Before the UK left the EU, it participated in the EU Emissions Trading Scheme (EU ETS).
However, in May 2021, the UK introduced its own Emissions Trading Scheme (UK ETS), designed for energy-intensive industries, including aviation and power generation.
What is the EU ETS?
Introduced in 2005, the EU ETS operates on a cap-and-trade system aimed at reducing greenhouse gas emissions. The scheme sets a limit on total carbon emissions, ensuring they remain within predefined levels.
Companies covered by the EU ETS can trade emission allowances based on their needs. At the end of each year, they must surrender allowances equivalent to their actual emissions.
The emissions cap is reduced annually, leading to a 43% reduction in emissions from key sectors such as power generation, heating, and energy-intensive industries since the scheme began.
How Does the UK ETS Differ?
The UK government has modelled its system on the EU ETS but claims it offers greater flexibility for businesses. One key difference is the UK ETS's 5% annual reduction in the emissions cap, a more ambitious target than the EU’s. This stricter limit is intended to help the UK achieve its 2050 net-zero emissions goal.
Who does the UK ETS apply to?
Similar to the EU scheme, the UK ETS applies to energy-intensive industries, aviation, and power generation.
Government guidance states that the scheme covers activities involving fuel combustion in installations with a total rated thermal input exceeding 20MW.
Previously, under the EU ETS, around one-third of UK emissions - including approximately 1,000 factories and industrial plants - were regulated by the scheme. These facilities were automatically transferred to the UK ETS when the new system took effect.
Why should we think about the UK carbon tax for smaller business & SMEs?
Clearly government policy is steering towards a low carbon economy - the aim to reduce fossil fuel usage being key. The UK has made great reductions in the last 15 years with wind; PV; by phasing out coal power plants; and introducing incentives such as the FITs and RHI.
Currently there are few incentives or penalties for smaller businesses to move from fossil fuels, extending the ROIs.
One mechanism could be the reduction in the UK ETS threshold from 20MW downwards, which would bring in many smaller businesses and SMEs.
Therefore, it's important to consider the potential carbon tax when planning a new or replacement plant, as these decisions are often based on 10-20 year plant life.
The Government greenhouse gas emission figures are updated and published annually, making it easy to compare, contrast and calculate the annual emissions in T/yr for individual businesses with the associated annual cost avoidance.
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