CIA warns that the current design of the UK Emissions Trading Scheme risks undermining both industrial competitiveness and the UK’s wider climate goals. By maintaining an absolute emissions cap while the UK’s statutory target is based on net emissions, the scheme is drifting away from its core purpose, enabling emissions reduction at the lowest cost and supporting industry to invest in the technologies needed for a net zero economy.
The UK Emissions Trading Scheme (UK ETS) is the UK’s primary industrial decarbonisation policy instrument. By setting a limit - a ‘cap’ - on emissions from industrial sectors, and creating a market to buy and sell emission allowances under that cap, the UK Government says the scheme is intended to incentivise investment in decarbonisation in line with climate targets across the UK. Yet the way the cap is designed is not in line with the UK’s net zero targets.
‘Net zero’ refers to the balancing of greenhouse gases produced by human activities with those being removed from the atmosphere, i.e. ending the UK’s contribution to the total amount of greenhouse gases in the atmosphere. A ‘net’ zero target was chosen over an absolute zero target because it is recognised that some emissions are too costly to eliminate, and so these residual emissions should instead be balanced by greenhouse gas removal from the atmosphere, e.g. planting trees, restoring peatlands or with direct air capture technologies.
The UK ETS, by contrast, operates an absolute emission cap. In other words, the emissions cap is set and reduced, without the possibility of balancing residual emissions with emission removal from the atmosphere. The UK Government intends to include greenhouse gas removal within the UK ETS by the end of 2029. However, under current proposals the emission allowances generated by removals will only serve to replace allowances that would otherwise have existed under the cap. The total number of allowances under the cap will remain the same.
This approach is intended to drive up the cost of emissions, to incentivise industrial decarbonisation. Yet this overlooks a fundamental problem, that industry’s net zero options - electrification, hydrogen, biomass and CCUS – remain inaccessible or uneconomic in the UK. Moreover, intervention aimed at setting a desired price moves us away from the primary benefit of an emissions trading scheme, which is to seek out the lowest marginal abatement cost. The result is that businesses are closing UK sites and investing elsewhere. With 25 site closures over the past 5 years, our once dominant chemical industry is in the fight of its life.
Crucially this approach does not fit with our national target, which is to reach ‘net’ zero emissions by 2050. This net target accepts that there will be both greenhouse gas emissions and withdrawals in 2050, and that it is the balance between the two that is important. The way we account for emissions across the economy – including within the UK ETS - must be joined up, so that we can set the right targets, design the right policy to get us there, and limit the cost to the UK economy.
The CIA recommends taking a different approach to the proposed inclusion of emission removals in the UK ETS, an approach that aligns with net zero: Allowances generated by removals should be introduced to the carbon market, over and above the existing cap. This would enable a transition from an absolute cap to a market which must find a balance between emissions and withdrawals. Industry would still face a price for emitting and an incentive to reduce emissions, whilst those working towards emission removals would have no limit on the number of allowances they can bring to market.
A net zero cap would better incentivise developers of emission removal projects to remove greenhouse gases from the atmosphere at the lowest cost, and provide industry with a pathway to mitigate its emissions at the lowest cost. Keeping the cost down is critical, because the green premium associated with low carbon production passes through to downstream sectors and the wider economy. A net zero cap also fits with our national target to have net zero emissions by 2050, acknowledging that we must find a balance between emissions and withdrawals.
