UK ETS: what you need to know about reporting

The UK was a founding member of the EU Emissions Trading Scheme when it first launched in 2005. As the world’s first major carbon market, it was designed to incentivise the reduction of carbon emissions in a cost-effective way. Following Brexit, the UK established its own Emissions Trading Scheme (UK ETS) to further drive down emissions and maintain the UK’s competitiveness in a green global market.

How does the UK ETS work?

The UK was influential in the design of the EU ETS. So, it came as no great shock that when the UK ETS launched in May 2021, it looked very similar to its predecessor.

The system still works on the ‘cap and trade’ system. This means that a cap is set on the total amount of certain greenhouse gases that can be emitted by installations covered by the system. The cap is reduced over time so that total emissions fall in line with the UK’s net zero target.

This cap is converted into tradable emission allowances. For each allowance, the holder has the right to emit one tonne of CO2 (or its greenhouse gas equivalent). After each year, large energy users must give up enough allowances to cover all their emissions or face a fine.

What does it mean for companies that apply?

Facilities with installed combustion equipment above the 20MWth threshold are required to monitor and report their emissions each year. They then must surrender allowances to cover their reported emissions.

A portion of allowances will be issued for free to eligible installations (typically energy intensive industries or aviation). This follows the same approach as the EU ETS. If they are likely to emit more than their allocation, companies can take measures to reduce their emissions or buy additional allowances.

If a company decides to reduce its emissions, it can keep the spare allowances to either use the following year or sell them on. In this way, the ETS helps to monitor emissions from energy intensive industries and incentivises carbon conscious strategies. And it’s been a successful driver of reductions. Between the launch of the EU ETS in 2005 and 2019, emissions from installations covered by the scheme have declined by about 35%.

This is promising progress for the fight against climate change, and the UK ETS is expected to be even more ambitious in readjusting its cap. This will mean tighter restrictions on emission reductions in future carbon reporting, especially for big energy users.

uk ets timeline

How can EIC help?

EIC has a team of dedicated Carbon Consultants and Data Analysts who provide an all-encompassing UK ETS service. We provide you with guidance and support: interpreting complex legislation and keeping you up to date with any policy shifts. You will be assigned a dedicated Carbon Consultant who will help you navigate the reporting and compliance process with ease.

Our in-house carbon team has extensive experience with reducing energy consumption, costs and emissions for our clients. This means we can keep you ahead of the curve and prepare your business for future reporting requirements.

To learn more about how EIC can help you with reporting for UK ETS, contact us today.

The future of the carbon market beyond Brexit

EU carbon allowances are bought and sold as part of the European Emissions Trading Scheme (EU ETS). Currently the UK is part of the EU ETS, but continued participation is contingent on a deal with the European Union.

 

What are carbon allowances?

EU carbon allowances, or European Allowances (EUAs) serve as the unit of compliance under the European Emissions Trading Scheme (EU ETS). EUAs are auctioned for use by energy-intensive industries that fall under the scheme, namely power generators, oil refiners, and steel companies, entitling them to emit one tonne of CO2.

The EU ETS works on the ‘cap and trade’ principle. A limit has been set on the amount of EUAs made available, capping the total amount of greenhouse gases that can be emitted by installations that fall under the system. As the cap decreases with time, total emissions fall.

These emission allowances work as tradeable goods, allowing companies to receive or buy them. After each year a company must use enough allowances to cover all its emissions, otherwise they will be heavily fined. Spare allowances can be saved to cover future needs or sold onto other companies that are short of allowances.

 

Overcoming the oversupply

The 2008 global financial crisis and the recession that followed saw a large oversupply of carbon allowances build up, which in turn saw prices reach all-time lows for an extended period. At the end of 2016 the EU ETS had an oversupply of 1.7bn tonnes worth of EUAs, which significantly weakened the incentive to reduce emissions.

In response, the European Commission has introduced a long-term solution known as the Market Stability Reserve (MSR), which will begin operations in January 2019. The purpose of the MSR will be to address the current surplus of allowances and to improve the system’s resilience to major impacts by adjusting the supply of allowances to be auctioned.

This will see 900 million allowances, which were back-loaded between 2014 and 2016, transferred to the Reserve, rather than be auctioned in 2019-2020. After this, unallocated allowances will also be transferred to the Reserve.

To improve regulation, the Commission will publish the total number of allowances in circulation by 15 May each year. They will then examine whether more allowances should be placed into the Reserve or released.

 

 How will Brexit affect these plans?

With Brexit looming, there’s uncertainty as to whether these changes will affect the UK. Under current plans the UK will remain a member of the EU ETS until at least 2020, almost a full year after its scheduled departure from the EU in March 2019.

Experts have warned that exiting the scheme before 2020, in the middle of an ETS trading phase, would cause disruption for both UK businesses and EU firms. However, staying within the scheme is contingent on a deal with the EU, something which the Energy and Climate Change Minister, Claire Perry, has acknowledged is yet to be formally agreed with EU policymakers.

 

What if there’s no deal?

Under a ‘no deal’ scenario, the UK would be excluded from participating in the scheme. This would mean current participants in the EU ETS who are UK operators of installations will no longer take part in the system. The UK government plans to remove the requirements relating to the surrender of emissions allowances as, post-Brexit, the European Commission will invalidate any allowances issued by the UK in 2019, such that they would have no value on the carbon market.

In this instance, the UK government will initially meet its existing carbon pricing commitments through the tax system, taking effect in 2019. A carbon price would be applied across the UK, with the inclusion of Northern Ireland.

 

Stay informed with EIC

Further details on how the Government intends to apply this carbon price will be covered in next week’s Budget. For the most timely updates you can find us on Twitter. Follow @EICinsights today.