The triggering of the CCM under the UK ETS and ongoing consultations under UK Reach signal speedbumps in the transition process.
By Paul A. Davies, Michael D. Green, and James Bee
On 30 November 2021, the UK government’s Department of Business, Energy and Industrial Strategy (BEIS) updated its guidance on the UK Emissions Trading Scheme (UK ETS), the UK’s cap-and-trade-based system to reduce the country’s greenhouse gas (GHG) emissions. This update signalled that the cost containment mechanism (CCM) was triggered for December 2021, which is further indicative of the widespread impacts of increasing energy prices.
Under the UK ETS, the UK government sets a cap on the maximum level of emissions across certain sectors of the UK economy and creates allowances for each unit of emission up to the level of the cap. Certain companies are then allocated free allowances, and remaining allowances are auctioned off and can be subsequently traded by market participants. Emitters are required to surrender the amount of allowances equal to their total in scope emissions, meaning that heavy emitters are required to purchase allowances.
In the last few months, the well-documented issues relating to gas supply in Europe have led to certain emitters in the UK switching from gas generation to coal generation. This, among other factors, has increased GHG emissions and boosted demand for allowances under the UK ETS, which, in turn, has resulted in higher prices in the market-based system.