The UK Government and Devolved Administrations move forward with the UK Emissions Trading System (UK ETS)

This week, the UK Government and Devolved Administrations have released their response following the UK ETS consultation which saw responses from over 130 varied stakeholders.

As the UK ceases to be part of the EU following BREXIT, there has been much speculation surrounding what this will mean for the UK’s participation in the existing EU Emissions Trading System (ETS). Currently approximately one third of the UK’s emissions are covered by it.

The UK will cease to be a part of the scheme once 2020 allowances have been surrendered in April 2021 and preparations are now being made to forge ahead with the UK ETS. The government is still committed to its 2050 Net Zero target and the UK ETS will ultimately play an important part in the future of carbon pricing in the UK.

Here we summarise the main takeaways from the latest consultation.

Streamlining the transition

The UK ETS scheme is to start on 1^st January 2021. The Government has a preference to link it to the EU ETS scheme, but it can operate as a standalone UK ETS scheme. Efforts are being made to smooth the transition and the Government has also stated that moving forward it is open to considering a more direct link between the two schemes.

• The scope of sectors in the UK ETS scheme will remain the same and will be reviewed in 2026.
• The main UK ETS has a lot of similarities with Phase IV of the EU ETS
• Free allowances will be available for participants based on the EU ETS Phase IV 2019 National Implementation Measures (NIMs) exercise. Free allowances are deemed to reduce the carbon leakage risk and competitiveness impacts raised in the consultation.

Aligning to the Net Zero ambition

It will be really important that the scheme supports the UK climate targets and this is being taken into account.

• UK ETS will set an initial cap on the total emissions allowances. This will be 5% less than the UK’s notional share of the EU ETS cap for Phase IV. This will be reviewed by the Committee on Climate Change for the Sixth Carbon Budget.
• Auctioning will continue and be the main way of allowances entering the market. The Transitional Auction Reserve Price will be set at £15/tonne to reduce the possible large difference between the EU ETS price and price of a standalone UK ETS. This will also maintain the Government’s climate ambition.
• No international offsets will be permitted in the UK ETS
• Aviation is included in the UK ETS and the UK scheme will go beyond CORSIA.

Administration

The consultation has also outlined some of the administrative aspects of the scheme and how it will work:

• If the Government cannot start the UK ETS on 1^st January 2021, the Carbon Emissions Tax will be brought in.
• To reduce the administrative burden for smaller emitters, there are two exemption categories, small emitter and hospital opt-out and ultra-low emitters exclusions.
• Participants with surplus EUAs will not be able move their allowances to the UK ETS registry, they need to move them to other EU ETS member state registry accounts.
• The UK ETS will be reviewed twice within the phase period of 2021-2030.

This response on the UK ETS can start to provide some clarity for large emitters and enable them to plan for a smooth transition to the UK ETS. There is still much work to be done to forge ahead with the scheme and still ongoing negotiations to be made with the EU on trade which will influence exactly how the final UK ETS will work. Ultra-low emitters will also have some relief, as there will be reduced administrative and financial burden for them in the UK ETS, although monitoring of emissions will still need to be done. However, all participants should not lose the focus on reducing their overall emissions to achieve their own climate ambition.