On 3 July 2023, the Government confirmed in its response to the March 2022 consultation on developing the UK ETS that major structural changes will be made to the scheme. These changes include that the 2024 cap will be at the top of the net zero consistent range, additional allowances will be released from the reserve pots, the industry cap will be set at 40% of the overall cap, 29.5 million allowances will be set aside for future market management, current free allocation of allowances for industry will continue until 2026, and free allocation for the aviation sector will be phased out for the 2026 to 2030 allocation period. Additionally, the scope of the UK ETS will be expanded to include domestic maritime transport, waste incineration and energy, and "process emissions" from carbon dioxide venting in the upstream oil and gas sector. Further details on changes to the cap, free allocation, and expanding the scope will be consulted on and published later this year.
After a year, the UK Governments have published their joint response to the March 2022 consultation on developing the UK Emissions Trading Scheme (UK ETS). We reported on this consultation and what it could mean for high-emitting sectors in a series of articles starting with Developing the UK ETS – the Road to Net Zero. Please refer to this for more detailed background.
A quick recap
The UK ETS was set up after the UK left the EU (and consequently the EU ETS). It is a scheme that places an annual cap on the amount of greenhouse gases certain sectors can emit. The cap reduces over time. If installations within the scheme emit over their cap, they must surrender allowances to the regulator. They can also sell surplus allowances if they emit below their cap. There are a certain number of free allowances allocated each year to those sectors most at risk of carbon leakage, to stop them moving their operations to another country where it may be cheaper to use carbon intensive processes.
The original consultation asked for views on reducing the cap over time to make it consistent with the UK's 'net zero' commitment and on reviewing the free allocation policy. It also proposed extending the scope of the UK ETS to other sectors including domestic shipping, energy from waste (EfW) and waste incineration.
Increasing the UK ETS cap and releasing additional allowances to the market will give businesses more time and support to cut their emissions, decarbonise and adopt cleaner fuels, but in the longer term may cause the UK to fall behind in the race to net zero.
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