Decarbonisation prioritised in UK power and industrial sectors

The UK power and industrial sectors are setting the pace in decarbonisation, facilitated by an affirmed tighter cap on emissions from certain high-energy industries. This sets a trajectory that aligns with the nation's bold climate goals.

UK Emissions Trading Scheme Authority's Key Role

These strides towards decarbonisation are driven by the UK Emissions Trading Scheme Authority (UK ETS). This joint body involves the UK Government, Scottish Government, Welsh Government, and the Department of Agriculture, Environment and Rural Affairs in Northern Ireland.

The scheme, operative since 2021, enforces a limit on greenhouse gases emitted by industries including aviation, power, and other energy-intensive sectors.

Incentives and Benefits of the Scheme

The UK ETS fosters a shift away from costly fossil fuels by encouraging industries to invest in energy efficiency and cleaner, renewable technologies. This results in a reduced carbon footprint and enhances energy security.

Reforms Accelerating Ambition

The UK ETS announced a series of reforms on 3 July 2023. These initiatives build on the scheme's success, escalating ambition while ensuring a supportive transition for affected industries.

Starting from 2024, these industries must reduce their emissions at a rate that aligns with net-zero goals. This sends a clear signal to invest in long-term decarbonisation, consolidating the UK's leading position in cutting carbon emissions.

Easing the Transition

To smooth the transition, the cap will be set at the highest level of the consulted range, offering maximum flexibility for industries. Additional allowances will be provided between 2024 and 2027, and the existing levels of free allocation of allowances will be extended until 2026. These measures protect industries from international pressures.

UK ETS Expansion

The UK ETS will expand to cover more sectors, including domestic maritime transport from 2026 and waste from 2028. This expansion will occur alongside a phased removal of free carbon allowances for the aviation industry in 2026 and will support investments in new Greenhouse Gas Removal technologies.

UK ETS's Comprehensive Approach

The UK ETS recognises that a comprehensive suite of policies, including funding, regulation, and carbon pricing, is needed to deliver the decarbonisation required this decade and beyond. It continues to counter carbon leakage risks by providing businesses in competitive sectors with free emissions allowances, ensuring decarbonisation efforts aren't undermined by higher-carbon competitors.

Cap Consistency with Net-Zero Ambitions

The cap range remains consistent with net-zero delivery. Choosing the top of this range supports a smooth transition and allows flexibility to mitigate market risks and carbon leakage. In line with prior commitments, the net-zero cap will be implemented for 2024.

Smooth Transition and Future Additions to the Scheme

A smooth transition to the net-zero cap is facilitated by releasing additional allowances from reserve pots to the market between 2024 and 2027. This ensures no abrupt drop in allowance supply. For the first time, sectors like domestic maritime transport, waste incineration, and energy from waste will be included in the scheme. Large maritime vessels of 5000 gross tonnage and above will be subject to the scheme, encouraging companies to cut their emissions and invest in cleaner alternatives.

Phasing Out of Aviation Free Allocations

Aiming to decarbonise the economy, the UK ETS Authority announced the phasing out of aviation free allocations in 2026, given minimal risk of carbon leakage. Aviation businesses will need to buy allowances for every tonne of carbon emitted under the scheme.

Greenhouse Gas Removals Encouraged

The UK ETS is considered an appropriate long-term market for Greenhouse Gas Removal (GGR) technology, boosting investment in technologies that are pivotal in achieving net zero. The integration of GGR technologies into the UK ETS will catalyse early investment in new technologies, such as Direct Air Capture. This involves the extraction of carbon emissions directly from the atmosphere for storage in the earth's subterranean layers.

The UK ETS might also provide a suitable long-term market for high-quality nature-based Greenhouse Gas Removals, pending further consideration.

Joint Statement from UK ETS Authority Ministers

UK ETS Authority Ministers, including Lord Callanan, Julie James MS, Màiri McAllan MSP, and Gareth Davies MP, asserted the importance of accelerating the transition from costly fossil fuels towards greener, more secure energy sources. They emphasized the strategic role of the UK Emissions Trading Scheme in incentivising UK industries to decarbonise.

The ministers maintained that the reforms would not only direct the country towards net-zero emissions but would also bolster crucial industries on their path to long-term sustainability. They pointed out that the ETS, alongside other interventions, provides a long-term framework for industries to make significant investments in new green technologies. This responds to the vast opportunities emerging from the rapidly expanding clean energy sector and ensures industrial certainty.

About the UK ETS

The UK ETS, launched in 2021 to replace the UK's participation in the EU ETS, encourages decarbonisation through a process of buying and selling emissions allowances. Companies must acquire these allowances for each tonne of emissions they generate each year. Those successful in reducing their emissions can sell unused allowances to other firms.

The scheme supports businesses facing significant overseas competition with free emissions allowances, preventing their decarbonisation efforts from being undermined by higher-carbon competitors. This is essential to combat the risk of carbon leakage, where production and associated emissions shift from one country to another due to differing levels of decarbonisation rules, carbon pricing, and climate regulation.

The Authority announced the decision to maintain support through free allowances at current levels until 2026. This provides industries with certainty over the level of support available in the medium term. As the nation pursues decarbonisation over the coming decade and beyond, the UK ETS continues to play a key role in shaping a green, sustainable future for the UK.