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UK ETS

The United Kingdom’s Emissions Trading Scheme (UK ETS)
 

In the aftermath of Brexit, there was some uncertainty surrounding the EU ETS and UK’s participation in it. Now, in the last stretch of the transition period some clarity is emerging with the UK government's announcement of their intentions to create and implement a UK ETS. In July 2020 following a long public consultation, the UK government published their responses and decisions on the creation of an independent UK ETS. The UK ETS in the future may be linked to the EU ETS, however this does not impact the applicability of EU ETS on the 2020 monitoring period.

During the transition period, from 1st February to 31st December 2020, the UK will remain a full participant in the EU ETS which implies that participating UK operators must meet their 2020 compliance obligations. The deadlines for UK operators participating in the EU ETS during the transition period are:
 
  • 31 March 2021 - submit Verified Annual Emissions Report for 2020 emissions
  • 30 April 2021 - surrender equivalent allowances to 2020 verified emissions
Considering the recent EU-Swiss ETS linking agreement the scope of emissions that must be reported for 2020 has increased. Operators should ensure all emissions on flights between the UK, EEA and Switzerland are included in their 2020 emissions report, and that allowances to cover this increased scope are surrendered by 30 April 2021.

The EU ETS works on a “cap and trade” basis, where there is a cap on all greenhouse gas emissions from covered installations and aviation operators. The cap is reduced over time to ensure that total emissions fall. Each year, operators must surrender sufficient allowances to cover their greenhouse gas emissions. Allowances are awarded free to participants considered at risk of “carbon leakage” (where, due to the cost of emission allowances, industry relocates to regions outside the EU with a lower carbon price). Allowances are also auctioned directly by Member States and traded on the secondary market between operators and other market participants.

The proposed UK ETS will to a great extent follow the footsteps of the existing EU ETS framework, with variations implemented only where the UK government deems the EU ETS framework to be unsuitable for the UK's clean growth strategy or to be misaligned with the UK’s 2050 Net zero goal. From a design perspective, the UK government decided that an UK ETS should be designed at all levels to be at least as ambitious as the EU ETS.
 
In addition, the UK ETS will be a new emissions market, whereby any uncertainties around how the market will respond will need to be considered when setting the cap. 

To balance these objectives, the cap for a UK ETS will initially be set at 5% below the UK’s expected notional share of the EU ETS cap for Phase IV of the EU ETS. Based on the proposed design scope, this equates to around 156 million allowances in 2021. These cap figures include our proposed aviation scope (administrators, June 2020)
  
Duration and timeline
     
Figure 1 - Overview of the planned implementation
 
The UK government has decided to implement a UK ETS with Phase I running from 2021 to 2030 which matches the duration set for the EU ETS Phase IV. With regards to the review of the UK ETS, it was deemed sufficient to have two full system reviews within Phase 1. These reviews are exactly in line with the EU ETS Phase IV reviews and the Paris Agreement Global Stock take efforts.
 
  • The first whole-system review of the UK ETS is to be conducted from 2023 to assess performance during the first half of the phase (2021-2025) with any necessary changes to design features implemented by 2026.
  • The second whole-system review will be from 2028 onwards to assess performance across all of Phase I (2021-2030) with any update to the UK ETS rules implemented for 2031 (Phase II).
                
Figure 2 - Planned Phases

The whole system reviews will include targeted reviews on certain elements of the UK ETS policy. The reviews will aim to discuss changes required to align with international aviation decarbonization efforts through CORSIA. This is in addition to reviewing necessary changes which may result from a linking with EU ETS. (Pg. 28 (administrators, June 2020))
 
Offsets

The UK Government and Devolved Administrations remain of the view that offsets should not be permitted in the UK ETS right from the outset. (Pg. 37 (administrators, June 2020))

The UK government is very clear on their position of introducing offsets right at the beginning of the UK ETS. They have expressed concerns on how offsets would potentially create an over-supply of allowances and therefore undermine the cap and trade mechanism reducing their ability to achieve the environmental targets. Nonetheless, the UK government has left the door open and is willing to review and develop standards or tests which would be necessary for the acceptance of offsets in a UK ETS. This implies that the UK ETS would not be compatible with the CORSIA and that the operators would have to report on CORSIA separately. The UK government plans to review the inclusions of offsets and CORSIA during the first full review.
 
