Government sets out stall for UK carbon market

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Government has set out plans to implement a UK carbon trading scheme by January next year.

The UK Emissions Trading Scheme (UK ETS) will replicate many aspects of the reformed EU Emissions Trading Scheme (EU ETS), under which around 1,000 UK companies have to either reduce their carbon emissions to meet set limits, or buy carbon credits via carbon markets.

The government has previously stated that it may link up a UK market with the EU’s scheme and has not shut the door on that option, “if it suits both sides’ interests”.

But it may yet decide to switch to a different form of carbon tax and will consult later this year on how that might be designed.

What, where, when

The UK ETS will apply energy intensive industries (EIIs), the power generation sector and aviation, plus sectors including refining, heavy industry and manufacturing.

Proposed aviation routes include UK domestic flights, flights between the UK and Gibraltar, flights from the UK to EEA states, and flights from the UK to Switzerland.

The department for Business, Energy and Industrial Strategy (Beis) said it would start the scheme by setting emissions limits 5 per cent lower than EU ETS equivalents and will align the limits with the UK’s net zero targets no later than 2024.

The auction for carbon credits will initially have a minimum reserve price of £15, but government will include cost containment mechanisms within its design to smooth out “very high” price spikes, should they occur.

While the scheme is intended to capture all sites with more than 20MW of generation, hospitals with up to 35MW net rated thermal capacity will be able to opt out. There will also be an ‘Ultra-Small Emitter Exemption’ for installations with emissions lower than 2,500t CO2e per annum.

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