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UK emissions trading system to launch on 1 January 2021

18 December 2020 Kevin Adler

The United Kingdom is set to launch its own emissions trading system (ETS) on 1 January 2021, coinciding with the country's exit from the European Union ETS.

The announcement was made on 14 December in a white paper issued by the nation's government, "Powering our Net Zero Future."

The white paper provides new details on the nation's Ten Point Plan for a Green Industrial Revolution, which was unveiled in November, to coordinate the UK's activity in offshore wind, nuclear power plants, hydrogen technologies, carbon capture, and green public transportation such as zero-emissions buses, cycling and walking. The plan also ends the sale of fossil fuel-powered cars in the UK by 2030 (For full coverage of the Ten Point Plan, see this article by IHS Markit.)

"Through a major program of investment and reform, we are determined to both decarbonize our economy in the most cost-effective way, while creating new sunrise industries and revitalizing our industrial heartlands that will support new green jobs for generations to come…. With this long-term plan, we are turning climate ambition into climate action — putting the UK firmly on the course to net zero to end our contribution to climate change as we build back greener, said Business and Energy Secretary Alok Sharma in a press statement.

The emissions trading scheme will be an important component of the UK's push toward a "green revolution," as it is "the world's first net-zero carbon cap-and-trade market," the government said in the statement. "The scheme is more ambitious than the EU system it replaces; from day one, the cap on emissions allowed within the system will be reduced by 5%, and we will consult in due course on how to align with net zero. This gives industry the certainty it needs to invest in low-carbon technologies."

The UK's plan would require a 68% reduction in CO2 emissions by 2030 from a 1990 baseline, compared to the European Commission's commitment of 55%, which was announced in early December (an upward revision from a previous mandate of 50%).

Initially, the UK program will cover emissions from energy-intensive industries, electricity generation and aviation. The country will explore opportunities to expand the UK ETS to cover the two-thirds of remaining uncovered emissions, according to the white paper.

The UK is open to linking the system internationally "in principle," the announcement stated, "but no decision on our preferred linking partners has yet been made."

The decision to launch a standalone trading program was supported by the International Emissions Trading Association (IETA), a proponent of carbon pricing solutions to combat climate change. "The announcement of a new UK ETS is a bold step in the right direction toward climate neutrality," said IETA EU Policy Director Adam Berman. "Choosing a carbon pricing system that can be truly aligned with net-zero sends a strong message that the UK is serious about action on climate change."

IETA said, however, that the UK plan is missing a critical component: a supply adjustment mechanism that will be required to meet the revised 2030 target, IETA said in the release. "IETA strongly encourages the [UK government] to consider implementing such a mechanism which can reduce surplus allowances if the market becomes oversupplied. This has been shown to be an effective mechanism in the [EU ETS] and will be critical to maintaining a robust price signal in the UK ETS," IETA said.

Linking a separate national emissions trading system with the EU ETS is not unprecedented, noted the law firm Latham & Watkins LLP, citing Switzerland as an example. However, the firm added that negotiations for the linkage "took nearly a decade."

Article includes original reporting on 14 December 2020 by Kylee West, Oil Price Information Service.

Posted 18 December 2020 by Kevin Adler, Editor, Energy and Natural Resources Group, IHS Markit

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