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UK announces reforms to align ETS with net zero target

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On 3 July 2023, the UK ETS Authority set out a package of reforms for the UK ETS, aimed at aligning the scheme with the country’s 2050 net zero target. It also expands the ETS’s coverage to additional sectors.

The announcement marks the conclusion of a public consultation process on developing the UK ETS, which ran from March to June 2022. Aside from changes to the cap and coverage of the scheme, the consultation explored other measures such as including greenhouse gas removals (GGRs) in the UK ETS and reforming existing market stability mechanisms.

Key changes that will be implemented include:

  • Reducing the total amount of allowances available over the period 2021-2030 by 30% with a rebasing of the cap in 2024. To smooth the transition, 53.5 million reserve allowances will be auctioned between 2024 and 2027.
  • Increasing the industry cap, which determines the maximum amount of free allocation each year, from 37% to 40% of the overall cap from 2024. Further changes to free allocation for stationary installations will take effect from 2026. Free allocation for aviation will be phased out from 2026.
  • Expanding the coverage of the UK ETS to include emissions from domestic maritime travel from 2026. Vessels of over 5,000 gross tonnage will be included, which aligns with current UK monitoring, reporting and verification (MRV) thresholds. The UK ETS will also be expanded to cover waste incineration and waste from energy sectors from 2028. For waste installations, the UK ETS Authority has proposed a two-year phase from 2026 to 2028, during which emissions will be monitored before full participation starts from 2028.
  • Incorporating engineered GGRs into the UK ETS, subject to frameworks for robust MRV and the management of any wider impacts being in place. Further work will be undertaken before considering the possible inclusion of nature-based GGRs in the scheme.

The UK ETS Authority also signaled several areas which will undergo further consultation as part of the ongoing reform process, including:

  • The methodology for distributing free allowances and how to better target sectors most at risk of carbon leakage, which will be addressed by the second phase of another consultation process, the free allocation review. Changes to the free allocation methodology will be implemented from 2026.
  • The expansion of the UK ETS to cover emissions from the domestic maritime and energy from waste and waste incineration sectors, including adjustments to the cap and MRV processes.
  • The inclusion of both engineered and nature-based GGRs into the UK ETS, including market design, eligibility requirements and the timing of inclusion within the scheme.
  • The structure of the UK ETS market, including the role of current market stability mechanisms (an auction reserve price and cost containment mechanism), as well as the option of a supply adjustment mechanism.

Between March and June 2023, the UK government consulted on different options to mitigate future carbon leakage risk. These options included a carbon border adjustment mechanism, mandatory product standards, and other measures to support the growth of markets for low-carbon products. Any measures adopted as a result of the consultation would be designed to work with the UK ETS Authority’s decisions on the future of free allocation in the scheme.

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