Thank you for contacting me about the UK’s Emissions Trading Scheme (ETS).
My ministerial colleagues and I take the threat of climate change incredibly seriously. The Government is working hard domestically and internationally to increase climate ambition. The UK was the first major economy to set a legally binding net zero target to achieve net zero by 2050 and, since then the Government has set interim targets of a 68 per cent reduction in emissions by 2030 and a 78 per cent reduction in emissions by 2035, both compared to 1990 levels. The increased commitments to reducing emissions were announced during COP26 as these will help to keep the 1.5 degree target alive.
The UK’s ETS launched in January 2021, covering aviation, manufacturing and fossil fuel power generation, and is more ambitious than the EU scheme it replaced. It is the world’s first net zero carbon cap and trade market, and a crucial step towards achieving the UK’s target for net zero carbon emissions by 2050. The cap on emissions has initially been set at a level which is 5 per cent below the UK's notional share of the EU ETS cap. The UK ETS also allows the UK to encourage innovation in emerging decarbonisation technologies.
The Government is committed to carbon pricing as a tool to drive decarbonisation and intends explore expanding the UK ETS to other sectors, including aligning the total cap on emissions with net zero by no later than January 2024.
The UK's ETS industrial participants, such as steel sector businesses, are provided with free allocations of emissions. This reduces exposure to carbon prices and mitigates the risk of carbon leakage. In 2021, they were worth over £2 billion. Free allocations are guaranteed at current levels until 2026. The review into free allocation policy will continue into 2023 and will include consulting on changes to the calculations of free allocations post-2026. The Government is committed to consulting on carbon leakage mitigations this spring including measures such as product standards, the Carbon Border Adjustment Mechanism and policies to grow the market for low emissions industrial products.
More broadly, the UK’s ETS, alongside a wide range of taxes, including the Climate Change Levy and Carbon Price Support (CPS) rate, are designed to encourage businesses and consumers to make greener choices. Specifically, the ETS and CPS have helped clean up the UK’s electricity generation and will be key to achieving the total phase out of coal by October 2024 and meeting emissions targets.
