Title page
Contents
General information 8
Why we are consulting 8
Consultation details 8
How to respond 10
Confidentiality and data protection 10
Quality assurance 11
Introduction 12
Context - UK climate action 12
Context - Emissions trading in the UK 13
International cooperation on carbon pricing 15
Carbon leakage: Definition and approach 16
This consultation 16
Chapter 1: Net zero consistent cap 18
Introduction 18
Net Zero Consistent Cap 18
The current UK ETS cap 18
The CCC's advice on the Sixth Carbon Budget and a net zero consistent cap 19
The UK Government's Net Zero Strategy 19
A net zero consistent cap 21
Smoothing the transition to a net zero consistent cap 23
Funding for decarbonisation 25
Chapter 2: Free allocation review 26
Introduction 26
Approach to the review 26
Changes to free allocations in the context of a net zero consistent cap 28
Changes to the methodology for distributing free allocation 31
Broad approach to other carbon leakage mitigation policies 33
Other carbon leakage mitigation policies 35
Government response to the call for evidence into stationary free allocation policy 36
Transparency, certainty and decarbonisation pathways 36
Linking with the EU ETS 37
Interaction with other environmental policies 37
Free allocation methodology - Benchmarking and the carbon leakage list 37
Impacts of the COVID-19 pandemic 38
Electricity generators 38
Free allocation technical changes 38
Proposal one: amendment to the Activity Level Changes Regulation due to the 2020 COVID year 39
Proposal two: amendment to the Activity Level Changes Regulation to take into account the turn-off of activity for maintenance or planned down time 41
Proposal three: Activity Level Changes and treatment of existing/new sub-installations 42
Proposal four: putting current benchmark values in UK law 43
Proposal five: amending the electricity generator definition to only consider electricity exports in the baseline period 44
Proposal six: Combined Heat and Power (CHP) plants and electricity generator definition 45
Chapter 3: Unallocated free allowances and flexible share 47
Options for bringing unallocated allowances and/or flexible share to market 49
Mitigating against the application of a CSCF 49
Smoothing the transition to a net zero consistent cap and supporting market liquidity 49
Retaining allowances for market stability 50
Chapter 4: A call for evidence on future markets policy 52
Introduction 52
Markets policies in general 52
Issues that ETS markets policies can guard against 53
Excessive price fluctuations 53
Guarding against demand shocks 54
Quantity-triggered supply adjustment 54
Price-triggered supply adjustment 55
High prices 55
Low prices 55
Liquidity 55
Market abuse and destabilising behaviour 56
Evolution of the UK ETS in the coming years 57
UK ETS policy design changes 57
UK ETS scope changes 57
International context 57
Objectives for markets policy as the UK ETS matures 58
Cross-cutting objectives 58
Policy-specific objectives 59
Summary of existing markets policy in the UK ETS 59
Auction Reserve Price (low prices) 60
Cost Containment Mechanism (rapidly rising prices) 60
Auction process (liquidity, market abuse/destabilising activity) 62
The market stability mechanism account 62
Banking and borrowing of allowances 63
Chapter 5: Aviation 64
Introduction 64
Aviation free allocation 67
Summary of call for evidence responses on aviation free allocation policy 69
Summary of economic research on the impacts of carbon pricing on the UK aviation sector 70
Government response to the call for evidence into aviation free allocation policy 73
Sustainable aviation fuels 76
Scope expansion 78
Non-CO₂ impacts 78
UK to Switzerland flights 80
International ETS co-operation for aviation 81
Virtual site visits 82
Chapter 6: Expanding UK ETS coverage within covered sectors 84
Introduction 84
Upstream oil & gas - Venting & flaring 84
Sector overview 84
Defining flaring & venting 85
Reasons for consulting and calling for evidence 86
Proposed changes 87
CO₂ venting consultation 87
Methane call for evidence 89
Safety venting and flaring call for evidence 91
