The U.K. Emissions Trading Scheme Authority has announced a package of reforms that caps emissions from selected high-energy industries, limiting the total amount of greenhouse gasses aviation, power, and other energy-intensive industries can emit.
The UK ETS is the joint body comprising the U.K. Government, Scottish Government, Welsh Government, and the Department of Agriculture, Environment and Rural Affairs in Northern Ireland. The group was formed to replace the U.K.’s involvement in the EU ETS in 2021, and the scheme works through a process of buying and selling emissions allowances. Companies must obtain allowances for every ton of emissions they produce each year, and they can sell unused allowances to other firms.
The new reforms require companies to bring down emissions, though the cap next year will be set at the highest level of the range consulted on, in line with net zero, which will allow maximum flexibility for industries, the UK ETS noted.
“From next year, these industries will be required to bring their emissions down at the rate needed to reach net zero goals – sending a clear signal to industry to invest in the long-term decarbonization that will help the U.K. to maintain its world-leading position in cutting carbon emissions,” the announcement from the UK ETS stated.
Extra allowances will be available to the market between 2024 and 2027, and the current levels of free allocation for allowances will be guaranteed until 2026. The allowances and caps have already been created in previous scheme years within the overall cap limits. This will help protect the industries from international pressure “to ensure their efforts to [decarbonize] are not undermined by higher-carbon competitors – a risk known as carbon leakage,” the ETS said.
Carbon leakage is defined as the movement of production and associated emissions from one country to another due to different levels of decarbonization rules, such as carbon pricing and climate regulation.
The UK ETS also expanded the affected industries, with the inclusion of the domestic maritime transport industry from 2026 and waste from 2028. The extension will happen while “rolling out a phased removal of free carbon allowances for the aviation industry in 2026 and supporting investment in new Greenhouse Gas Removal technologies.” The move is in line with the ETS’ efforts to include high-emitting sectors in the U.K.
Large maritime vessels of 5,000 gross tonnage and above will be applicable in 2026, giving the industry time to adjust to upcoming requirements. Waste incineration and waste from energy sectors will be applicable to the scheme in 2028, with further consultation on the details of implementation and an initial reporting period for waste sectors to come.
Within the aviation sector, the UK ETS announced it will phase out free allocations in 2026, “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.” This means aviation businesses need to buy allowances for every ton of carbon emitted under the scheme, with free allocation entitlement continuing as planned in 2024 and 2025, until 2026.
The UK ETS also announced that it will bring in Greenhouse Gas Removal technology, such as Direct Air Capture, that extracts carbon emissions directly from the atmosphere to store in rocks beneath the earth’s surface. The UK ETS’ involvement in these technologies will drive early investment, and act as an appropriate long-term market.
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