195. However, the UK Government and Devolved Administrations are open to reviewing the usage of offsets in future, especially in deciding how best to implement CORSIA alongside a UK ETS. 

196. We will review the usage of offsets in a UK ETS as part of the review process set out in the Phase and Review sections. Once there is more certainty on the development and implementation of global decarbonization mechanisms such as CORSIA and the Paris Agreement, any review of this area will also consider how a UK ETS can best align with them. (administrators, June 2020)
 
On a similar note they have also outlawed GGR (greenhouse gas reduction) technologies but have reportedly invested millions to research and monitor the maturity of said technologies for a potential future inclusion in the UK ETS.
 
Coverage

The UK Government and Devolved Administrations have agreed on the ambition to implement the below proposed route option presented in their UK ETS public consultation. Therefore, a UK ETS would impose surrendering obligations on the following routes from day one:
 
  • UK domestic flights
  • Flights departing from the UK to aerodromes within EEA states. 
The above stated apportioning of routes will apply in both a standalone and a linked UK ETS, with flights arriving in the UK from the EEA covered by the EU ETS (can change subject to ongoing negotiations). This has been the principle adopted by the EU-Swiss agreement to link emissions trading systems and mirrors how other international flight emissions are calculated. It will also impose surrendering obligations on flights between Gibraltar, offshore installations and the UK.
 
  • Flights between the UK and Gibraltar would still be subject to surrendering obligations but now under the UK ETS, just as they were covered by the EU ETS prior to Brexit.
  • As for flights departing the UK to territories of EEA member states, they would be included in the scope of UK ETS. These include Ceuta and Melilla (Spain), the Åland Islands (Finland) and Jan Mayen (Norway).
  • Flights to offshore installations would also be included in a UK ETS.
  • On the other hand, the UK ETS would not cover/ require the reporting of flights to or from the three crown dependencies of the Isle of Man and the Bailiwicks of Jersey and Guernsey. On the same note, it would also not cover the flights to or from the nine EU outermost regions.
         
 
 Cap and Trajectory

The UK Government and devolved administrators have decided that the aviation component of the UK ETS cap should be at least as ambitious as the UK’s expected notional share of the EU ETS aviation cap for Phase IV. Furthermore, they have also stated that it would be a single cap for all participating sectors in the UK ETS.  The UK government recognizes that not all sectors would be able to abate emissions at the same rate and hence wish to facilitate abatement where it is most cost effective.
 
 
This will help ensure that decarbonization can first happen where it is most cost-effective to do so. We will be reviewing the abatement potential for different UK ETS participating sectors, taking efficiency gains into account for future UK ETS policy design. (Pg. 56) (administrators, June 2020) 
 
This initial cap would then be reduced annually by 4.2 million allowances to keep in line with the goal of having a UK ETS cap which is 5% below the expected notional share of UK in the Phase IV EU ETS cap. Furthermore, The UK Government and Devolved Administrations have decided to mirror the EU ETS in certain aspects where they deemed that there would be no negative repercussions to the UK’s 2050 Net Zero goal. All allowances in the system will be interchangeable between participating sectors just as they are in Phase IV of the EU ETS. This is also subject to review considering the integration of the global offsetting scheme, CORSIA. The UK ETS will also mirror the EU ETS in freedom of purchasing allowances between sectors. In Phase III of the EU ETS, aircraft operators could purchase stationary allowances; in Phase IV, the reverse will also be true as stationary operators will be able to buy aviation allowances.
 
Allocation Methodology

The UK Government has proposed to keep the “day one UK ETS” free allocation approach which mirrors the EU ETS’s allocation methodology for Phase IV. This implies that the operators will receive free allowances on day one based on their historical activity on the routes covered under the UK ETS. The free allowances received by operators would then reduce annually by 5%, which is the same percentage by which the UK’s overall emissions cap will reduce. The UK Government has also stated that it will review the free allowances allocation methodology in the first review with changes likely to be implemented on Phase 1(b). 
 
Thresholds and exemptions

In all scenarios (linking or no linking), the thresholds for commercial and non-commercial aircraft operators would be the same as those in the current EU ETS.

