carbon emission allowances and expanding the trading of emissions within the market. The Consultation closes on 17 June 2022. We consider the key proposed changes in more detail below.

Background

The UK ETS came into effect on 1 January 2021 (to replace the EU ETS after the end of the Brexit transition period). The UK ETS requires operators of installations in a number of energy-intensive sectors (such as manufacturing facilities, power stations and aviation) to surrender CO2 emission allowances equivalent to the total emissions of CO2 from the installations within a given year.

The UK ETS is effectively a cap-and-trade system which sets a cap on the total level of permitted greenhouse gas emissions, while simultaneously creating a carbon market of emission allowances for any unused emissions allowances.

The UK ETS is intended to assist in facilitating the achievement of net-zero in the UK and the UK ETS Consultation proposes ways to achieve this objective.

Proposed amendments to the UK ETS

The UK ETS Consultation includes the following key proposals:

1. Expanding the scope of the UK ETS in existing sectors, such as: the upstream oil and gas venting sectors; and
2. Expanding the scope of the UK ETS in additional sectors, such as: shipping, waste, and energy-from waste sectors.

A The consistent net-zero cap

From 1 January 2021, the cap for Phase 1 of the UK ETS, was initially set at 5% below the UK's expected notional share of the EU ETS cap for Phase IV of the EU ETS (2021-2030). This UK cap will remain until the end of 2023. A new net-zero cap will come into force in 2024.

The proposed new cap is in line with the UK’s plans to achieve net-zero by 2050, by proposing a stricter cap (with a cap of between 887 million and 936 million allowances, compared to the current cap of 1365 million allowances). This cap is expected to become stricter throughout the course of the phase with an expectation that the annual cap will be 50 million allowances by 2030.

B Free allocation review

Following the implementation of the stricter cap on carbon allowances, fewer allowances will be available during Phase 1. The UK ETS Consultation specifically includes:

(a) Proposals to move towards a net-zero consistent cap;

(b) Principles for the second phase of the free allocation review which will set out changes to the methodology for distributing free allocation; and

(c) The Government's response to the call for evidence into free allocation policy.

As the UK is less production-intensive than the EU, there are currently a large number of unallocated free allowances. The UK ETS Consultation sets out options for bringing these unallocated free allowances to the market.

C Aviation review

The UK ETS Consultation proposes a number of amendments to the current UK ETS aviation policy. These amendments include proposals for free allocation in the aviation sector and considering how the use of sustainable fuel can be incentivised under the UK ETS. Additionally, there are proposals to expand the scope of the ETS within the aviation sector. Non-CO2 emissions in the aviation sector are contemplated, but this is not expected until January 2024.

D Greenhouse gas removals and emissions related to agriculture and land use

Although the Government has not proposed expanding the UK ETS to the agricultural sector, the UK ETS Consultation has invited stakeholders to share their views on incorporating greenhouse gas removals into the UK ETS. This includes the monitoring, reporting and verification to address greenhouse gases in land use and the agricultural sector, so this may be a key development to look out for in future.

Conclusion

The UK ETS Consultation seeks to widen the scope of the current UK ETS in order to assist with the gradual achievement of net-zero in the UK. Responses to the UK ETS Consultation must be submitted by 17 June 2022. We will provide further updates on amendments to the UK ETS.