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UK ETS to set lower emissions cap than EU and then align with net zero
Published June 18, 2020
The UK’s replacement for the EU emissions trading system (ETS) would reduce the existing emissions cap by five percent, the government has announced following a consultation on the future of carbon pricing after Brexit.
The government intends to consult again on the emissions cap in line with its target of net zero emissions by 2050.
The new scheme will replace the EU ETS when the UK leaves the EU scheme at the end of the year. The new scheme could follow the Swiss model, establishing a link between the future UK ETS and the EU ETS, or it could operate independently.
The EU ETS puts a price on carbon emissions to encourage large industries to reduce their emissions of greenhouse gases. The EU ETS sets a cap on the total amount of greenhouse gases that can be emitted from sites covered by the scheme. The cap is reduced over time so that total emissions fall.
Each year companies must surrender carbon allowances to cover its emissions or pay fines of up to £100 per allowance. Carbon allowances can be bought at auction and traded. This trading determines the carbon price.
The UK ETS will apply to energy intensive industries, the power generation sector and aviation. Around a third of UK emissions and around 1,000 UK factories and plants are currently covered by the EU ETS and will continue to be covered by the UK system.
The proposed scheme includes plans to reduce the existing emissions cap by five percent. The UK scheme will also allow installations with emissions lower than 25,000t CO2e per annum and a net-rated thermal capacity below 35MW to opt out of the scheme. An exemption will be implemented for installations with emissions lower than 2,500t CO2e per annum.
The government will consult again on what an appropriate trajectory for the UK ETS cap is for the remainder of the first phase (2021-2030). The cap will be aligned with net zero by 2023.
A standalone UK ETS will introduce a transitional auction reserve price of £15 to ensure a minimum level of ambition and price continuity during the initial years of UK ETS.