Under UK ETS, full scope activity is defined as all flights that either arrive or depart from an aerodrome within the UK, Gibraltar or European Economic Area, regardless of where the aircraft operator is registered.

Similarly, the reduced scope would refer solely to domestic UK flights and flights departing from the UK to EEA states and its territories as explained in the coverage section above.

All thresholds will be based upon the full scope activity while all surrendering obligations would be calculated based on the UK ETS reduced scope.
 
Flights operated by fixed wing and rotary wing aircraft would be included unless the MTOW (maximum takeoff mass) is below 5700 Kg. Helicopters are subject to MRV under UK ETS just like they were under EU ETS.

Commercial aircraft operators would not be subject to any obligations if they meet either of the following criteria:

• Operate fewer than 243 flights per period for three consecutive four-month periods based on full scope activity. The four-month periods are: January to April, May to August, September to December,
• Operate flights with total annual emissions less than 10,000 tonnes of CO2 per year based on full scope activity.

Non-commercial aircraft operators would not be subject to any obligations if they operate flights with total annual emissions lower than 1,000 tonnes of CO2 per year based on full scope activity.
 
Other exemptions based on type of flight
 
  • The transport, on official mission, of a reigning Monarch and his/her immediate family, Heads of State, Heads of Government and Government Ministers of a country other than the UK.
  • Military flights (by military aircraft), police, customs.
  • Search and rescue flights, fire-fighting flights, humanitarian flights and emergency medical service flights
  • VFR flights. Flights performed solely under visual flight rules as defined by the Chicago convention.
  • Circular flights
  • Training flights, exclusively for obtaining a license or a type rating for the crew.
  • Scientific research flights or flights carried out for testing or certifying the aircraft or equipment.
 
Small Emitters

The criteria to classified as a small emitter under the UK ETS is the same as it is under the EU ETS. The UK government has committed to reviewing the thresholds associated with the small emitter classification in the first year of UK ETS itself. Any changes if decided upon will be implemented by the start of Phase 1(b).

If an operator is classed as a small emitter, they would be eligible for a simplified monitoring approach that involves the use of EUROCONTROL’s Small Emitters Tool (SET).

Listed below are the two criteria. An operator fulfilling either one would be classed as a small emitter.
  • Operate flights with total annual emissions less than 25,000 tonnes of CO2 based on full scope activity,
  • Or, operate fewer than 243 flights per period for three consecutive four-month periods based on full scope activity.
Fulfilling either of the below listed criteria makes operators eligible to use the EUROCONTROL's ETS Support Facility
  • Operate flights with total annual emissions less than 25,000 tonnes of CO2 based on full scope activity,
  • Or, operate flights with total annual emissions less than 3,000 tonnes of CO2 based on activity within the scope of UK ETS.
Monitoring Reporting and Verification

The compliance timeframes under the UK ETS will be the same as that under the EU ETS. A representative from the Environment agency of the UK government confirmed that the a new emissions monitoring plan would be required for all operators reporting under the UK ETS. The operators will have the option to use the same two methods permitted under the EU ETS, however the UK government aims to reach reconciliation between the UK ETS and CORSIA (Pg. 63, 341), which would grant operators the ability to use any of the five methods in CORSIA. It has also been confirmed that the operators can continue using ETSWAP for reporting for another year at least and possibly in the future for the UK ETS as well. Other specific points pertaining to the MRV are yet to be finalized and a more information and updates can be expected before the first compliance period starts.
 
Conclusion

As a consequence of Brexit, the formation of a UK ETS is inevitable and while linking with the EU ETS seems to be still under discussion, it will only be achieved when both parties deem the linking to be acceptable to their goals. The UK ETS is greatly inspired by the structure and policies already implemented in the EU ETS and will most probably stay so. That being said, the UK government and the devolved administrations have promised that UK ETS will support and evolve in line with their goals. The UK ETS is building on the rich legacy of the EU ETS to achieve the 2050 net zero goal. It is a good example for other countries to also set up their own emissions trading schemes to account for all types of emissions that they generate.

Bibliography

Administrators, U. G. (June 2020). The future of UK carbon pricing. UK Government.
Enquiry mail to UK Environmental agency

> UK ETS FAQ's are available here

UK government sets out plans for including aviation in its own emissions trading scheme from next year (GreenAir Online)