Industry invited to share views on changes to Emissions Trading Scheme

New proposals aim to enhance UK Emissions Trading Scheme’s role in supporting decarbonisation.

Consultations ask for views on scheme improvements to promote market stability and support businesses in the net zero transition.

The UK Emissions Trading Scheme Authority confirms the scheme will run until at least 2050, providing long-term certainty.

Power, aviation and industrial sectors are today (18 December) being invited to offer their views on proposed changes to the UK Emissions Trading Scheme that will ensure it continues to support progress to net zero across the UK.  

Companies under the scheme are required to obtain allowances for every unit of carbon they emit. These allowances are traded between participants, generating a carbon price that spurs businesses to invest in cleaner or renewable energy sources and improved energy efficiency.  

In the two consultations launched today, the UK Emissions Trading Scheme Authority has set out proposals to ensure the scheme’s market continues to facilitate cost-effective decarbonisation for the businesses involved. This includes options for a new mechanism to manage the supply of carbon allowances in the market.  

The consultations also consider support available for energy intensive industries under the scheme. Participants and other organisations will be able to share their views on how best to calculate free allocations of carbon allowances, which ensure efforts from UK industries to decarbonise are not undermined by higher-carbon imports.

Today’s move follows ambitious reforms to the UK  Emissions Trading Scheme announced earlier this year. It signals the next step in the scheme’s market-led transition to net zero, alongside long-term economic growth across the UK. 

Also today, the Authority has published a response to MP Chris Skidmore’s Independent Review of Net Zero in which it confirms the Emissions Trading Scheme will be extended beyond 2030 to 2050 – providing certainty needed for businesses to invest in decarbonisation.

In a joint statement, UK Emissions Trading Scheme Authority ministers, including Lord Callanan, Julie James MS, Màiri McAllan MSP, Exchequer Secretary Gareth Davies MP and Aviation Minister Anthony Browne MP said:

The UK Emissions Trading Scheme is a cornerstone of our climate policy. Continuing its success means giving industries confidence to invest in decarbonisation. 

Today’s plans form the next step in developing the scheme so it can continue to enable the transition to net zero for industries across the UK alongside lasting economic growth.

The two consultations will run for 12 weeks until 11 March 2024 and are open to all participants of the UK Emissions Trading Scheme as well as wider organisations. These include trade bodies, market participants, academics, NGOs, and future ETS participants from maritime and waste sectors. 

Consultation on Markets Policy: 

• The Authority has today set out plans to ensure the UK Emissions Trading Scheme market continues to offer an effective financial incentive that drives its participants to decarbonise, following a call for evidence last year. The proposals seek to support market stability and provide long-term confidence for participants.
• Industries are being asked for their views on a range of potential market policies, including a new Supply Adjustment Mechanism. The Authority proposes introducing this system to help respond to changes in demand within the market that have a long-term impact by amending the amount of carbon allowances available.
• The consultation also covers proposals for the Authority to maintain its power to intervene if the carbon price rises rapidly over a sustained period, in what is known as the Cost Containment Mechanism. Other potential measures include maintaining the Auction Reserve Price, which sets a minimum bid level for allowances during auctions – currently at £22.

A Review of Free Allocation:

• This consultation explores how to better target free allocations of carbon allowances for industries most at risk of carbon leakage – where production and associated emissions are moved from one country to another due to different levels of decarbonisation rules.
• The review considers how to improve the free allocation calculation ensuring carbon leakage risk specific to UK industry is accounted for. New proposals will also ensure closed industrial sites do not receive free allocations after they have ceased activity.
• This consultation is the final phase of a comprehensive review into free allocation and will allow the Authority to give industries certainty over the support they will receive from 2026.
• The Authority is engaging with the UK Government on wider carbon leakage mitigation policies, which were the subject of a consultation in Spring 2023, to ensure any policies progressed work cohesively with UK ETS free allocation.

In addition, the Authority has published four reports today covering the UK ETS’s current operations and future outlook. These include: 

• Response to the Independent Review of Net Zero: The Authority has today set out a long-term pathway for the scheme, in its response to MP Chris Skidmore’s Independent Review of Net Zero. It confirms the scheme will be extended beyond 2030, until at least 2050 – providing the certainty needed for businesses to invest in decarbonisation.
• Review of the Operation of the UK Emissions Trading Scheme: This is the first statutory review of the ETS, concluding the scheme is on track to support the transition to net zero. It offers recommendations to enhance the scheme, by expanding its coverage and making technical amendments to its operation. The Review draws on information collected as part of an independent external evaluation of the scheme, which the Authority is also publishing today.

The Authority is a body comprising the UK government, Scottish Government, Welsh Government and the Department of Agriculture, Environment and Rural Affairs in Northern Ireland that jointly runs the scheme.   

Notes to Editor:

• The consultation on the Review of Free Allocations is available here. The consultation on Markets Policy is available here.
• The content of these documents has been agreed by senior officials in Northern Ireland in the absence of Ministers. The Executive Office will publish their decision to provide agreement as part of the monthly summary reports. The content of the publications announced today does not apply to the power generation sector in Northern Ireland, which continues to participate in the EU Emissions Trading Scheme under the terms of the Windsor Framework/Northern Ireland Protocol.