UK ETS changes: net zero cap and plans to expand scheme to maritime and waste
The government has announced a package of reforms for the UK Emissions Trading Scheme (UK ETS), including a new limit on emissions, and a planned extension of the scheme to cover domestic maritime transport and waste.
The UK ETS – which has been in place since 2021 – puts a limit on the total amount of greenhouse gases aviation, power and other energy intensive industries can emit, to incentivise industries away from fossil fuels.
The reforms announced follow a consultation on changes to the UK ETS which ran in 2022.
UK ETS: The changes at a glance
- Setting the UK ETS cap to be consistent with net zero and doing this at the top of the net zero consistent range. This will be implemented for 2024.
- Smoothing the transition to the net zero cap. 5 million additional allowances from the reserve pots will be released to the market between 2024-2027 to ensure that there is no sudden drop in allowance supply between 2023 and 2024. This will be a gradual transition, allowing the market and participants time to adapt.
- Setting the Industry Cap at 40% of the overall cap. The government says it recognises businesses need time and support to decarbonise: “Setting a higher limit on the quantity of allowances available to be distributed for free, compared with retaining a limit of 37%, will ensure we can continue to provide free allowances to those sectors at most risk of carbon leakage.”
- Providing long term market resilience. To manage unforeseen challenges, 29.52 million allowances will be put aside for future market management. This is equivalent to over 3% of the overall cap and will provide the UK ETS Authority with resilience to respond in a way that is flexible, targeted and timely in the face of market challenges. It will also support the ongoing market review which will set the design of future UK ETS markets policy.
- Free allocation technical changes. In its consultation response, the government said, “We have listened to concerns regarding features of industrial free allocation policy which are not working as intended and are taking action to address this. We are also making targeted changes to benchmarks and carbon leakage policy for specific stakeholders in the Malt Extract and Lime sectors. Our review into free allocations will continue with an aim to update the methodology to better target support at sectors most at risk of carbon leakage.”
- Phasing-out of aviation free allocation. The UK ETS Authority will not extend free allocation for the aviation sector for the 2026-2030 allocation period. Aircraft operators will receive their existing entitlement for the 2024 and 2025 scheme years as set out in the aviation allocation table. As such, aviation free allocation entitlement will reduce at the existing fixed amount of 2.2% annually in 2024 and 2025 until full auctioning in 2026.
- Expanding the scope of the scheme. Subject to further consultation on the details of implementation, the government intends to expand the scope of the UK ETS to include domestic maritime by 2026, and energy from waste and waste incineration in 2028 (preceded by a two-year phasing period from 2026-2028). Further, the existing scope of the scheme will be expanded to create a level playing field between operators who use pipeline and non-pipeline modes of transportation of CO2. CO2 venting from upstream oil and gas will be brought into the scope of the UK ETS, and the government will consult on introducing UK ETS biomass sustainability criteria for all biomass to develop a greater understanding of its impacts upon markets and operators.
- Incorporating Greenhouse Gas Removal (GGR) technologies. Engineered GGRs will be included in the UK ETS, subject to further consultation; a robust monitoring, reporting and verification (MRV) regime being in place; and the management of wider impacts. The government says the UK ETS may offer an appropriate long-term market for high quality nature-based GGRs, subject to further work to consider the range of potential issues regarding permanence, costs and wider land management impacts.
If your business is in scope of the UK ETS, get in touch with our team for advice on how the changes affect you, and how you can achieve compliance.