Post: Significant reform of the UK ETS announced

Significant reform of the UK ETS announced

The UK Emissions Trading Scheme (UK ETS) Authority committed to reform of the UK ETS in line with the UK’s net zero legal requirements under the Climate Change Act

The UK ETS, launched on 1 January 2021 seeks to reduce greenhouse gas (GHG) emissions and requires those operating in specified sectors (including manufacturing, energy generation and aviation) to surrender emission allowances to reflect in scope emissions. In its response to a 2022 consultation on developing the UK ETS the Authority committed to expand the scope of the scheme to include maritime, incineration and energy from waste and process emissions from carbon dioxide venting of upstream oil and gas alongside changes impacting all existing market participants with a commitment to further expansion of sectors covered.

On 3 July the Authority announced that it will make various changes to the UK ETS, including:

• Setting the UK ETS cap to be consistent with net zero
• A total emissions cap of 936M allowances, a drop of 30% over the course of this phase
• Smoothing the transition to the net zero cap for 2024 by releasing 53.5M additional allowances from the reserve to the market between 2024 and 2027
• Raise the industry cap (i.e. the quantity of allowances that are allocated for free) from 37% to 40% of the overall cap, to continue to provide free allowances to those sectors at most risk of carbon leakage

The scope of the UK ETS will also be expanded to include:

• Domestic maritime transport for vessels of at least 5,000 gross tonnes from 2026.
• Waste incineration and energy from waste from 2028 (phase in monitoring and reporting period from 2026).
• Process emissions from CO2 venting from the upstream oil and gas sector from 2025.
• Set aside 29.5 million allowances (equivalent to over 3% of the overall cap) for future market management and long-term market resilience.

In addition, the Authority also committed to consider further reforms. In particular, it will work to:

• Establish how to bring non-pipeline modes of CO2 transportation (e.g. shipping, rail or road) into the UK ETS’s scope
• Expand the UK ETS to include methane emissions from upstream oil and gas sectors
• Consult on introducing UK ETS biomass sustainability criteria for all biomass before the end of 2023
• Consult on incorporating engineered GHG removal technologies (GGR) (e.g. direct air capture) in the UK ETS
• Consider whether the UK ETS could provide an appropriate long-term market for high-quality nature based GHG removal technologies
• Review technical changes to free allocation in order to update the methodology to better protect sectors most at risk of carbon leakage

At the end of 2023 the Authority will publish a consultation which will capture proposed but not yet agreed changes and its vision for the long-term development of the UK ETS including its continuation until at least 2050 and its expansion into more high emitting sectors.

GridBeyond CCO Mark Davis said:

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