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Submission to the UK ETS Authority consultation, ‘Developing the UK Emissions Trading Scheme (UK ETS)’

This written evidence to the consultation by the UK ETS Authority on ‘Developing the UK Emissions Trading Scheme (ETS)’ was submitted by the Grantham Research Institute in June 2022. It responds to questions relating to implementing a net zero consistent ETS cap, Free Allocation policy, the expansion of the UK ETS to additional sectors, and incorporating greenhouse gas removal into the scheme.

Selected responses

  • On the implementation of a net zero consistent cap, the initial range of emissions allowances (887-936 million) proposed by the ETS Authority is suitable, but requires minor adjustments. The allocation range should be gradually narrowed in order to provide greater regulatory certainty and less investment procrastination.
  • Free allocation (a measure put in place to prevent carbon leakage) comes at various costs, including delayed decarbonisation among sectors receiving free allocations. But reducing free allocation alone does not resolve the issue. A comprehensive package of policies should be developed to ensure robust leakage protection as well as carbon price signals throughout the value chain to deliver a transition towards net zero industrial production.
  • Flexible share within free allocation is an important feature which should mitigate the possible negative impacts that excess allocation may produce. Setting the industry cap below the free allocation in 2024 and 2025 is appropriate but requires stringent monitoring and frequent revisions.
  • It is recommended that BEIS investigates the potential impact of specialised carbon financial products that could permanently shift the demand of allowances, affecting the stability and integrity of the market.
  • Using the UK ETS as the policy framework for greenhouse gas removal technologies (GGRs) brings a number of risks: emissions removals and emissions reductions should not be treated as interchangeable, and carbon markets may not provide insufficient demand for the deployment of costly GGR techniques at commercial scales.
  • An alternative policy and governance framework which separates targets for GGR and conventional emissions abatement is needed, as are a range of innovation and technology-specific mechanisms to make GGR technologies more affordable.