New updates to the UK ETS announced

The UK Government recently announced important new updates to the UK Emissions Trading Scheme (UK ETS). EcoAct’s Chimdi Obienu explains what they are and how this will impact businesses and their supply chain partners.

Overview of the updates to the UK ETS

Amid ongoing discontent with the Prime Minister’s climate credentials, the UK Government has communicated its intention to bring the UK Emissions Trading Scheme (UK ETS) in line with the country’s commitment to reach net-zero emissions by 2050. The UK ETS will expand to the shipping and waste sectors before 2030, and the annual emissions cap will fall, tightening the supply of allowances and incentivising firms to decarbonise. Engineered greenhouse gas removals will also be added to the system, a move intended to stimulate investment and “futureproof” the UK ETS.

The UK ETS covers greenhouse gas emissions from several carbon intensive sectors. In theory, regulated entities are supposed to buy and surrender UK allowances (UKAs) to pay for their emissions. In practice, many firms receive their allowances for free to protect the international competitiveness of UK businesses. However, with these recent updates by the UK ETS Authority, and expected introduction of a carbon border adjustment mechanism (CBAM), costs will soon rise. This will have serious implications for regulated firms and their supply chain partners.

Lower cap fails to shift prices

The number of emissions allowances to be made available from 2021 – 2030 has been set at 936 million, 30% below the previous cap. In recent months, the price of UKAs has plummeted, partly due to market sentiment that any new cap would not be low enough to outweigh the historical oversupply of allowances, at least in the short term. This feeling has not shifted – UKAs are still trading at around £50 per tonne, half of the prices seen in July 2022.

Later in 2023, the Authority will consult on updating the methodologies to determine how free UKAs are distributed. Should these changes cause the supply of free UKAs fall sharply later in the decade, greater demand for purchases allowances at auctions and on the secondary market may drive prices back up.

Higher costs for aviation sector

Most airlines will face an abrupt escalation in ETS compliance costs, starting in 2026, due to the end of free allocations. The aviation sector is still scheduled to receive over 4 million UKAs for free per year until 2025, worth approximately £200 million at current prices. While higher costs will prompt the industry to accelerate its green transition, the UK ETS Authority also pledged to reform its treatment of Sustainable Aviation Fuel (SAF). For now, SAF is inaccurately rated as zero emissions, so the estimated lifecycle emission savings of SAF compared to standard fossil kerosene will soon be revised downwards.

Incorporation of shipping vessels and waste facilities

Emissions from shipping vessels over 5,000 gross tonnage (GT) travelling on domestic routes will be regulated under the UK ETS, from 2026. The high weight threshold means that only around 40% of domestic maritime emissions will be covered, and the commission has promised to review this scope in future. From 2028, energy from waste (EfW) and waste incineration facilities will also be brought fully into the system – with emissions monitoring and reporting obligations beginning in 2026.

Future inclusion of engineered removals

The government recognises that the UK cannot achieve its net-zero target without the ability to remove greenhouse gas emissions that industry cannot entirely eliminate. Consequently, the Authority fully intends to include engineered removals into the UK ETS, creating a new tradeable unit for negative emissions. The hope is for the system to provide dependable demand and an established price for removals, helping to solve a major barrier to investment in and the scaling-up of these solutions. Nature-based removals are also under consideration, although the language relating to their future inclusion is less certain.

The Authority recognises that removals should only be included if strict market eligibility requirements and a robust monitoring, reporting, and verification regime are established to protect the environmental integrity of the ETS. In particular, the possibility of purchasing removals cannot dampen the incentive for firms to decarbonise. A further consultation this year will explore options, such as reducing the UKA cap alongside the incorporation of removal credits, setting eligibility requirements for the use of removals, and establishing a CO2 storage permanence threshold for eligible removal credits.

Following the updates to the UK ETS – How EcoAct can help?

As carbon pricing policies expand in the UK and elsewhere, companies should be assessing their regulatory carbon pricing risk and seeking transparency regarding the emissions-related policies of their suppliers. EcoAct’s services – such as our Carbon and Energy Pricing Tool – are constantly evolving in line with government climate policy initiatives. We help firms to calculate their emissions, engage suppliers, and fundamentally understand their direct and indirect exposure to the UK ETS and other carbon pricing systems around the world.