Updated Jul 29, 2020

Draft Greenhouse Gas Emissions Trading Scheme Order 2020 published

The Draft Greenhouse Gas Emissions Trading Scheme Order 2020 has been published, and will establish a new emissions trading scheme covering greenhouse gas emissions from power and heat generation, energy intensive industries and aviation.

The scheme will be called the UK Emissions Trading Scheme or UK ETS, and is the UK successor to the EU Emissions Trading System (EU ETS) established by Directive 2003/87/EC, on the same subject.

Provisions of the Order     

The key provisions included in this Order cover the:

  • scope of the scheme;
  • monitoring and reporting requirements;
  • cap (the total level of emissions permitted);
  • trajectory (the rate at which the cap declines); and
  • roles of the regulators in monitoring and enforcing the rules of the scheme.

Legislative background

The purpose of this Order is to establish a UK-wide greenhouse gas emissions trading scheme, to encourage cost-effective emissions reductions which will contribute to the UK’s emissions reduction targets and net zero goal.

The UK ETS will be operational from 1 January 2021, and policy positions have been agreed by the four Governments of the UK nations. They are set out in the Government Response to the Future of Carbon Pricing Consultation, which was published on 1 June 2020.

This is a policy replacement for the UK’s participation in the EU ETS, which will cease at the end of the Transition Period on 31 December 2020. There is potential for the possibility and consideration of a link between a UK ETS and the EU ETS, if it suited both sides’ interests, in line with the UK Government’s document on a future relationship with the EU.

No significant changes

The Order is made under the Climate Change Act 2008. Although it replaces the EU ETS, it does not impose duties that are significantly more onerous than those imposed by the EU ETS, or require participants in the UK ETS to adopt significantly different patterns of behaviour.

Any requirements on UK ETS participants will only come into force from 1 January 2021 (the beginning of the UK ETS’s first trading period), rather than from the day the Order comes into force. There is a necessity to allow regulators to prepare for the transition from the EU ETS to the UK ETS at the beginning of next year.

To maintain continuity with the EU ETS, and a possible future working relationship, the Order relies on two related pieces of EU legislation made in 2018 for technical rules on how the emissions of operators and aircraft operators should be monitored, reported on and verified.

However, a slightly different approach is taken to those two pieces of legislation:

  • Regulation (EU) 2018/2066, on the monitoring and reporting of greenhouse gas emissions (the Monitoring and Reporting Regulation 2018); and
  • Regulation (EU) 2018/2067, on the verification of data and on the accreditation of verifiers (the Verification Regulation 2018).

Due to when when the Verification Regulation 2018 came into force, it will be retained EU law. However, the Monitoring and Reporting Regulation 2018 will not.

As a result, the Order will amend a retained version of the Verification Regulation 2018. The Monitoring and Reporting Regulation 2018 will be modified to make sure that it works with the UK ETS.

Additional elements

Alongside the Order, secondary legislation will be introduced to establish rules for the auctioning of emissions allowances and mechanisms to support it.

Additional legislation will also be introduced that amends the provisions for free allocation and the UK ETS registry.

Free allocation is given to UK ETS participants most at risk of carbon leakage, and aims to maintain the competitiveness of certain covered sectors and support the transition of UK industries towards a low-carbon economy.

This approach is in line with Phase 4 of the EU ETS, and should help UK businesses transition smoothly to the UK ETS.

What about the proposed Carbon Emission Tax?

Following the announcement in the 2020 Budget, the Government confirmed that they would publish a Consultation later this year on the design of a Carbon Emission Tax as an alternative to a UK ETS.

That has now been made available, but it is a little confusing as to why a carbon tax consultation is going ahead despite the announcement that the UK ETS will begin on 1 January 2021.

To clarify, the Department for Business, Energy and Industrial Strategy (BEIS) has stated that "given inherent uncertainty, it is sensible to have a fall-back carbon pricing option, which if needed, will ensure a carbon price remains in place in all scenarios".

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