UK government expands emissions trading scheme for carbon-intensive industries

From 2024, there will be a new limit on emissions for the power sector, energy intensive industries and aviation. The cap will be set at the highest level of the range that the government proposed in its March 2022 emissions trading scheme (UK ETS) consultation. The government said the level, which remains in line with its net zero pledges, would ease the industries’ transition to the new emissions requirements.

It also announced that the UK ETS Scheme will be expanded to more UK sectors. The changes will be overseen by the UK ETS Authority, a joint body comprising the UK government, Scottish Government, Welsh Government and the Department of Agriculture, Environment and Rural Affairs in Northern Ireland.

Stacey Collins of Pinsent Masons said: “This announcement is a strong signal from government that carbon-intensive industries need to keep developing and implementing their decarbonisation strategies. The government needs those industries to accelerate their path to decarbonisation, so that the UK can meet its net zero obligation. In that respect it’s no surprise that it is raising the bar for what is expected from the private sector.

He added: “It’s useful to finally have some clarity on how the UK ETS Scheme will be developed: it’s been a long consultation process. However, there’s still more consultation and detail to come, so impacted sectors should not miss the opportunity to have their say on how the stated principles will be implemented.”

The government also announced that the UK ETS will be expanded to include the UK’s domestic maritime transport in 2026. The scheme will be applicable to large maritime vessels only – those of 5000 gross tonnage and above. The government also intends the expand the UK ETS scheme to include the incineration of fossil material by waste incineration and energy from waste.

Ross McDowall of Pinsent Masons said that, although the proposed expansion will be subject to further consultation on the details of implementation, waste incinerators and energy from waste is expected to be brought within the UK ETS in 2028 and could be subject to an initial emissions monitoring period between 2026 and 2028.

“It is reassuring to note the government has acknowledged that expansion of the UK ETS should be complimentary to existing and future waste policies rather than being a one stop shop solution. To achieve net zero in the waste sector, decarbonisation will need to be collectively driven by households, business waste producers and the waste industry,” he added.

“Reinforcement and promotion of existing concepts such as the circular economy and the waste hierarchy, and the development of new regimes on deposit recovery and extended producer responsibility, must therefore accompany any proposed changes to the UK ETS,” McDowall said.

The UK ETS has also been designated as an appropriate long-term market for GGR technology. The Authority said that bringing technologies, such as carbon capture and storage (CCS) and direct air capture (DAC) into the scheme would drive early investment in them. It added that the UK ETS could also offer an appropriate long-term market for high-quality nature-based GGRs in future, subject to further consideration.

“There’s a lot of excitement about the announcement that the UK ETS is believed to be the right structure for the development of the long-term market for GGRs. It’s a welcome boost to GGR projects in development, and will give potential funders comfort that there is a serious investment opportunity in relation to this market,” Collins said.

He added: It’s initially intended that ‘engineered’ GGRs will be included in the scheme, which would include relevant CCS and DAC projects. There is an associated call for evidence, so companies involved in the GGRs sector should make sure their voices are heard.”

McDowall said: “The potential integration of the UK ETS and voluntary carbon markets raises a number of interesting issues and opportunities for natural capital projects/ voluntary carbon markets. On the one hand, inclusion of such projects could drive further investment and development whilst increasing the liquidity of the UK ETS allowances market.”

“However, this would need to be carefully balanced as integration of these schemes may lead to unintended effects, such as a decreased incentive to decarbonise, the risk of double-counting credits, and concerns over the permanency of certain types of CO2 sequestration,” McDowall added.

The UK ETS, which has run since 2021, puts a limit on the total amount of greenhouse gases aviation, power and other energy intensive industries can emit. The scheme is designed to incentivise industries away from costly fossil fuels and encourages them to cut their carbon footprint by investing in energy efficiency and cleaner, or renewable technologies, which in turn can boost energy security.

The scheme incentivises decarbonisation through a process of buying and selling emissions allowances, which companies must obtain for every tonne of emissions they produce each year. Companies that are successful in reducing their emissions can sell unused allowances to other participants in the scheme. Businesses that face significant overseas competition are granted free emissions allowances by the UK ETS Authority to ensure their efforts to decarbonise are not undermined by higher-carbon competitors.

The Authority said it would continue free allowance support at current levels until 2026, when it will begin a phased removal of free carbon allowances for the aviation industry. Extra allowances will also be made available to the market between 2024 and 2027. The Authority said it recognised that a “comprehensive suite of policies” including funding, regulation and carbon pricing is needed to deliver on the UK’s decarbonisation commitments.