The UK Emission Trading System

Posted by Matthew Temple on

The UK ETS

In 2019 the UK Government launched a carbon pricing consultation and they have since confirmed their intention to establish a UK Emissions Trading System (UK ETS) from 1st January 2021. The UK ETS will replace the incumbent European Union Emissions Trading System (EU ETS) at the end of the Brexit transition period. As it stands, the UK ETS will be a standalone system however the UK government remains open to the possibility of linking with other schemes.

Mirror image

The UK ETS will largely be a mirror image of the EU ETS to ensure a smooth transition. The same Monitoring, Reporting and Verification rules will be applied as those agreed for Phase IV of the EU ETS. In addition, free allocation rules will remain the same, utilising the data collected for Phase IV of the EU ETS to determine the benchmarks to be used. The allowances that will be issued under the scheme will be called UK Allowances (UKAs). Other similarities between the systems include:

  • Auctioning will continue in the same proportion as the EU ETS
  • Offset use will not be allowed
  • Cost Containment Mechanisms will be in place but with tighter rules for the first two years of the UK ETS

Increased ambition

Despite the similarities between the two systems, there are some significant differences. The UK has set a cap for its ETS of 45% below 1990 levels, this is 5% more ambitious than the current EU ETS cap to help ensure that the UK is on target to meet its carbon neutral commitments by 2050. It is expected that both the EU and UK ETS caps will be further adjusted to incorporate the recently revised Nationally Determined Contributions and 2030 emissions reduction targets.

In addition, the UK ETS will have an auction floor price. The price floor will provide UK installations with minimum allowance price certainty and will help drive investment in lower emissions technology. The floor price is likely to rise over time. Because the floor price is only applied to the clearing price of UKA auctions, and not to the market as a whole, the price of a UKA in the secondary market could fall below £15 per tonne. However, it would be very difficult, if not impossible, for it to remain below for an extended period of time.

Although the Cost Containment Mechanisms, which would see additional auction volumes should the UKA price remain at elevated levels for a period of time, are similar to those already employed by the EU ETS, the rules will be tighter for the first two years of the UK ETS. If the price for 3 months is more than double that of the preceding two years the UK government may choose to intervene and release additional supply.

According to BEIS, the UK government department responsible for the UK ETS, development of the system is well underway. The new registry and MRV systems are expected to be ready in good time by 1st January 2021.

Next steps for the UK ETS

Further information and amendments to the legislation already laid out are expected before the end of 2020. It remains to be seen if a trade deal can be reached with Europe and if, within the trade deal, there are provisions for linking the two ETS. A link between the systems is one of the ways to avoid the liquidity and price volatility concerns at the start of the UK ETS that Redshaw Advisors have raised with BEIS directly. You can also read our blog on managing the risks here.

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