The UK Emissions Trading Scheme is One to Watch

The UK Emissions Trading Scheme (ETS), a key piece of the UK’s climate change response infrastructure, will become increasingly important and complex in the years and decades to come as Greenhouse Gas Removals (GGRs) are developed at scale and international carbon markets evolve.

The UK ETS is designed to incentivise a reduction in greenhouse gas emissions from power and heat generation, energy-intensive industries, and aviation. It’s a carbon market that operates on a 'cap and trade' principle where there is a cap on the total amount of greenhouse gases that can be emitted by regulated sectors. Within this cap, companies receive or buy emission allowances which they can trade with one another as needed. The cap reduces over time, lowering the total emissions from sectors covered by the system.

While it has its critics, the UK ETS and other carbon markets will play an important role in a world economy that, despite inconsistencies, continues to decarbonise at pace. What will shake things up is the potential incorporation of GGRs into the UK ETS, and linking it to other carbon markets in the future.

A recent consultation confirmed the UK Government’s intent to include engineered GGRs in the UK ETS, subject to further consultation on the detail. This includes bioenergy with carbon capture and storage, or BECCS, and Direct Air Capture, or DAC, which are scaling up and beginning to enter market. If incorporated into the ETS, GGR developers would be able to sell removal credits back into the carbon market adding another layer of complexity.

This will be even more notable as inter-jurisdiction carbon markets begin linking. There is a precedent for this. On a recent business trip to Canada, industry members in Quebec, a province of 8 million people, reminded me that they have their own cap and trade system that, since 2014, has been linked to California’s system, creating a sub-national carbon market of over 48 million people - the largest in North America.

While aligning international regulation and increasing free trade is currently out of vogue, the idea of ‘friendshoring' certainly is, and in carbon markets, there are notable voices who are advocating for a joined-up approach. “What is becoming critical is to be part of a web of trading relationships amongst likeminded countries” said Mark Carney recently, former Governor of the Bank England and current UN Special Envoy on Climate Action and Finance. While he wasn’t speaking about carbon markets per se, Mr. Carney has previously backed the idea of establishing enhanced global carbon markets. Indeed, with carbon markets and other nascent technologies where regulation is not yet designed, many have called for allied countries to align regulations. Some within the GGR industry support the idea of incorporating international removal projects within the UK ETS, meaning a removals project outside the UK could interact with its ETS.

The Paris Agreement’s Article 6 includes clauses for international cooperation on greenhouse gas reductions. Quebec and California provide a template. The UK ETS and Swiss ETS are linked. The UK ETS itself was based on the European Union’s ETS. While domestic politics won’t allow for any sort of linkage between the UK and EU ETS any time soon, it’s not hard to envision a future government joining a wider global market with international GGR projects included into the framework.

On GGRs, the UK Government continues to lead on policy development even if domestic deployment is a ways away. The UK has firmly backed BECCS in this year’s Biomass Strategy, and it continues to develop GGR business models that future DAC or BECCS projects can use.

These are complicated policy areas, that are increasingly internationalised, and increasingly political. If you want to learn more about the UK ETS, DAC or BECCS UK state of play, drop us a line at [email protected].