New changes: the UK emissions trading scheme (UK ETS)

Introduction

Minor amendments to the legislation governing the UK ETS have been laid in Parliament and are intended to come into force on 1 January 2024. The amendments follow on from the Government’s response to the March 2022 consultation on reforming the UK ETS scheme (see our previous article: The UK Emissions Trading Scheme (UK ETS): Consultation Response).

Background

The UK ETS was established in January 2021, to replace the UK’s participation in the EU Emissions Trading System (EU ETS) after the Brexit transition period. Like the EU ETS, the UK ETS is designed to tackle greenhouse gas emissions through a cap-and-trade scheme.

Practical implications

The amending legislation is focused on supporting the ongoing transformation of energy systems and transition to a low carbon economy, and will have the following effects:

• Aircraft operators: entities operating aircraft can receive more free allowances than their verified emissions presently. The amending legislation prevents this by requiring aircraft operators to return allowances in excess of emissions for the 2024 and 2025 scheme year. This effectively caps the free allocation in aviation to 100% of emissions.
• Electricity generators: installations are currently classified as ‘electricity generators’ if they have produced electricity for sale since 2005 and if their only regulated activity is the combustion of fuels. The amending legislation modifies the electricity generator definition to exclude electricity exports representing no more than 5% of the total produced, and to consider electricity exports in the baseline period only i.e., 2019-2023, rather than all electricity exports since 2005.
• Free allocation for electricity generators: electricity generators are not presently eligible for free allocation, except in relation to measurable heat produced by means of high efficiency cogeneration over a historic period or exported for the purpose of district heating. The amending legislation enables electricity generators to be eligible for free allowances once they can demonstrate that they meet the high-efficiency cogeneration eligibility criteria, rather than considering the historic period.
• Electricity generator exclusions: the current definition of electricity generator captures operators that have on-site combined heat and power (CHP) plants who export the excess electricity to the grid. The amending legislation changes the electricity generator classification to exclude installations that have produced electricity for sale if that electricity was produced by means of a CHP Quality Assurance-certified plant, operating as part of an operator’s industrial activity.
• Carbon capture clarifications: presently, there are inconsistencies with the recognition of carbon capture that occurs at the same installation or at other installations as other regulated activities. The amending legislation clarifies that an industrial installation that installs a carbon capture plant to capture carbon dioxide from other regulated activities carried out at that installation or at other installations is not disqualified from receiving free allocation.

Conclusion

The amending legislation closes loopholes and replaces outdated law to incentivise good industry practice, and these small changes are considered necessary to ensure that the UK ETS can be efficiently utilised to reduce emissions and support the UK’s progress towards net zero. NRF will continue to track developments in this field and provide further updates on amendments to the UK and EU ETS, so that we can continue to support clients across all key environmental and carbon markets.

With thanks to Rebecca Bell for her contributions.