On 18 December 2023, the Authorities revealed a collection of latest paperwork on the UK Carbon Border Adjustment Mechanism (UK CBAM), voluntary product requirements and the event of the UK ETS. An early Christmas reward, so to talk, for these concerned in decarbonisation and emissions buying and selling.
Coverage is growing quickly on this space and there’s a diploma of overlap and integration between the assorted regimes. This purpose of this text is to take inventory of the place we’re, by offering an outline of the paperwork launched earlier than Christmas and the important thing coverage selections, and touch upon what’s forward in 2024.
What was revealed on 18 December 2023?
The next paperwork have been revealed:
A UK CBAM by 2027
Within the session response on addressing carbon leakage (no.1), the Authorities introduced that it’s going to implement a UK CBAM “by 2027”. The UK CBAM will apply an efficient carbon worth to imported items in sure sectors, to make sure that they’re topic to a comparable worth incurred by UK-based producers.
In the identical session response, the Authorities has additionally confirmed that it’s going to:
- work with trade to determine voluntary product requirements, to advertise low-carbon merchandise, and
- develop an embodied emissions reporting framework to offer dependable information on embodied emissions in merchandise, which can inform future coverage.
Authorities has, for now at the least, confirmed that it’s going to not proceed with obligatory product requirements for embodied carbon emissions.
Additional info on the session response and the proposed UK CBAM, together with scheme design and potential business impacts, will be discovered right here. Additional session will happen on the design and supply of the UK CBAM in 2024.
The long-term pathway for the UK Emissions Buying and selling Scheme
The UK CBAM announcement has considerably overshadowed various key bulletins within the long-term UK ETS pathway coverage paper (no.2).
The headline factors from this coverage paper are:
1. The UK ETS will probably be prolonged till “at the least 2050” (present laws supplies for it to proceed till the top of 2030).
2. The UK ETS Authority will think about extending the subsequent part of the UK ETS, beginning in 2031, for longer than 10 years to align with the dates of the UK carbon budgets.
3. The UK ETS will proceed to be developed. This contains:
a. aligning the UK ETS cap with the online zero trajectory from 2024;
b. increasing the UK ETS to new sectors together with home maritime (see additional our article on maritime emissions and worldwide maritime emissions) and energy-from-waste (see additional our article on EfW), and to cowl engineered greenhouse gasoline removals (GGRs);
c. reviewing free allocation alongside the event of the UK CBAM.
4. The UK ETS Authority will think about increasing the UK ETS to different new sectors, together with excessive emitting sectors. No particular sectors are talked about for inclusion; nonetheless it’s confirmed that agriculture won’t be included (for now).
Free Allocation Evaluate
The UK ETS Authority has launched a second-stage detailed session on the assessment of free allocation within the UK ETS. Free allocation is the observe of allocating allowances to emitters uncovered to carbon leakage totally free. Carbon leakage is the chance of emissions related to manufacturing of carbon-intensive items shifting to jurisdictions with much less stringent insurance policies on emissions discount. Free allocation subsequently softens the affect of carbon pricing on UK ETS operators.
The session seeks views on proposed adjustments to the methodology for distributing free allowances. The general purpose is to make sure that free allowances are “higher focused” for the sectors most uncovered to carbon leakage.
In abstract, the session proposes varied amendments to the part components of the system for calculating an emitter’s free allocation. The session envisages adjustments to ‘exercise degree adjustments’, benchmarks, the carbon leakage record, the appliance of the carbon leakage publicity issue and the appliance of the cross sectoral correction issue. These are every phrases of artwork and so the session is technical and complicated. Nonetheless, owing to the worth of free allowances, UK ETS operators which obtain numerous free allowances ought to familiarize yourself with the proposed adjustments to know how they might affect their degree of free allocation.
The assessment additionally considers various different technical adjustments, together with how free allowances are allotted to operators upon the closure of an set up or sub-installation.
General, that is on no account a ‘gentle learn’ nonetheless it could be of great monetary consequence to these operators receiving free allowances. The session closes on 11 March 2024.
UK Emissions Buying and selling Scheme: Future Markets Coverage
The long run markets coverage session is, following the decision for proof within the, Growing the UK ETS Session, the second stage of a two-stage strategy to develop proposals on future UK ETS markets coverage. The aim of the session is to hunt views on probably the most vital dangers to efficient market functioning and the suitability of various coverage choices to deal with these dangers. Additional, the session seeks views on the design of particular person market stability insurance policies.
The principle goal of the session is to make sure that the UK ETS continues to have the required financial safeguards to make sure a secure carbon market.
Whereas the session is related to operators, notably these with vital carbon emissions and which might be uncovered to the carbon worth, the session is prone to curiosity these involved with financial principle and the design of emissions buying and selling scheme (versus these specializing in day-to-day compliance).
The session units out that:
1. The Authority is minded to retain the 2 current market stability mechanisms within the UK ETS, particularly:
a. The Public sale Reserve Worth (ARP), to protect towards worth decreases;
b. The Value Containment Mechanism (CCM), to mitigate towards the chance of worth will increase.
The Authority is consulting on the design of the ARP and the CCM to make sure that they supply acceptable danger mitigation. For instance, the session asks for suggestions on the extent of the ARP (at present £22) and the set off thresholds for when the CCM applies.
2. The Authority is contemplating further mechanisms alongside the ARP to mitigate the chance of low public sale costs. Coverage choices thought of embody an absolute worth flooring throughout each main (auctions) and secondary markets, momentary worth flooring, an emission containment reserve and a reverse price containment mechanism.
3. The Authority is minded to implement a ‘Provide Adjustment Mechanism’ or SAM. The SAM could be ‘amount triggered’, which means that if the entire variety of allowances in circulation within the UK ETS crosses an higher or decrease threshold, changes are made to handle extreme or inadequate surplus of allowances.
The session closes on 11 March 2024.
These with an curiosity within the design of the ‘checks and balances’ within the UK ETS to take care of a secure carbon market might want to take part. Particularly, operators with vital publicity to carbon costs might want to touch upon the CCM and SAM which might act to mitigate vital carbon worth will increase.
A glance-ahead for 2024 – quite a few consultations on the horizon
Along with the 2 18 December 2023 consultations on future markets coverage and free allocation, we anticipate to see the next further consultations in 2024, as authorities appears to be like to develop coverage on this space:
1. UK CBAM – additional session on design and supply
2. Voluntary product requirements and embodied emissions reporting – technical session
3. UK ETS scope sectors – additional consultations are anticipated on detailed facets of the enlargement of the UK ETS to cowl the waste (EfW) and maritime sectors and on the inclusion of Greenhouse Fuel Removals (GGRs)
4. UK ETS scope gases – session on the inclusion of methane and nitrous oxide emissions from the upstream oil and gasoline sector within the UK ETS and to assessment the definition of security flaring
5. Non-pipeline transport for Carbon Seize Utilization and Storage (CCUS) – session on the event of a regulatory framework for integrating non-pipeline transport for CCUS
6. Sustainability standards for biomass – session on implementing UK ETS sustainability standards for all sorts of biomass. The intention is to broaden UK ETS sustainability standards to cowl strong and liquid biomass (along with the prevailing liquid biomass standards).