UK government reveals plans for national emissions trading system after Brexit

Long-awaited document says scheme will have more ambitious emissions cap than EU’s flagship system

The UK is to establish a national emissions trading system (ETS) at the start of next year, it has revealed in a long-awaited final decision on carbon pricing after Brexit.

The system, which will cover power generation, aviation and other energy-intensive industries, will feature a tighter emissions cap than the EU ETS and a floor price of £15 per tonne of emitted carbon. 

Whether the system will link to the EU ETS, or function as a standalone scheme, remains up in the air. 

The document, published yesterday, is the response from the UK Government and the devolved administrations of Scotland, Wales and Northern Ireland to the carbon pricing proposals it asked for industry feedback on last year.

The document leaves room for linking with the EU ETS “if it suit[s] both sides’ interests” but doesn’t commit either way; where different approaches would apply under a linked or standalone UK ETS, this is highlighted.

The cap will start at around 156 million allowances in 2021, 5% tighter than the UK would have seen under the next phase of the EU ETS, and will be reduced by 4.2 million allowances each year, keeping the cap at 5% below the UK’s EU ETS cap share.

The document leaves scope to tighten the cap more within the first phase of the UK ETS – which will run from January 2021 to December 2030 – in line with forthcoming carbon budget advice from the Committee on Climate Change (CCC) in December, and the government will consult again on first phase cap trajectory within the next nine months. 

The document said: “Our aim is that any changes to the policy to appropriately align the cap with a net-zero trajectory will be implemented by January 2023 if possible and no later than January 2024, although we would also aim to give the industry at least one year’s notice to provide the market with appropriate forewarning.”

Sector coverage could be expanded in the future, and will be considered in the first ETS review in 2023 to enable any changes by 2026. “We recognise that there is a case for expanding carbon pricing, especially in the context of a net-zero emissions target,” the document said.

The CCC has already suggested that expansion “to a much larger part of, or all of, the economy could be desirable” and recommended the government seek to include agriculture and land use.

Like the EU ETS, the UK scheme will provide free allowances for businesses exposed to international competition, that could cause “carbon leakage” if they were to relocate production and emissions abroad.

The UK ETS will also establish a New Entrants Reserve (NER) – a ring-fenced reserve of free allowances for new entrants to the UK ETS, as well as existing operators that increase their activity. 

The reduction in the overall emissions cap is to be taken from the auction share, with free allowances being broadly the same as they would be if the UK continued participation in the EU ETS “in order to ensure a smooth transition for participants for the 2021 launch”.

“This commits the UK ETS to a steeper trajectory, aiding climate ambition while protecting industries in the traded sector from the risk of carbon leakage.”

Free allocation will also be reviewed “in the coming months”, rather than as part of the 2023 review.

According to the document, the aviation component of the cap will be “at least as ambitious” as the UK’s share would have been of the EU ETS aviation cap, and the single UK ETS cap will apply to all participating sectors, including aviation. 

The document says there will be “no impact to aircraft operators’ day one free allocation entitlement” as a result of the establishment of the UK ETS, but that free allocation to aviation will reduce annually in line with the overall UK cap.

The proposed aviation routes include UK domestic flights, flights between the UK and Gibraltar, flights from the UK to EEA states, and flights from the UK to Switzerland, once an agreement is reached.

The ETS will establish an Auction Reserve Price (ARP) – a minimum price for which allowances can be sold at auction – of £15 “to ensure a minimum level of ambition in a standalone UK ETS and to minimise the potential for a significant fall  in the UK carbon price”.

Previously the UK government had proposed introducing a Supply Adjustment Mechanism (SAM), based on the EU ETS Market Stability Reserve (MSR) to withdraw excess allowances from the market in the event of a glut to ensure pricing levels don’t plummet. Data requirements mean the SAM couldn’t launch until mid-2022, however, meaning the ARP will be introduced in the meantime and removed if the SAM becomes operational.

The legislation to underpin the system will be completed for the UK and the DAs this year, and the registry – the main IT system for the UK ETS – is under construction. 

The design reflects many features of the EU ETS, but the document said the standalone UK scheme would “allow us to have autonomy over its design and governance…and make the system work better for the UK”.

The consultation received more than 130 responses with a “large proportion of stakeholders express[ing] a preference to link a UK ETS to the EU ETS”. 

Later this year, the UK Government will publish a consultation on the design of a Carbon Emission Tax as an alternative to a UK ETS. 

“Given inherent uncertainty, it is sensible to have a fallback carbon pricing option; therefore, the UK Government will also consult on a Carbon Emissions Tax which, if needed, will ensure a carbon price remains in place in all scenarios.”

The UK established Europe’s first emissions trading scheme in 2002, which served as a pilot for the EU ETS. As of April 2019, 57 carbon pricing initiatives had been established or scheduled for implementation globally, covering around 20% of global greenhouse gas emissions. Of these, 28 are emissions trading systems.