The UK Emissions Trading Scheme (UK ETS) Authority has published a long-term pathway for the UK ETS, as recommended by an Independent Review of Net Zero.
The scheme will encourage investment in decarbonisation by providing businesses with certainty.
Long term Commitment
The legislation underpinning the scheme has been extended to (at least) 2050, when the UK aims to be at net zero. This extension beyond the previous date of 2030 aims to encourage investment in decarbonisation by providing businesses with certainty over Government policy.
Along with this certainty, carbon pricing is viewed as an effective tool to economically rationalise investment in green technologies and allows participating businesses the freedom to choose how best to decarbonise their operations.
Expansion of the Scheme into New Sectors
Due to the described benefits of carbon pricing, the UK ETS Authority will continue to review the possibility of expanding the scheme into more sectors, including those with high emissions. Consideration will be given to ensure there is sufficient support for businesses to transition to net zero and to limit any risk of carbon leakage.
More detailed assessments on each potential new sector are yet to be made and further targeted consultations will be published before any decisions on expansion are made.
For now, agriculture is not being considered in any expansion of the scheme. However, the UK Government plans to develop a method of recording farm emissions to explore new areas of decarbonisation.
The authority has set out the following considerations for each new sector:
- Practicality – Can emissions be monitored, reported, and verified effectively?
- Suitability – Could the UK ETS encourage decarbonisation in the sector?
- Business – How would the expansion effect both new and current participants?
- Distributional – Are there any adverse effects on consumers?
- Timing – Where is the sector on the pathway to Net Zero?
Development of the Scheme
The UK ETS allowances cap is now aligned with the net zero trajectory as the total amount available at auction in 2024 is 69 million, a drop of 12.4% from 2023, and will continue to fall to approximately 24 million in 2030.
The Authority has also announced that the industry cap, the portion of allowances available as free allocation, will be set at 40% of the overall cap. However, free allocation for the aviation sector will be phased out completely by 2026.
There is currently an ongoing consultation reviewing the Free Allocation rules, which aims to better support sectors most exposed to carbon leakage. There is more information about this in Rebecca Scarratt’s recent blog. Click here to read.
The UK Government has recently published a response to their previous consultation, which introduced a Carbon Border Adjustment Mechanism (CBAM) for imported goods. To read more about CBAM, please click here to read Bethany Bailey’s latest update.
Further Consultation
Several key proposals were raised in an initial 2021 consultation, as the scheme began to transition away from the EU ETS. The UK ETS continues to develop several more targeted consultations are expected. These include considerations to how the scheme will interact with the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), how GRRs and carbon capture/storage may be accounted for in UK ETS and the implementation of a sustainability criteria for all biomass.
Currently open consultations on the free allocation review and future markets policy can be found here:
- UK Emissions Trading Scheme: free allocation review
- UK Emissions Trading Scheme: future markets policy
As always, Swan Energy will continue to report on any imminent or potential changes to the UK ETS and ensure are clients are prepared for any necessary transitions. Click here for all UK ETS updates that we have published. If you would like to speak to the Swan Energy team, please do get in touch.
