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UK power and industrial sectors to trailblaze the way to decarbonisation, as a tighter cap confirmed for emissions from selected high energy industries that will set a path to the country’s ambitious climate goals.

First published:
3 July 2023
Last updated:

Today a package of reforms has been announced by the UK Emissions Trading System Authority (UK ETS) – the joint body comprising the UK Government, Scottish Government, Welsh Government and the Department of Agriculture, Environment and Rural Affairs in Northern Ireland that runs the scheme.

  • New limit on emissions confirmed for power sector, energy intensive industries and aviation, from 2024
  • Emissions cap will be expanded to more UK sectors - domestic maritime transport and waste – driving forward the UK’s position as a world-leader in decarbonisation
  • Gradual transition for industries as they take the next step to decarbonise, with changes phased and measured

The scheme – which has been in place since 2021 – puts a limit on the total amount of greenhouse gases aviation, power and other energy intensive industries can emit. This incentivises industries away from costly fossil fuels and encourages them to cut their carbon footprint by investing in energy efficiency and cleaner, or renewable technologies, which in turn can boost energy security.

The reforms announced today build on the success of the UK ETS so far, increasing ambition while managing the transition in a way that supports affected industries.

From next year, these industries will be required to bring their emissions down at the rate needed to reach net zero goals – sending a clear signal to industry to invest in the long-term decarbonisation that will help the UK to maintain its world-leading position in cutting carbon emissions.

To ease this transition, the cap will be set at the highest level of the range consulted on, in line with net zero - allowing maximum flexibility for industries. Extra allowances will also be made available to the market between 2024 and 2027, while the current levels of free allocation of allowances for industry has also been guaranteed until 2026, to continue to protect them from international pressures.

The Authority has also today announced that the UK ETS will be extended to cover more sectors – domestic maritime transport from 2026 and waste from 2028 – while rolling out a phased removal of free carbon allowances for the aviation industry in 2026 and supporting investment in new Greenhouse Gas Removal technologies.

In a joint statement, UK ETS Authority Ministers, including Lord Callanan, Julie James MS, Màiri McAllan MSP and Gareth Davies MP said:

With the recent rises in energy prices, it is more important than ever that we accelerate the transition away from costly fossil fuels, towards greener and more secure energy.

Our UK Emissions Trading Scheme, along with other interventions, forms part of a wider strategy to provide a long-term framework to incentivise UK industries to decarbonise - seizing the huge opportunities that are arising from a rapidly expanding clean energy sector, and providing the certainty that industries need to invest in new green technologies.

The decisions taken here will not only put us on the path to net zero, but will also support crucial industries on their path to long term sustainability.

The UK ETS was launched in 2021 to replace the UK’s participation in the EU ETS. The scheme incentivises decarbonisation through a process of buying and selling emissions allowances, which companies must obtain for every tonne of emissions they produce each year. Companies that are successful in reducing their emissions can sell unused allowances to other firms.

The ETS supports businesses in sectors that face significant overseas competition with free emissions allowances, to ensure their efforts to decarbonise are not undermined by higher-carbon competitors – a risk known as carbon leakage. Carbon leakage refers to the movement of production and associated emissions from one country to another due to different levels of decarbonisation rules, such as carbon pricing and climate regulation. 

Also announced today is the decision to keep support through free allowances at current levels until 2026, to give industries certainty over the level of support available in the medium term.

The Authority recognises that a comprehensive suite of policies including funding, regulation and carbon pricing is needed to deliver the decarbonisation we need this decade and beyond.

UK ETS cap

The ambitious range consulted on last year for the UK ETS cap remains consistent with delivering on net zero. Opting for the top of this range will support a smooth transition for participants and enable continued flexibility to mitigate market risks and carbon leakage. In line with prior commitments, the net zero cap will be implemented for 2024. There will be a smooth transition to the net zero cap – by releasing additional allowances from reserve pots to the market between 2024 and 2027 the UK ETS Authority will ensure that there is no sudden drop in allowance supply between 2023 and 2024. These allowances have already been created in previous scheme years within the overall cap limits, so the strength of overall climate ambition will not be affected.

Maritime transport and waste sectors added to ETS

For the first time the domestic maritime transport, waste incineration and energy from waste sector will be added to the scheme. This is in line with commitments to bring other high-emitting sectors in the UK ETS and will encourage companies in those sectors to cut their emissions and invest in cleaner alternatives. The scheme will be applicable to large maritime vessels only, of 5000 gross tonnage and above. These changes are being announced now to provide operators with time to prepare and ensure a smooth transition for affected businesses. The ETS will expand to cover the domestic maritime transport sector from 2026, as well waste incineration and waste from energy sectors from 2028. This will be subject to further consultation on the details of implementation and an initial reporting period for waste sectors.

Aviation free allocations to be phased out

In another move towards decarbonising the economy, the UK ETS Authority has today announced its decision to phase out aviation free allocations in 2026. This decision is taken in light of evidence of minimal risk of carbon leakage, meaning ETS aviation emissions are unlikely to be displaced as a result of the UK ETS. Instead, aviation businesses need to buy allowances for every tonne of carbon emitted under the scheme. To help aircraft operators prepare for this transition, free allocation entitlement will continue as planned in 2024 and 2025 until 2026.

Greenhouse Gas Removals

The Authority has also announced the decision that the UK ETS is an appropriate long-term market for Greenhouse Gas Removal (GGR) technology, in a move to support investment in technologies that will be vital for meeting net zero. Bringing GGR technologies into the UK ETS will drive early investment in new technologies - such as Direct Air Capture, that extract carbon emissions directly from the atmosphere to store in rocks beneath the earth’s surface. The UK ETS may also offer an appropriate long-term market for high-quality nature-based Greenhouse Gas Removals, subject to further consideration.