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UK Emissions Trading Scheme

Volume 742: debated on Monday 18 December 2023

My noble Friend the Parliamentary Under-Secretary of State (Lord Callanan) has today made the following statement:

The Government and our partners in the devolved Administrations are today delivering on commitments to continue the development of the UK emissions trading scheme (ETS), a key part of our approach to achieving net zero by 2050. The scheme puts a limit on the emissions of the power, industrial and aviation sectors, and requires participants to obtain carbon allowances to cover their emissions. In doing so, it creates a carbon price signal that incentivises investment in decarbonisation.

In July the UK ETS Authority published an ambitious package of reforms to the scheme, to ensure it supports our net zero goals.

Today, building on those reforms, the UK ETS Authority has launched consultations on changes to market and free allocation policies within the scheme. It has also published a statutory review of the scheme’s operation since its launch in 2021, and a joint response to the UK ETS recommendations in the independent review of net zero.

Review of market policies

The markets consultation explores how to strengthen the functioning of the scheme by supporting market stability and providing long-term confidence for participants. Following a call for evidence last year, it seeks views on a range of potential market policies, including a new supply adjustment mechanism to support the long-term operation of the scheme.

The consultation also considers potential changes to the existing auction reserve price, which sets a minimum auction price of £22 for carbon allowances; and the cost containment mechanism, which allows the UK ETS Authority to intervene if the carbon price rises rapidly over a sustained period.

Free allocation review

The consultation on free allocation is the final stage of a comprehensive review of this vital area of the scheme. It offers UK industries an opportunity to shape UK ETS policy and ensure the scheme can support them in the transition to net zero.

Industries that face a risk of carbon leakage are supported under the UK ETS through free emissions allowances, to ensure their efforts to decarbonise are not undermined. Carbon leakage refers to the movement of production and associated emissions from one country to another, due to different decarbonisation policies, for example carbon pricing and climate regulation.

The consultation explores how to better target free allocations for those most at risk of carbon leakage. It follows the changes to the industry cap (the share of overall allowances put aside for free allocation) announced in July and considers how key UK-specific factors are accounted for when calculating free allocations from 2026. It also consults on new proposals that will ensure closed industrial sites under the scheme do not continue to receive free allocations after they have ceased activity.

Addressing carbon leakage risk to support decarbonisation

In parallel to the free allocation review, this year the Government consulted on a range of potential additional domestic carbon leakage mitigation measures. After careful review, and giving thorough consideration to the potential implications, the Government have today published a response to the consultation. The Government will implement a carbon border adjustment mechanism (CBAM) from January 2027 which will place a carbon price on some of the most emissions-intensive industrial goods imported to the UK from the aluminium, cement, ceramics, fertilizer, glass, hydrogen, iron, and steel sectors.

The UK CBAM will work cohesively with the UK ETS to ensure imported products are subject to a carbon price comparable to that incurred by UK production, mitigating the risk of carbon leakage. The Government will work with the rest of the UK ETS Authority to consider whether free allocation should be adjusted to reflect changes to carbon leakage risk for given sectors.

Alongside a CBAM, the Government will work with industry to establish voluntary product standards that businesses can adopt to help promote their low carbon products to consumers, and we will seek to develop an embodied emissions reporting framework that could serve future carbon leakage and decarbonisation policies.

Delivery of the CBAM will be subject to further consultation in 2024, as will voluntary standards and the embodied emissions reporting framework.

UK ETS pathway and statutory review

The UK ETS Authority has also published a joint response to the independent review of net zero’s recommendations for the scheme. It confirms the authority’s commitment to continuing the UK ETS until at least 2050, and is intended to give businesses in sectors covered by the scheme the policy certainty they need to make the long-term decarbonisation investments.

Finally, the UK ETS Authority has published its first statutory review of the operation of the UK ETS since its launch. The review, supported by independent evaluation, confirms the scheme’s central role in delivering on the UK’s net zero targets, alongside recommendations to enhance its function, such as expansion to new sectors and technical amendments to its operation.

These publications demonstrate our commitment to delivering continued development of the UK ETS, and doing so in a way that works in partnership with affected sectors.