The government has set out the design of the new UK Emissions Trading System (ETS), set to replace the EU Emissions Trading System.
It will initially set the cap at 5% lower than the EU ETS cap in recognition of the country’s net zero emission ambitions, according to The future of UK carbon pricing published on Monday 1 June. This will be revisited following the publication of the Sixth Carbon Budget by the Committee on Climate Change, due out in December 2020, to ensure the UK ETS remains in line with decarbonisation ambitions.
The ETS has been designed by the UK government together with the Scottish government, Welsh government and Northern Ireland Executive, and will be launched in 2021 with the first phase running till 2030.
The ETS sets a cost for emissions over a designated cap; large industries such as the power sector then have to pay for any emissions produced above this. Gradually the cost of these emissions will be increased, encouraging a reduction in emissions.
At the moment, around a third of the UK’s emissions are covered by the EU ETS. This represents around 1,000 factories and plants, which will be covered by the UK ETS when it is brought in to replace the EU scheme due to Brexit.
Energy Minister Kwasi Kwarteng said that thanks to “opportunities arising as we exit the transition period, we are now able to go even further, faster” to tackle climate change.
“This new scheme will provide a smooth transition for businesses while reducing our contribution to climate change, crucial as we work towards net zero emissions by 2050.”
The system will likely looks similar to the EU ETS as it “draws on the best of the current system” the government has said, whilst adding greater flexibility. It will still use auctions to introduce emissions allowances, with an initial Auction Reserve Price (ARP) of £15 per tonne.
Going forwards, the UK is “open to considering” a link between a UK ETS and the EU ETS, according to the government. This will be if it suits both sides’ interests, and is subject to Brexit transition negotiations.
The announcement has been welcomed by many, with the REA’s chief executive Dr Nina Skorupska calling this “good news for the industry".
“Introducing a UK ETS scheme and a strong carbon price provides clarity, shows commitment to continuing to work as partners with Europe on carbon prices post Brexit and highlights the government’s commitment to achieving net zero.
“Whilst a great first step, we urge the government to go further and faster, expanding the carbon price beyond the power sector into heat and transport as seen in other countries and setting a carbon price in line with net zero by the end of the year to further incentivise a green recovery.”
Energy UK, together with a number of other trade bodies from both the UK and EU, collectively welcomed the announcement as a positive step, but called for urgency going forwards.
In an open letter they outlined a number of comments and concerns regarding the UK ETS announcement including the need for collaboration, deficiencies in the coverage of trading between the SEM and Great Britain and the need for further details regarding offshore grid projects in the North Sea.
The need for a link between the UK and EU systems is emphasised, with the trade organisation saying it must be agreed on “with urgency” that it needs to be negotiated, details and timings provided regarding the implementation and that it should “support deep decarbonisation” of the traded sectors.
It concludes that: “This agreement will form the basis for future cooperation between the UK & EU on energy, as we all head down a decarbonisation route that will see a rapid evolution of the sector. Linkages are needed both to preserve the functioning of current systems and to enable the evolution of future systems.
“Our organisations encourage the negotiators to continue constructive conversations at pace to achieve such a deal and to provide enough clarity and time to prepare for this future we are currently trying to shape out. ”
The UK ETS design follows a consultation period, which saw over 130 responses from a range of stakeholders comment on the proposal.
You can read the full report, The future of UK carbon pricing here.