UK-ETS Procurement & Advisory
The UK ETS cap-and-trade system was introduced in May 2021 and represents a key aspect to the UK’s climate aspiration of carbon neutrality by 2050.
Compulsory participation in the scheme applies to permit holders of installations previously covered by the EU Emissions Trading System (EU-ETS).
Sectors primarily affected are:
- Energy intensive industries (iron, steel, cement, paper, glass, and chemicals)
- Oil refineries
- Aviation administered within the UK
- Power generators
On the face of it, one could regard UK-ETS as a punitive market aimed at heavy emitters – the greater the emissions, the higher the expense. Participants are required to surrender sufficient UKAs (allowances) in April each year commensurate with their greenhouse gas emissions. The government sets a maximum level for total emissions, and every unit of emissions up to this maximum is part of a system of tradeable allowances.
Systems like the UK ETS are regarded as compatible with a free-market economy as they don’t seek to control how and where emissions are created – instead, they allocate a financial value to each unit of emissions and allow the market to do the rest. Each year the overall cap is lowered, which means the cost of emissions allowances goes up. This is intended to incentivise cuts in emissions and ultimately, investment in renewable technologies.
The Cost Containment Mechanism, provided for by the Greenhouse Gas Emissions Trading Scheme Auctioning Regulations 2021, enables the UK ETS Authority to intervene, if deemed appropriate, if prices are elevated for a sustained period. The “trigger level” for the CCM changes every month because it is based on what prices have been doing during a reference period of the previous two years. If the UK ETS price hits double the reference period average and then stays there for three consecutive months, the government may look to intervene to bring prices down.
