The power, industrial, and aviation industries will face more stringent limits on their emissions from 2024, under a string of reforms to the UK Emissions Trading Scheme (ETS) announced this morning by the government.
The body that runs the UK Emissions Trading Scheme (ETS) - the UK's post-Brexit domestic equivalent of the EU ETS - confirmed it will be tightening up emissions budgets for the power sector, energy-intensive industries, and aviation from next year, in a bid to ramp up decarbonisation efforts in some of the most emissions-intensive corners of the economy.
The UK ETS Authority also announced it will extend the carbon market to cover more sectors - domestic maritime transport from 2026 and waste incineration and energy from 2028 - while overseeing a "phased removal" of free carbon allowances for the aviation industry in 2026.
And it signalled the UK ETS could be amended to include "engineered" greenhouse gas removals, subject to consultation and the development a "robust" measurment, reporting, and verification (MRV) framework. It also said it would "explore" the inclusion of "natural" greenhouse gas removal projects in the market, but stressed such a move would be subject to further consideration.
The government-run scheme, which has been in force since May 2021, is a key pillar of the government's plan to decarbonise heavy-industry and drive investment into clean technologies and solutions. The scheme incentivises decarbonisation by putting a price on carbon for certain emissions-intensive sectors of the economy, with companies in these sectors permitted to buy and sell emissions permits - known as allowances - in order to operate within a set carbon budget.
The emissions cap for industry is designed to be tightened over time to drive industries to continually ramp up their decarbonisation efforts in line with the UK's climate goals.
Today's move follows similar reforms to the EU ETS from Brussels, which have pushed prices for EU carbon allowances to record highs in recent months.
The UK ETS Authority said the new cap on allowances coming into force next year would be set at the higher level of the 887 to 997 million range proposed in a consultation that ran last year, marking a significant drop from the current cap of 1,367 million.
However, the Authority also confirmed it would be providing extra allowances to the market between 2024 and 2027, and would be maintaining the current levels of free allocation of allowances for industry until 2026, in a bid to protect sectors from "international pressures".
Yan Qin, a carbon analyst at Refinitiv Carbon, noted on Twitter the UK carbon price had rallied by 17 per cent on the back of the UK ETS Authority's announcements, with UK Allowance (UKA) now trading at £62.99.
In a joint statement, the ministers responsible for the UK ETS Authority - UK Energy Efficiency and Green Finance Minister Lord Callanan, Welsh Minister for Climate Change Julie James, Scottish Cabinet Secretary for Transport, Net Zero an Just Transition Màiri McAllan and UK Exchequer Secretary to the Treasury Gareth Davies - said it was "more important than ever" to transition away from costly fossil fuels and towards more secure sources in clean energy, given the recent rises in energy bills driven by the gas price crisis.
"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," they said. "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."
