Insight Focus
- UK publishes carbon market reform proposals
- Government proposes to cut allowances issued between 2021 and 2030 by 30%.
- Will bring market in line with achieving net zero emissions by mid-century.
The UK government has published a response to its 2022 public consultation on reforms to the UK Emissions Trading System, in which it proposes to cut the number of allowances issued to the market between 2021 and 2030 by more than 30%.
The reduction is one of a number of proposed changes that would bring the market in line with the legislated goal of achieving net zero emissions by mid-century, the government said in its response, published last week.
The headline change would reduce the cap on emissions for installations covered by the market to 936 million tonnes of CO2 equivalent over the period 2021 to 2030, which represents the first phase of the market.
The UK ETS launched in May 2021 with a ten-year cap of 1.37 billion tonnes.
The adjustment to the cap would take effect from 2024, meaning that next year’s supply of UK emission allowances (UKAs) would drop significantly from the 37.2 million tonnes issued freely to trade-exposed industry this year, and the 79 million allowances scheduled to be sold at auction this year.
The response document proposes to release 53.5 million extra UKAs to the market between 2024-2027 to “smooth the transition” to the lower cap. These additional allowances represent unallocated permits from the first three years of the market and their distribution will not affect the overall cap, the government said.
The government will also boost the share of the cap that is handed out to industry – from 37% to 40% – in order to guarantee the free handout of permits to those sectors most at risk of carbon leakage.
In addition the regulator will set aside 29.5 million allowances as a “future market management” reserve; if the supply of allowances falls well below demand, these additional allowances could be injected into the market to calm rising prices, or to bolster the free allocation to industry if planned supply is insufficient.
This last proposal is also a tacit acknowledgement that the UK market does not operate a market stability reserve, as the EU emission market does, to dynamically adjust supply.
According to the government document, the number of UKAs available for free allocation to industry is already anticipated to fall short of the required amount in 2024 and 2025, and an estimated 2.5 million UKAs will be needed to shore up the handout.
The document also announced a number of new consultations that will be carried out ahead of additional changes to the market.
The first, to be undertaken this year, will seek views from the market on potential changes to the way in which the free allocation of allowances is calculated.
Second, the government will canvass opinions on whether the UK market should be expanded to cover emissions from domestic maritime activities from 2026, and from energy from waste and waste incineration starting in 2028. The authorities have already decided to include emissions from CO2 venting at gas and oil installations.
Market regulators will also seek views on whether, and how, to include greenhouse gas removals into the market structure. Activities such as carbon capture and storage, direct air capture and land-based sequestration are increasingly viewed as the most important component in reducing atmospheric CO2 concentrations, and including them in the market structure could drive significant investment into the emerging technologies.
These latter two consultations acknowledge work that is being done by EU lawmakers to reform and expand the scope of the EU ETS. The UK’s steps also suggest that maintaining a relatively similar structure to the neighbouring EU market is still a priority in the event that linking the systems becomes politically feasible.
