Understanding the new UK Emissions Trading Scheme. A Native-Hue energy management briefing.

The UK has been acting quickly to deal with an early Brexit “casualty” – the UK’s participation in the EU Emissions Trading Scheme (EU ETS) – by setting up the UK Emissions Trading Scheme (UK ETS). In this briefing we look at operational aspects of the changes in post-Transition periods. We also look at a newly created class of EU ETS participants who are low emitters and who will have reduced obligations – installations with mainly standby plant will be likely to benefit from this change.

Cornerstone of Climate Change policy

The ground-breaking EU ETS scheme has been justifiably touted as a key element of European environmental policy, requiring installations responsible for 40% of EU greenhouse gas emissions to be permitted and then to measure, verify and report their annual emissions. If they exceed their nationally set emissions-cap they have to buy traded emissions allowances to make up the difference. The scheme – the world’s first and currently the largest emissions trading scheme – targets large electricity generators and energy intensive industrial sites but many smaller operations have been caught in the net including data centres and offices with sizeable standby generators.

As an example of the effect of the EU ETS scheme, it establishes a carbon emissions market and hence a carbon price in a fairly natural way. Many environmentalists and economists consider a carbon price as all-but-essential to support global emissions reduction initiatives. The EU has some power to moderate the EU ETS carbon price upwards or downwards by changing the number of free allowances (tonnes of CO2 equivalent) annually allocated to member states who apportion them to individual installations – these allocations tend to form the target emissions for installations.

The information in this Native-Hue energy management briefing should be verified before use for compliance purposes.

UK Emissions Trading after Brexit

The UK Emissions Trading Scheme (UK ETS), has been rapidly developed and made into law to largely continue the operation and national benefits of the EU ETS. The EU say that the UK cannot participate in the EU scheme after the current emissions reporting year which is to 31st December 2020. The UK ETS was established in law in November 2020 by The Greenhouse Gas Emissions Trading Scheme Order 2020. Some key operational aspects are now considered.

Completion of reporting and any allowances trading for the January to December 2020 emissions year of the EU ETS is a process which must by law be completed by the end of April 2021. The arrangement is that this reporting and trading by UK installations can and must be carried out as previous years for this final year of UK participation, with monitoring, verification, access to the UK technical registry ETSWAP and the EU-UK allowances registry. There is one exception: that no traded allowances/credits can be transferred in from UK-based EU ETS trading accounts after 31.12.2020 – they have to be purchased in Europe or elsewhere from EU ETS registered accounts.

For the January to December 2021 emissions reporting year we now have the UK ETS in place which largely replicates the EUETS in operational terms. The UK on-line systems for technical emissions registration and allowances registration are being developed.

The new Ultra-small Emitters class

For one section of participants in the ETS things change significantly: a new category of so-called Ultra-small Emitters with emissions below a threshold 2,500 tCO2e has been created which has a reduced compliance burden as detailed in Schedule 8 of the new 2020 law shown above. Ultra-small Emitters are “Article 27a” sites in a list downloadable from its official source. The first surprise is that Ultra-small Emitters are not in the UK ETS scheme at all, as they are defined as those “excluded from the EU ETS under Article 27a of the Directive” by being in the list just above.

Ultra-small Emitters have obligations but they do not require a Greenhouse Gas Emissions Permit and their Permits were indeed revoked on January 1st 2021. Despite that, under the new law’s Schedule 8 their emissions must still be monitored in accordance with their “appropriate monitoring plan” which may be the existing 2020 plan and so still highly rigorous. The emissions monitoring must be self-verified but need not have the independent verification mandated up to 2020. Emissions are not reported annually unless they rise above the Ultra-small Emitter threshold (2,500 tCO2 per site).

The next stages

An ongoing aspect of the new arrangements is the trading mechanism and the carbon price itself. The price might in principle float with a UK carbon market – possibly moderated by the government – or it could, if agreed with the EU, be firmly aligned by trading with the EU ETS. Alternatively the price might be set periodically by the UK government at a level which maintains reasonable alignment with the EU price – this would render the scheme more like a tax than a genuine trading scheme.

So at present it looks like business as usual for participants, with a procedural benefit for some smaller emitters. However, medium and longer term developments are less certain.

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