Understanding the UK Emissions Trading Scheme. A Native-Hue energy management briefing

What are the UK Emissions Trading Scheme UKETS and the EU Emissions Trading Scheme EUETS

The UKETS was created by legislation (The Greenhouse Gas Emissions Trading Scheme Order 2020) to replace the UK’s participation in the EUETS – a globally significant carbon reduction scheme. The UKETS is a lookalike of the EUETS which accounts for around 40% of all EU carbon emissions and naturally establishes a carbon price for EUA allowances measured as Euros per tonne of CO2 equivalent.

The schemes are aimed primarily at large oil and gas fuelled electricity generators and industrial plant. So fossil power stations are major participants but sites with large standby generators – like data centres and some city buildings – can be pulled in even though their generators are rarely used.

The UKETS is a “cap and trade” scheme requiring participating sites to measure and report to the government their annual emissions from all combustion plant. Each year, knowing the previous year’s national emissions, the government sets a tCO2e cap for the coming year and issues that number of tCO2e allowances. Some of the allowances are provided free, to certain industrials for example, and the rest are auctioned by government to participants or traders. After that it’s up to the participants using the auctions directly and the carbon allowances market that arises to ensure that each site has bought enough allowances at the end of the year to cover its emissions. There are significant fines for non-compliance.

How do the schemes work

The idea is that

  • as the government issues only enough allowances to meet the national emissions cap it has set – and then enforces compliance firmly – national emissions are indeed restricted each year to the decreasing total cap.
  • high carbon prices justify more emissions reduction measures.
  • sites which can cheaply reduce emissions can benefit by not having to buy so many allowances – freeing them up for others within the total cap.

An interesting idea developed further at COP26 in Glasgow is to strive for a global scheme – possibly similar to EUETS and UKETS – with national caps to be agreed while allowing more relaxed (higher) levels for developing countries.

What determines a participating site for the UKETS is the amount of large combustion plant (including generators) measured as MW of thermal input from fuel such as gas or oil. The site is pulled in if, adding up only plant items over 3 MW of thermal input (so around a MW of electrical output for generators), it exceeds a total of 20 MW thermal input. 

Both the EUETS and the UKETS have been strongly affected by the disruption in the energy markets. In 2021 the EUA allowance price rose from €30 to €80/tCO2e (and the UKA price similarly) due partly to fuel switching from more expensive but low-emitting fuels like gas; with many sites emitting more than previous years there is strong competition for the available allowances and prices rise. The price rise has triggered the UKETS Cost Containment Mechanism process which can re-allocate or bring forward allowances – but so far no such action has been taken by the government.

The Ultra-small Emitters class

For one section of sites pulled into the scope of the UKETS – for example by having large standby generator plant – things change significantly: a category of so-called Ultra-small Emitters with emissions below a threshold 2,500 tCO2e has been created which has a reduced compliance burden as detailed in Schedule 8 of the new 2020 law. Ultra-small Emitters are “Article 27a” sites in a list downloadable from its official source. These sites are not in the full UK ETS scheme at all, as they are defined as those “excluded from the EU ETS under Article 27a of the Directive” by being in the list just above.

Ultra-small Emitters have obligations under the new law’s Schedule 8: their emissions must be robustly monitored . Emissions are not reported annually unless they rise above the Ultra-small Emitter threshold (2,500 tCO2 per site).

What next

The schemes have worked when markets are reasonably stable, but questions remain.

  • Does their carbon reduction justify the bureaucratic burden?
  • Can the UKETS and EUETS schemes survive usefully in turbulent markets?
  • Could they form an essential stepping stone to international emissions limitation?

The information in this Native-Hue energy management briefing should be verified before use for compliance purposes.