The UK Emissions Trading Scheme: a quick explainer

The UK Emissions Trading Scheme is set to enter operation in May 2021. Here we take a look at the new scheme, and how it will work.

The UK Emissions Trading Scheme: a quick explainer

The UK’s Emissions Trading Scheme is set to enter operation in May 2021. Here we take a look at the new scheme, and how it will work.

What is the UK ETS?

The UK Emissions Trading Scheme (UK ETS) replaced the UK’s participation in the EU ETS when the UK left the EU. The scheme puts a cost on carbon pollution to encourage polluters to reduce the amount of greenhouse gases they emit.

The government says it wants to increase the climate ambition of the UK’s carbon pricing policy, whilst also protecting the competitiveness of UK businesses. It is seen as a crucial step towards achieving the UK’s target for net zero carbon emissions by 2050.

When does the UK ETS come into effect?

Intercontinental Exchange (ICE) – the firm which operates the EU ETS – has been appointed to oversee the UK ETS. It has recently published its allowances auction calendar, which outlines that the first auction will take place on 19 May 2021.

Energy Minister Anne-Marie Trevelyan says “Our scheme is even more ambitious than the EU system it replaces and the publication [of the calendar] will give businesses and operators clarity over this year’s supply of emissions allowances, enabling them to plan ahead, build back greener and better prepare for the transition to a low-carbon economy”.
The UK ETS will have a transitional auction reserve price of £22 per tonne, which establishes a minimum price for which allowances can be sold.

How does it differ from the previous EU system?

The government says the new system has been designed to draw on the best of the European system whilst ensuring it has greater flexibility to work in the best interests of the UK. As a result, elements of the Emissions Trading System will be familiar to operators. It does go one step further than the EU ETS, as the scheme includes plans to reduce the existing emissions cap by five per cent, going further than the EU system.

How does emissions trading work?

Emissions trading systems work by setting a cap on the total amount of greenhouse gases that can be emitted from certain sectors. The cap is reduced over time so that total emissions fall. After each year, every covered company must surrender enough carbon allowances to cover all its emissions. Carbon allowances can be bought at auction and traded, and these markets determine the ‘carbon price’.

Who does the new UK scheme apply to?

The UK ETS will apply to energy intensive industries, the power generation sector and aviation.

It covers activities involving combustion of fuels in installations with a total rated thermal input exceeding 20MW (except in installations for the incineration of hazardous or municipal waste). Around a third of UK emissions and around 1,000 UK factories and plants were covered by the EU ETS and will continue to be covered by the UK system.

What happens if I was participating in the EU ETS?

Participants in the EU Emissions Trading System (EU ETS) must still comply with their obligations under that system for the 2020 compliance year. Annual emissions reports for 2020 must be submitted by 31 March 2021 and equivalent emissions allowances surrendered by 30 April 2021.

How will the scheme impact on small emitters?

In the UK ETS, there will be simplified provisions for small emitting installations and hospitals with emissions lower than 25,000t CO2e per annum and a net-rated thermal capacity below 35MW. These installations will be subject to emissions targets instead of trading allowances. Separate simplified provisions are available to Installations with emissions lower than 2,500t CO2e per annum.

Will free allocation continue under the new scheme?

Free allocation of allowances to qualifying operators of installations and aircraft operators will continue. At the time of writing (March 2021), the government has just launched a call for evidence on how the use of free allocations can better incentivise emissions reduction, and protect energy intensive, trade exposed industries from the risk of carbon leakage. It is seeking to make free allocations fairer and more targeted, and also wants to see examples and evidence of carbon leakage to help inform future free allocation policy.

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