Huw Irranca-Davies MS, Deputy First Minister and Cabinet Secretary for Climate Change and Rural Affairs
On 30 January 2025, the UK Emissions Trading Scheme (UK ETS) Authority (comprising of the Welsh Government, the UK Government, the Scottish Government, and the Northern Ireland Executive), published a Response to the UK_ETS_Authority Technical_consultation_September_2024 (Hereinafter: Technical and Operational).
Additionally, on 5 February 2025 “The Greenhouse Gas Emissions Trading Scheme (Amendment) (No. 2) Order 2025” (hereinafter: the Order) has been presented to the Senedd, which will allow for these changes. The Order also implements the changes confirmed in the Authority Response to the Moving_the_UK_ETS_Second_Free_Allocation_Period_Consultation, published in December 2024.
In September 2024, the UK ETS Authority published the targeted Technical and Operational consultation that proposed three technical amendments to the scheme. The first was to make it a requirement on the UK ETS Authority to publish details of all transfers of allowances between accounts in the UK ETS Registry (other than those between UK ETS Authority accounts) annually, after a three-year delay. The second proposal was to make the sharing of UK ETS data between government departments and with the Climate Change Committee (CCC) possible for the purposes of policy development. The final proposal was related to the ultra-small emitters (USE) aspect of the scheme, which includes emitters with less than 2,500t CO2e annual emissions. Currently, a regulated activity must begin on or before 1 January 2021 to be eligible for USE status for the 2026-2030 period of the scheme. The consultation proposed amending this to allow operators who began operations between 2 January 2021 and 1 January 2024 to apply for USE status for the 2026-2030 period.
Stakeholder responses were mostly in favour, with some disagreement towards specific aspects of the proposals due to concerns over commercial data sensitivity and whether a non-disclosure agreement was sufficient to protect UK ETS information. However, there will be a high bar for data sharing and other processes, such as anonymising the data where appropriate, will be in place to help mitigate these concerns. These changes will overall contribute to improved policy development across Government and will reduce administrative burden on (those which are likely to be) small businesses. The Response therefore confirms the Authority’s intention to move forward with the changes.
The Order also implements changes relating to allocation periods for free allocations of allowances in the scheme. As announced in the UK Emissions Trading Scheme: Moving the UK ETS Second Free Allocation Period Authority Response in December 2024, the UK ETS Authority has confirmed the intention to delay making changes to free allocation policy from the initial target year of 2026, to 2027. Free allocations are UK ETS allowances, provided for free to industries who face competition globally from competitors based in countries with weaker climate change mitigation policy (a negative outcome known as carbon leakage). Free allocations are currently the primary policy lever in mitigating carbon leakage, and the changes are being made to make allocations better targeted within the UK context.
The delay to the changes was recommended as it would provide additional time for careful consideration of stakeholder views and policy development in what is a complex and challenging area, as well as align any changes with the UK Governments plans to introduce a UK Carbon Border Adjustment Mechanism (CBAM) in 2027.
Through the UK ETS, we must encourage decarbonisation in a way that does not risk disadvantaging Welsh industry and supports their decarbonisation pathways to a net zero world. The publications referenced and amendment Order represent a crucial next step in improving policy making through better data-sharing and a more considered approach to free allocations within the UK ETS.