The UK Emissions Trading Scheme (UK ETS) is the

carbon emission trading Emission trading (ETS) for carbon dioxide (CO2) and other greenhouse gases (GHG) is a form of carbon pricing; also known as cap and trade (CAT) or carbon pricing. It is an approach to limit climate change by creating a market with limited ...

scheme of the

United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and North ...

. It is

cap and trade Emissions trading is a market-based approach to controlling pollution by providing economic incentives for reducing the emissions of pollutants. The concept is also known as cap and trade (CAT) or emissions trading scheme (ETS). Carbon emission t ...

and came into operation on 1 January 2021 following the UK's departure from the European Union. The cap is reduced in line with the UK's 2050

net zero Carbon neutrality is a state of net-zero carbon dioxide emissions. This can be achieved by balancing emissions of carbon dioxide with its removal (often through carbon offsetting) or by eliminating emissions from society (the transition to the " ...

commitment.

Phase 1: 2021 to 2025

Although initially somewhat similar to the earlier UK participation in the

European Union Emission Trading Scheme The European Union Emissions Trading System (EU ETS) is a "cap and trade" scheme where a limit is placed on the right to emit specified pollutants over an area and companies can trade emission rights within that area. It covers around 45% of th ...

(EU ETS),Department of Business, Energy and Industrial Strategy
Participating in the UK Emissions Trading Scheme (UK ETS)
published 17 December 2021, accessed 15 January 2021 there are differences. The initial cap is 5% lower than the UK’s share under phase four of the EU ETS.

Price stabilisation

The auction

reserve price In economics, a reservation (or reserve) price is a limit on the price of a good or a service. On the demand side, it is the highest price that a buyer is willing to pay; on the supply side, it is the lowest price a seller is willing to accept ...

is £22 per tonne, and the government intends legislating for measures to limit price spikes.

Coverage

The UK ETS is initially limited to internal flights, electricity generation and industries which use a lot of energy: but the scheme will be expanded.

International Offsets

international carbon offsets are not permitted.

Enforcement

the fine for exceeding allowances is £100 per tonne.

Former voluntary scheme

The former UK Emissions Trading Scheme was a voluntary

emissions trading Emissions trading is a market-based approach to controlling pollution by providing economic incentives for reducing the emissions of pollutants. The concept is also known as cap and trade (CAT) or emissions trading scheme (ETS). Carbon emission t ...

system created as a pilot prior to the mandatory EUETS. It ran from 2002 and it closed to new entrants in 2009. Management of the scheme transferred to the

Department of Energy and Climate Change The Department of Energy and Climate Change (DECC) was a department of the Government of the United Kingdom created on 3 October 2008, by Prime Minister Gordon Brown to take over some of the functions related to energy of the Department for Busin ...

in 2008. At the time, the scheme was a novel economic approach, being the first multi-industry carbon trading system in the world. (Denmark ran a pilot

greenhouse gas A greenhouse gas (GHG or GhG) is a gas that Absorption (electromagnetic radiation), absorbs and Emission (electromagnetic radiation), emits radiant energy within the thermal infrared range, causing the greenhouse effect. The primary greenhouse ...

trading scheme between 2001 and 2003 but this only involved eight electricity companies). It took note of the emerging international consensus on the benefits of

carbon trading Emission trading (ETS) for carbon dioxide (CO2) and other greenhouse gases (GHG) is a form of carbon pricing; also known as cap and trade (CAT) or carbon pricing. It is an approach to limit climate change by creating a market with limited ...

that were being proposed in the mandatory

Kyoto Protocol The Kyoto Protocol was an international treaty which extended the 1992 United Nations Framework Convention on Climate Change (UNFCCC) that commits state parties to reduce greenhouse gas emissions, based on the scientific consensus that (part ...

, which had not been ratified at that time, and allowed government and corporate early movers and to gain experience in the auction process and the trading system that the later schemes have entailed. It ran in parallel with a tax on energy use, the

Climate Change Levy The Climate Change Levy (CCL) is a tax on energy delivered to non-domestic users in the United Kingdom. Scope and purpose Introduced on 1 April 2001 under the Finance Act 2000, it was forecast to cut annual emissions by 2.5 million tonnes b ...

, introduced in April 2001, but companies could get a discount on the tax if they elected to make reductions through participation in the trading scheme. The voluntary trading scheme recruited 34 participants from UK industries and organisations who promised to make reductions in their carbon emissions, this has since expanded to 54 sectors of the UK economy. In return they received a share of a £215 million "incentive fund" from the

Department for Environment, Food and Rural Affairs The Department for Environment, Food and Rural Affairs (Defra) is a department of His Majesty's Government responsible for environmental protection, food production and standards, agriculture, fisheries and rural communities in the United K ...

(DEFRA). Each agreed to hold sufficient allowances to cover its actual emissions for that year, and participate in a

system, with an annually reducing cap. Each participant could then decide to take action to manage its emissions to exactly meet its target, or reduce its actual emissions below its target (thereby releasing allowances that it could sell on, or save for use in future years), or buy allowances from other participants to cover any excess. From March 2002, DEFRA ran an auction of emission allowances to perform allocations to participants, after the start of the mandatory EU scheme. The UK's National Audit Office and DEFRA's consultantsReport appraising years 1-4 of the UK Emissions Trading Scheme
DEFRA/Enviros December 2006 ran reviews of the system in order to establish its basis and drew lessons from it. The review concluded that the scheme did achieve some emission reductions from the participants, although more could have been achieved had targets been more demanding. * The 34 companies that participated took advantage of the incentive fund to pay for reduction measures, and in practice most were incentivised to make additional efforts to further cut emissions beyond their targets. They gained experience in pricing strategies and were prepared in advance of the start of the mandatory scheme. * The companies that provided emissions trading brokerage and verification were able to establish their new businesses in the UK, and have since translated that first mover advantage to establish themselves on the European and wider international trading arena. * DEFRA discovered the issues and practicalities of negotiating and setting baselines and running an auction process.

References

{{DEFAULTSORT:Uk Emissions Trading Scheme Emissions trading Carbon finance Climate change policy in the United Kingdom Public policy in the United Kingdom 2002 establishments in the United Kingdom 2021 establishments in the United Kingdom Brexit replacement schemes