UK ETS

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Big Ben and Westminster bridge at night

Goods imported into the UK from countries with a lower or no carbon price will face a levy by 2027.

By Paul A. Davies, Michael D. Green, and James Bee

On 18 December 2023, the UK government announced a proposal for a new carbon border adjustment mechanism (UK CBAM). The announcement follows extensive consultation earlier this year on possible measures to mitigate carbon leakage risks and aims to support the UK’s decarbonisation efforts.

The UK has made a number of decarbonisation commitments including reaching net zero by 2050. These commitments to decarbonise can be undermined by “carbon leakage”, in which production of goods and associated emissions move from a jurisdiction with more ambitious climate policies (which add costs to carbon-intensive processes) to another jurisdiction with less ambitious policies, resulting in an overall negative impact on the carbon intensity of the processes/goods themselves. The UK CBAM (or other form of carbon tax) seeks to address this issue by aiming to put a fair price on the carbon emitted during the production of certain carbon-intensive goods entering the UK.

The outcome of the review may signal what climate-related laws and policies to expect in the UK in the coming years.

By Paul A. Davies, Michael D. Green, and James Bee

On 8 September 2022, newly appointed UK Prime Minister Liz Truss announced that Chris Skidmore MP, a Member of Parliament and former minister of energy and clean growth, would lead a review into the UK’s net zero commitment.

The previous administration established a UK target in 2019 to bring all greenhouse gas (GHG) emissions to a net zero level by 2050, in response to a recommendation from the Committee on Climate Change (the UK’s independent climate advisory body). The new Prime Minister, who during her leadership campaign had stated that she will “double down” on the UK’s attempts to meet its 2050 target, appointed Skidmore with the mandate to find the “fastest and most efficient way” to reach the target.

Skidmore, who as energy and clean growth minister signed the UK’s net zero target into law in 2019, has been given until the end of 2022 to report back with his findings.

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.