Remaining upstream oil and gas emissions call for evidence 91
CCUS & Transportation 92
Background 92
Proposal 92
Biomass 93
Introduction 93
A case for change 94
Proposed changes 95
20MWth threshold and 3MW aggregation threshold call for evidence 96
Introduction 96
Objective of the 20MWth threshold 96
A case for more evidence 97
Next steps 98
Annex 99
Chapter 7: Expanding the UK Emissions Trading Scheme to new sectors 100
Introduction 100
Why are we expanding the UK ETS? 100
How are we initially expanding the UK ETS? 101
Next steps 101
Reducing emissions from domestic maritime - a consultation on expanding the UK ETS to domestic maritime 101
Context 101
Policy design - General principles 103
Lead option - UK ETS inclusion on an activity basis 104
Alternative option 1 - Inclusion on a fuel supplied basis 106
Alternative option 2 - A hybrid approach 107
Wider impacts of applying emissions trading to domestic maritime 110
Reducing emissions from waste - a call for evidence on expanding the UK ETS to include waste incineration and energy from waste 113
Overview 113
Approach to expanding the UK ETS to cover emissions from waste incineration and EfW 115
Wider impacts of applying the UK ETS to waste incineration and EfW 120
Chapter 8: Calls for evidence on greenhouse gas removals and agriculture and land use emissions 125
Introduction 125
Greenhouse gas removals - A call for evidence on the role the UK ETS could have as a potential future market 125
Overview 125
The UK ETS as a long-term market option for GGRs 127
Supporting the development of GGRs 129
Call for evidence 130
Reducing emissions from agriculture and land use - a call for evidence on how emissions can be suitably measured, reported and verified 134
Overview 134
Background 135
Monitoring reporting and verification of emissions (MRV) 137
Call for evidence 140
Call for evidence questions 140
Chapter 9: Operational amendments to UK ETS 143
Introduction 143
Electricity generators 143
Primary energy savings 144
Flexible share 145
Permitting, monitoring, reporting & verification (PMRV) 146
Permit transfers and splits 146
Global warming potentials 149
Updates required to EN ISO 14065 150
Appeal routes 151
HSE re-entry to the scheme 151
Penalties 153
Surrender and revocation provisions 154
Table 2.1. Example Activity Level Changes and the effect on free allocation 39
Table 2.2/Table 1.2. Example Activity Level Changes and impact of output reduction without emissions reduction 40
Table 6.1. GHG emissions in 2020 from upstream oil and gas production (Mt CO₂e, AR5 with feedback GWPs) 85
Table 6.2. Activities for which a 20MWth threshold is currently in place (from the Order Schedule 2, Table C) 99
Table 9.1. GWP values currently used in the UK ETS 149
Figure 1.1. The CCC's proposed path for emissions for sectors covered by the UK ETS (purple), as per their updated June 2021 advice,... 19
Figure 1.2. The currently legislated cap (dotted line), which is not consistent with delivering net zero, will remain in place until end 2023.... 22
Figure 1.3. Schematic diagram illustrating how the legislated cap may translate into the total allowances distributed to market over the phase.... 23
Figure 2.1. Free allocation in Phase 1 27
Figure 2.2. Presenting no change to the industry cap 29
Figure 2.3. Presenting resetting the industry cap 30
Figure 3.1. Industry cap for each scheme year, 2021-23 47
Figure 3.2. Illustrative example of how the flexible share, unallocated allowances and the CSCF interact 48
Figure 5.1. Aviation emissions and free allocation 67
Figure 6.1. UK ETS exemption thresholds 97
Figure 7.1. Carbon dioxide (CO₂) emissions from UK domestic shipping in 2019 by vessel type 102
Figure 7.2. The two levels at which the UK ETS could be applied: upstream and downstream 105
Figure 7.3. Potential split between activity-based and fuel supplied approaches under a hybrid option 108
Figure 7.4. The waste hierarchy 114
Figure 8.1. Graphic illustrating flow of Greenhouse gas emissions in the Land Use and Agricultural sectors 136
Figure 8.2. Breakdown of the main sources of all GHG emissions in the agriculture sector (2019145) 136