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New UK system proposed to replace EU ETS on leaving the EU

After Brexit, the future of carbon trading was a point of concern for many industrial users until a new UK emissions trading scheme (UK ETS) launched in January 2021 to replace the EU ETS.

On Monday 1 June, the Department for Business, Energy & Industrial Strategy (BEIS) published new proposals showing how a UK-wide Emissions Trading System (ETS) would operate. BEIS believe the new system would be crucial in supporting the UK’s 2050 net-zero target.

The existing system (EU ETS) covers approximately 1,000 of the UK’s largest combustion plants and limits the amount of carbon emissions the installations can emit at no cost per annum.

The new scheme would replace the EU Emissions Trading System, which the UK will exit on leaving the EU in December 2020. It proposes to price carbon emissions to reduce the amount of greenhouse gases emitted and includes plans to reduce the existing emissions cap 5% lower than the current EU scheme.

We understand from previous announcements that the UK scheme is expected to have similar eligibility criteria as the EU system. This currently captures installations with a thermal combustion capacity in excess of 20MW, but only counts individual plants with over 5MW thermal each.

It is expected to have similar reporting and verification requirements also. We expect that free allocations will be based on the NIMS process carried out in 2019 by UK participants and if users exceed their free allocation, they must purchase additional allowances. Previously, allocations have decreased year on year, and it is believed this will continue with the new proposed system.

This change will affect businesses that are already part of the EU ETS, or if an organisation is planning to build a suitably large combustion plant such as a power station or district heating system, they are likely to have to join the new UK scheme in future. The proposed new system would operate very much the same as the EU ETS, at least initially. Current installations will transition to a fenced off UK Emissions Trading Scheme on 1st January 2021, once the UK has left the EU. The final year of EUETS for UK installations is 2020 which will be reportable by the 31st March 2021 and allowances surrendered by the end of April 2021.

It is not yet confirmed whether there will be a carbon trading scheme where participants can trade with each other and a wider market, or a straight Carbon Emissions Tax, where participants buy fixed price allowances directly from the Government. There has been talk of the ability to trade allowances with the EU ETS, but that is subject to the ongoing post-Brexit trade agreement.

For industrial businesses not captured by the UK ETS, other Levy Exemption Schemes act as drivers for energy efficiency improvements and decarbonisation.

As we move towards net-zero, we can expect to see our energy system evolve rapidly and increasing pressure on businesses to reduce their emissions. In this environment, it is vital for businesses to stay up to date with changes and ensure their energy strategy is built with tomorrow’s challenges and opportunities in mind.

Inspired Energy’s industry experts can help you to create a future-proof energy strategy that delivers the most value for your business – talk to us today on 01772 689 250 or email [email protected].