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.

IETA’s net zero plan

EIC breaks down the IETA’s proposed ideas to help guide Europe towards net zero 2050, specifically the role cap and trade practices may play and why we must raise ambitions.

Rowing together

Last month the International Emissions Trading Association (IETA) announced its 2020s forecast for the price of carbon emissions, expected to rise to  €32 per CO2 tonne equivalent.

The IETA, in a report published last week, also outlined several ways in which international carbon trading, spurred by the increased price, could aid the fight against climate change.

The report outlined that some countries and firms were better equipped than others to reduce and replace carbon-intensive practices. Infrastructure, resources and trade exports are among the variables that can impede or hasten an organisations ability to stay within allotted carbon allowances while remaining soluble.

The trading of such allowances frees individual states and firms up to offset one another’s emissions in order to achieve the collective goal of limiting global temperature rise.

Moreover, it is effective; the European Union’s Emissions Trading System (EUETS) reported a drop of 29% in emissions from stationary structures when comparing 2018 to 2005, thanks largely to such ‘cap and trade’ schemes.

Cap and trade is not a novel concept, it has been suggested as a market-led solution to polluting industry for years. During his presidency, Barack Obama met with a lot of criticism for introducing a bill in support of such schemes with pundits calling it a “sledgehammer to freedom”.

The concern was not unjustified since it was predicted that Carbon intensive industry would simply be undercut by foreign interests able to offer more competitive energy rates to consumers.

However with international cooperation now being actively encouraged, the attraction and probability of price gouging between domestic and international firms is likely to reduce.

The price is right

Alongside the proposed price rise has emerged a surge of concern that, while ambitious, the UK will fall behind on its own national targets unless an even higher charge is established.

The IETA’s forecast would mean an increase on the €27 price that was in effect from June 2018-19 however, think-tank Carbon Tracker believes this would still fall short of the targets stipulated in the UK’s Green New Deal.

A report released by the Zero Carbon Commission has estimated that the IETA’s price would need to be increased by almost 100% to €60 by 2025 to stay within established carbon budgets.

“We need to introduce a stronger, more consistent carbon price signal across more sectors of the economy if we want to accelerate the transition to a low-carbon economy.”

Sam Fankhauser

Assuming that Fankhauser’s perspective is adopted in the UK, carbon allowance trading promises to become a lucrative venture for firms that are able to significantly reduce their carbon emissions ahead of time. Any shortfall between emissions and allowance could be traded with more carbon intensive firms, thereby effectively doubling the value of carbon emissions saved.

Intelligent utility management, on-site generation and smart procurement are all methods to increase the gap between emissions and allowance and, subsequently, its potential value in cap and trade. EIC offers all of these services as well as over forty years of direct experience in integrating and applying them to the benefit of its clients.

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.