Policy paper

Legislation for a UK Emissions Trading System

Published 11 March 2020

Who is likely to be affected

Permit holders of installations currently covered by the EU Emissions Trading System (EU ETS). This includes: power generators; certain large industrial premises and manufacturers, including food processing plants; certain public sector facilities; and those small emitters and hospitals that are subject to simplified reporting arrangements.

General description of the measure

In line with the Withdrawal Agreement, the UK will remain in the EU ETS until 31 December 2020. As set out in the UK’s Approach to Negotiations, the UK would be open to considering a link between any future UK Emissions Trading System (ETS) and the EU ETS, if it suited both sides’ interests.

In the event that there is no link agreed between a UK ETS and the EU ETS then the UK would introduce an alternative carbon pricing mechanism. The Government is preparing both a standalone emissions trading system or a Carbon Emissions Tax, as possible alternatives. For further detail on the Carbon Emissions Tax, see the separate TIIN.

This measure therefore provides the powers for HM Treasury to establish a UK Emissions Trading System (UK ETS), which could be linked to the EU ETS, or a standalone UK ETS. This charging power means that allowances can be auctioned in a UK ETS and that additional market stability mechanisms can be implemented in a standalone UK ETS, to be defined in regulations.

Policy objective

The measure ensures that a UK ETS regime can be implemented from 1 January 2021, either as a regime linked to the EU ETS or as a standalone UK regime. This is intended to maintain a carbon price signal for emitters currently covered by the EU ETS, encouraging decarbonisation and therefore helping to meet our legally binding Net Zero target.

Background to the measure

This measure was announced at Spring Budget 2020.

The government sets a total carbon price to provide an incentive to invest in low-carbon electricity generation and technologies, as well as to ensure that polluters pay for their emissions. This currently comprises the EU ETS price and the Carbon Price Support (CPS) rate per tonne of carbon dioxide. Electricity generators pay both the CPS and ETS price and industrial installations pay only the EU ETS price. Spring Budget 2020 also contains announcements about Carbon Price Support rates which will remain in place irrespective of the outcome of UK-EU negotiations.

The government and the Devolved Administrations consulted on “The Future of UK Carbon Pricing” between May and July 2019. Following the end of the Transition Period, the following options have been designed to ensure a carbon price remains in place in all scenarios: a UK ETS linked to the EU ETS; a standalone UK ETS, or a Carbon Emissions Tax. For further detail on the Carbon Emissions Tax, see the separate TIIN.

This measure has been prepared to ensure that allowances in a future UK ETS (either linked or standalone) can be auctioned, as defined in regulations.

The measure also allows for the potential implementation of market stability mechanisms in a standalone UK ETS. As set out in the consultation, this could include a Cost Containment Mechanism (CCM) to respond to any significant short-term price spikes and an Auction Reserve Price (ARP). If implemented, the ARP would set a minimum price for which allowances can be sold at auction to provide a minimum carbon price signal and to mitigate any associated start-up issues.

A response to the consultation will be published in due course.

Detailed proposal

Operative date

Royal assent of Finance Bill 2020.

Current law

Section 44(1) of the Climate Change Act 2008 provides the power for the relevant national authorities to make provisions by regulations for trading schemes relating to greenhouse gas emissions. However, schedule 2, paragraph 5(4) of the Climate Change Act (2008) imposes a prohibition on the exchange of allowances in return for consideration.

Proposed revisions

This clause allows HM Treasury to make regulations which provide for the allocation of emissions allowances in return for payment under an emissions reduction trading scheme (UK ETS), as defined by the Climate Change Act (2008).

Summary of impacts

Exchequer impact

2019 to 2020	2020 to 2021	2021 to 2022	2022 to 2023	2023 to 2024	2024 to 2025
-	nil	nil	nil	nil	nil

This measure is not expected to have an Exchequer impact.

Economic impact

This measure is not expected to have any significant economic impacts.

Impact on individuals, households and families

This measure has no impact on individuals. In line with the consultation, a future UK ETS (either linked or standalone) would only affect permit holders of installations currently covered by the EU ETS. There is expected to be no impact on family formation, stability or breakdown.

Equalities impacts

This measure would not have impacts for groups sharing protected characteristics.

Impact on business including civil society organisations

This measure has no direct impact on the approximately 1,000 installations currently covered by the EU ETS. This measure would provide a charging power for HM Treasury to establish a UK ETS linked to the EU ETS, or a standalone UK ETS. A consultation response will be published over the coming months confirming the details of a UK ETS.

There is expected to be no impact on civil society organisations.

Operational impact (£m) (HMRC or other)

No operational impact.

Other impacts

Monitoring and evaluation

This measure does not require monitoring or evaluation, as the details will be confirmed in regulations.

Further advice

If you have any questions about this change, please contact HM Treasury: CEU.Enquiries@hmtreasury.gov.uk