UK ETS reforms: Tighter emissions cap and more sectors in scope
Reforms to the UK ETS are on the horizon – including a new limit on emissions, and an expansion of the scheme to domestic maritime transport and waste.
The scheme – which replaced the EU ETS in 2021 – puts a limit on the total amount of greenhouse gases aviation, power and other energy intensive industries can emit.
We’ve put together a short explainer on the changes.
UK ETS ‘net-zero’ cap
Following the outcome of a government consultation, industries in scope will be required to bring their emissions down at the rate needed to reach net zero goals.
The so-called net-zero cap for Phase 1 will be lowered to the top of the consulted range of 887-936 million allowances. The current cap is 1,365 million.
At the same time, the authorities will release an addition 53.5 million allowances from reserves between 2024 and 2027 to ensure that there is no sudden drop in allowance supply between 2023 and 2024.
More sectors in scope
For the first time, domestic maritime transport, waste incineration and energy from waste sectors will be added to the scheme. The scheme will be applicable to large maritime vessels only, of 5000 gross tonnage and above.
The ETS will expand to cover the domestic maritime transport sector from 2026, as well as waste incineration and waste from energy sectors from 2028. This will be subject to further consultation on the details of implementation and an initial reporting period for waste sectors.
Free allowances set to continue
The ETS supports businesses in sectors that face significant overseas competition with free emissions allowances, to ensure their efforts to decarbonise are not undermined by higher-carbon competitors – a risk known as carbon leakage.
The UK ETS Authority has confirmed that free allowances will continue at current levels until 2026, to give industries certainty over the level of support available in the medium term.
Aviation free allocations to be phased out
Aviation free allocations will be phased out in 2026. This decision was taken in light of evidence of minimal risk of carbon leakage, meaning ETS aviation emissions are unlikely to be displaced as a result of the UK ETS. Instead, aviation businesses need to buy allowances for every tonne of carbon emitted under the scheme. To help aircraft operators prepare for this transition, free allocation entitlement will continue as planned in 2024 and 2025 until 2026.
Greenhouse Gas Removals
The Authority has also announced the decision that the UK ETS is an appropriate long-term market for Greenhouse Gas Removal (GGR) technology.
The government says bringing GGR technologies into the UK ETS will drive early investment in new technologies – such as Direct Air Capture, that extract carbon emissions directly from the atmosphere to store in rocks beneath the earth’s surface. The UK ETS is also being considered as an appropriate long-term market for high-quality nature-based Greenhouse Gas Removals in the future.
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.