The government has unveiled proposals to tighten its proposed emissions trading regime cap beyond the levels currently demanded by the EU.
A policy paper from the department for business, energy and industrial strategy (BEIS) department outlines how a UK standalone emissions trading system (ETS) could work.
The new scheme would replace the EU ETS, which the UK is due to leave at the end of this year when the Brexit transition period ends.
The paper includes proposals to set the cap for a UK ETS initially at 5 per cent below the UK’s expected notional share of the EU ETS cap for phase four of the scheme, which is due to run until 2030.
The level of free allowances dished out to companies that would be disadvantaged vis-a-vis foreign competitors will be “broadly” in line with the levels if the UK had continued to participate in the EU ETS.
The ETS applies to all factories and power plants with a total rated thermal input of 20MW or more.
In the standalone UK ETS, the government proposes a floor price of £15 for allowances when they are auctioned.
The government said that once a new ETS is up and running, it intends to go “even further” by amending the cap again in line with its net-zero target.
The Committee on Climate Change is due to publish advice on how the ETS could contribute to this wider emissions eradication goal at the end of this year when it publishes its proposals for the sixth carbon budget.
The BEIS policy paper says changes to align the cap with a net-zero trajectory will be implemented no later than January 2024.
The paper says that the government’s proposals commit the UK ETS to a “steeper trajectory” of emission reduction, while protecting industries exposed to international competition.
Initially tightening the cap by 5 per cent provides the appropriate balance between the UK’s climate ambition and any risks of disproportionate costs to businesses, it says.
The paper also points out that, as previously stated in its Brexit negotiating document published earlier this year, the government remains “open to considering” a link between the proposed UK system and EU ETS.
And the government remains committed to publishing a consultation later this year on the design of a Carbon Emission Tax, which could provide a carbon pricing backstop if a UK ETS is not set up.
Kwasi Kwarteng, minister of state for energy, said: “The UK is a world-leader in tackling climate change, and thanks to the opportunities arising as we exit the transition period, we are now able to go even further, faster.
“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.”
Responding to the ETS announcement, Energy UK’s interim chief executive, Audrey Gallacher urged the government to clarify its thinking on how a carbon tax may work.
She said: “We strongly support government establishing a UK ETS linked to the EU ETS and back its efforts to agree this approach with the EU. This is the best long-term carbon pricing mechanism to continue driving decarbonisation at the lowest cost to consumers, which will allow us to benefit from the liquidity of the world’s largest carbon market and help us meet our net zero target by 2050.
“In the event that a linking agreement cannot be secured in time for 1 January 2021, we welcome government’s decision to introduce stability measures such as an Auction Reserve Price (ARP) to protect a newly-established standalone UK ETS from market shocks and volatility due to its smaller size. It is positive to have clarity on the level of the ARP, however we urgently need clarity from the Treasury of the level of the Carbon Emission Tax (CET) or at least the methodology in July. This will ensure that power operators have full visibility of the total carbon price, whether via a standalone UK ETS or CET fallback, in January 2021.”
Nina Skorupska, chief executive of the Renewable Energy Association (REA), said: “This is 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.
“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.”