OECD-CEFIM Focus Group Discussion: Implementation and technical design elements of ETS schemes, 14 December 2021, Paris

1. © 2021 Energy Systems Catapult
DESIGNING AND
IMPLEMENTING
THE UK ETS
DR. DANIAL STURGE
CARBON POLICY PRACTICE MANAGER
TUESDAY 14 DECEMBER 2021

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WHY DID THE UK IMPLEMENT ITS OWN ETS?
• Brexit
§ Upon leaving the European Union and once the transition period ended (31st December 2020), the UK
would no longer be participating in the EU ETS.
§ In ‘The Future Relationship with the EU’ the UK committed to “establishing a UK system that supports our
world leading clime ambition”.
• The UK Government consulted on and designed two broad options
§ UK Emissions Trading System (ETS) - The Department for Business, Energy and Industrial Strategy (BEIS)
consulted on the design of a UK ETS in mid-2019 (see later slides for more details).
§ Carbon Emissions Tax (CET) - Her Majesty’s Treasury (HMT) announced in their March 2020 Budget that
Government would legislate for a Carbon Emissions Tax as an alternative carbon pricing policy.
• Covered sectors (industry, power generation, and some aviation) were not informed of Government’s decision to
implement a UK ETS until the publication of the ‘Energy White Paper’ in December 2020 (only a few weeks before
its implementation).
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WHY WAS THE UK ETS THE BETTER CHOICE OVER A CARBON EMISSIONS TAX?
• By setting a cap on emissions instead of a price, it enables the desired outcome of emissions reduction to be
guaranteed. It also allows carbon policy to be better aligned with legally binding targets such as the UK’s Carbon
Budgets and Net Zero by 2050.
• International case studies also shows that setting an explicit carbon price at the level required to achieve the
desired emissions reductions is politically very challenging.
• The price is decided by the market, with participants incentivised to overachieve with the option to bank or sell
excess allowances.
• A standalone UK ETS (i.e. not linked to the EU ETS) also enables the UK Government to make design choices such
as expanding sectoral coverage, increasing cap ambition, better interactions with the wider UK carbon policy
framework, etc. while leaving open the possibility for future linkages.
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WHAT DID THE UK GOVERNMENT CONSULT ON WHEN DESIGNING THE UK ETS?
• Scope – Proposed that the UK ETS match that of the EU ETS both in respect
of sectors and greenhouses gases covered.
• Cap and Trajectory – A single cap that includes both stationary and
aircraft operators, with all allowances being interchangeable. A trajectory
for reducing the total number of allowances in the system each year.
• Free Allocation –
• Supply Adjustment Mechanism (SAM) – Proposed to provide price
stability on an annual basis via the dynamic adjustment of supply within the
cap. This is similar to the EU’s Market Stability Reserve (MSR).
• Cost Containment Mechanism – Proposed to provide a safeguard against
significant in-year price spikes.
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Image source: BEIS (2019). The Future of UK Carbon Pricing.
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_
data/file/815011/THE_FUTURE_OF_UK_CARBON_PRICING_-_04072019.pdf

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WHAT DID THE UK GOVERNMENT IMPLEMENT ON 1ST JANUARY 2021?
• Scope – Implemented a Standalone UK ETS as proposed.
• Cap and Trajectory – Total emissions cap equal to UK’s notional share of the
Phase IV EU ETS cap minus 5%.
• Free Allocation – As proposed, but with a targeted review to take place
(currently ongoing – a Call for Evidence closed in Spring 2021).
• Supply Adjustment Mechanism (SAM) – As proposed and to become
operational in mid-2022 due to the requirement for at least one year of verified
UK emissions data.
• Cost Containment Mechanism – As proposed and to be used under a range
of scenarios, e.g. substantive increases in the average carbon price of different
periods.
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Image source: BEIS (2020). Government’s Response The Future of UK Carbon Pricing.
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_
data/file/889037/Government_Response_to_Consultation_on_Future_of_UK_Carbon_Pricin
g.pdf

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HOW HAS THE UK ETS PERFORMED SINCE ITS IMPLEMENETATION?
• First UK ETS auction took place in May 2021 and auctions run every two weeks.
• For example, the most recent auction took place on 1st December 2021:
§ Clearing Pricing: £65.80/tCO2e
§ Revenue Raised: £372 million
§ Source: https://www.theice.com/emissions/auctions/uk-emission-allowances
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WHAT DOES THE UK GOVERNMENT INTEND TO CHANGE IN THE FUTURE?
• UK ETS cap consistent with Net Zero:
§ Government due to consult on the cap and trajectory before
Spring 2022
§ Promised implementation by January 2023 if possible and no later
than January 2024
• Expanding sectoral coverage of the UK ETS:
§ Government due to consult before Spring 2022
§ Unclear which sectors will be a priority, but likely heating &
buildings, surface transport, maritime, and waste
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Image source: BEIS (2021). Net Zero Strategy.
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_
data/file/1033990/net-zero-strategy-beis.pdf

9. © 2021 Energy Systems Catapult
DR. DANIAL STURGE
DANIAL.STURGE@ES.CATAPULT.ORG.UK
ES.CATAPULT.ORG.UK
@ENERGYSYSCAT
OUR MISSION
TO UNLEASH INNOVATION
AND OPEN NEW MARKETS
TO CAPTURE THE CLEAN
GROWTH OPPORTUNITY.