Government debuts plan for world's first net zero-aligned Emissions Trading Scheme

The government has confirmed plans to deliver the first Emissions Trading Scheme (ETS) in the world to be aligned with a net zero decarbonisation target.

In its official response yesterday to its previous consultation on the future of UK carbon pricing once the country leaves the EU and the bloc's established ETS, the Department for Business, Energy, and Industrial Strategy confirmed it intended to press ahead with proposals for a new domestic carbon trading scheme.

The new UK ETS - designed in conjunction with the Scottish Government, Welsh Government and Northern Ireland Executive - is set to largely emulate the EU ETS cap-and-trade scheme.

As such, carbon intensive businesses will face a cap on their level of emissions. If they exceed the cap they will have to purchase additional emissions allowances and if they operate below the cap they can sell any excess allowances they hold, creating a clear financial incentive for companies to reduce emissions.

However, the government stressed the new regime would be "even more ambitious in cutting emissions" than the EU ETS and would ensure the scheme is "consistent with [the UK's] net zero commitment".

The plan would see the emissions cap imposed across the scheme fall by five per cent each year, providing a long term signal for carbon intensive businesses to invest in emission reduction measures or face rising costs.

"Once a new system is up and running the government intends to go even further by amending the cap again in line with its net zero target," BEIS said. A consultation on aligning the UK ETS cap with a net zero trajectory is now expected to be launched within nine months of the advice from the Committee on Climate Change on the Sixth Carbon Budget, which is due later this year.

Energy Minister Kwasi Kwarteng said the plans would further enhance the UK's position as "a world-leader in tackling climate change".

"Thanks to the opportunities arising as we exit the Transition Period, we are now able to go even further, faster," he said. "This new scheme will provide a smooth transition for businesses while reducing our contribution to climate change, crucial as we work towards net zero emissions by 2050."

The consultation response confirms much of the new scheme will mirror the existing EU ETS with the government stressing that it has been designed to ensure "a seamless transition at the end of the year".

Carbon allowance auctions and trading will continue largely unchanged and all of the approximately 1,000 UK factories, plants, and airlines currently covered by the EU ETS will continue to be covered by the UK system.

Similarly, the current approach to free allocation of allowances to minimise the financial pressure on industries that may otherwise migrate to countries with lower carbon prices will remain "consistent with what operators expected under the EU ETS".

Likewise, the new scheme will feature a Cost Containment Mechanism (CCM) that mirrors the EU's Market Stability Reserve (MSR) and provides policymakers with the ability to intervene in the market if carbon prices escalate beyond expectations. Meanwhile, the government plans to introduce a transitional Auction Reserve Price (ARP) of £15 per tonne to "ensure a minimum level of ambition and price continuity during the initial years of UK ETS".

The proposals were welcomed by Nina Skorupska, chief executive at the REA clean energy trade body, who hailed them as "good news for the industry".

"Introducing a UK ETS scheme and a strong carbon price provides clarity, shows commitment to continuing to work as partners with Europe on carbon prices post Brexit and highlights the Government's commitment to achieving Net Zero," she said. "Whilst a great first step, we urge the government to go further and faster, expanding the carbon price beyond the power sector into heat and transport as seen in other countries and setting a carbon price in line with Net Zero by the end of the year to further incentivise a green recovery."

The document also confirms the UK remains open to considering a link between a UK ETS and the EU ETS.

However, any tie up with the EU scheme remains subject to the ongoing trade negotiations between Westminster and Brussels, and BEIS insisted it has "robust domestic carbon pricing options including these emissions trading system proposals, or a Carbon Emissions Tax" should links with the EU scheme be severed. 

Both the government and the EU have indicated they are keen on integrating the two schemes and more broadly maintaining co-operation on climate action, with experts advising that intergated carbon markets should help reduce the overall cost of decarbonisation efforts.

However, at the same time the negotiations have proved increasingly tense in recent months with the EU pushing for the UK to sign up to firmer commitments on environmental standards and compliance with the Paris Agreement, among other issues, all of which the UK has resisted on the ground such measures would impinge upon UK sovereignty.

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