UK Government announces new Emissions Trading System

THE UK Government has unveiled its UK Emissions Trading System (ETS) for a carbon trading market to encourage polluters to reduce emissions.

The UK ETS will replace the EU ETS, which the UK will leave at the end of the year when the Brexit transition period ends. The UK ETS will reduce the existing emissions cap by 5% compared to the EU system. The Government intends to amend the cap again when the system is up and running to keep it in line with the UK’s net zero target.

Kwasi Kwarteng, Energy Minister, said: “This new scheme will provide a smooth transition for businesses while reducing our contribution to climate change, crucial as we work towards net zero emissions by 2050.”

Around 1,000 UK facilities are currently covered under EU ETS and will be covered by the UK ETS. These facilities account for around one third of UK emissions. The scheme is mandatory for power, industrial, and aviation sections. The system works by setting a cap on the amount of emissions that can be produced from certain sectors. Companies can be fined if they emit more than their allowance at the end of the year. Carbon allowances can be bought and traded, and the carbon price determines the cost. Business that do not exceed the cap can sell their remaining allowances and businesses that exceed the cap would have to purchase additional allowances.

Nina Skorupska, Chief Executive of the Renewable Energy Association, said:  “This is good news for the industry; introducing a UK ETS scheme and a strong carbon price provides clarity, shows commitment to continuing to work as partners with Europe on carbon prices post Brexit, and highlights the Government’s commitment to achieving net zero. Whilst a great first step, we urge the Government to go further and faster, expanding the carbon price beyond the power sector into heat and transport as seen in other countries and setting a carbon price in line with net zero by the end of the year to further incentivise a green recovery.”

The UK will be open to considering a link between the UK and EU systems, although this is subject to ongoing trade negotiations. However, sources familiar with the negotiations told Reuters that the EU is reluctant to link the schemes without guarantees that the UK will not undercut the EU carbon market.

In a letter in March to Kwarteng by Lord Deben, Chairman of the Committee on Climate Change, concerns were raised over the target of an emissions cap 5% below the EU ETS. Lord Deben said that using the EU ETS was not suitable as a baseline and that the starting point should be based on the latest data on UK emissions. The Grantham Research Institute also cautioned in an August 2019 report that it could prove costly if UK industries can only trade with each other.

Roseanna Cunningham, Environment and Climate Change Secretary, said: “I have always made it clear that, in the event of Brexit, my preference was for an ETS that is linked to the EU’s scheme where possible – or, failing this, a standalone scheme – rather than pursue a policy of a carbon emissions tax. As Scotland will host the international climate negotiations at COP26 in Glasgow, which will include rules on international carbon markets, it is particularly important to signal our commitment to a linked UK ETS to demonstrate our international leadership on carbon and to retain access if at all possible to the wider EU carbon market. Accessing that larger market will help business achieve decarbonisation at lower cost.”