A guide to the new UK Emissions Trading Scheme

When the EU Emissions Trading System was established in 2005, it was the world’s first international emissions trading system. Since then, it has played a key role in international climate change strategy and inspired the development of emissions trading in other countries and regions.

Now, with the UK’s withdrawal from the EU complete, the government has established the UK Emissions Trading Scheme (UK ETS), providing continuity of emissions trading for UK businesses after Brexit.

We explore what the UK ETS means for industrial and commercial energy users, and what actions you need to take.

Large industrial and commercial energy users will already know that the EU ETS and UK ETS both work on a ‘cap and trade’ basis, setting a limit (‘cap’) on the total greenhouse gas emissions allowed by all participants within the specific system/scheme. The cap decreases over time to help bring down total emissions.

This cap is converted into tradable emission allowances, allocated to participants (typically power stations and industrial plants, intensive industrial energy users, as well as other heavy commercial energy users such as hospitals, universities and aviation) via a mixture of free allocation and auctions.

These allowances give holders the right to emit an equivalent amount of CO2 – one tonne for one allowance. In return, they must monitor and report their emissions each year. Any company likely to emit more than its allocation can choose between taking measures to reduce their emissions or buying additional allowances, including from other participants.

The UK Emissions Trading Scheme is now operational, with many of the same features and processes of the EU system to ensure consistency and familiarity for participants. It replaced the EU ETS for UK businesses from 1 January 2021, although UK operators were required to comply with the EU system until the end of the scheme year in April 2021.

The government now has the flexibility to set the number of permits allowed each year and to reduce that number as we approach the UK’s target of net -zero by 2050. The initial cap has been set 5% below the level that the UK would have had if it had stayed in the EU ETS.

The first UK ETS auctions were held on 19 May 2021 and will be held every two weeks going forward, with around 83 million allowances (of around 156 million in total) made available via auction. The remainder are distributed via free allocation, to safeguard the competitiveness of the regulated industries and to avoid carbon leakage.

Like the EU system, the UK ETS applies to energy intensive industries, the power generation sector and aviation. It covers activities involving combustion of fuels in installations with a total rated thermal input exceeding 20MW (except in installations for the incineration of hazardous or municipal waste).

A number of measures have been introduced to support the transition to the UK ETS, including an Auction Reserve Price (ARP) of £22 which has been set to ensure price continuity. This may be removed later this year once the scheme is established. A Cost Containment Mechanism (CCM) has also been created so that any significant and extended price spikes in the market can be managed.

Whilst the UK ETS scheme will indirectly impact the price of electricity, most organisations will not be directly affected by its launch and will not need to take any action. However, if your business was previously subject to the EU Emissions Trading System, you now need UK allowances under the UK ETS. If you haven’t already taken action, your next steps should include:

• Visit the gov.uk website for full details of the UK scheme.

• Check your free allocation - the benchmarks used to calculate your entitlement are the same as Phase IV of the EU ETS.

• Calculate how many further allowances you will need.

• Sign up for a trading account in the UK Emissions Trading Registry.

• Check the 2021 auction calendar published by ICE Futures Europe.

To discuss your future energy requirements with the Shell Energy team then contact us today.

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