Draft Greenhouse Gas Emissions Trading Scheme (Amendment) Order 2025

Kerry McCarthy Excerpts

Monday 27th January 2025 General Committees

[The Parliamentary Under-Secretary of State for Energy Security and Net Zero (Kerry McCarthy)]

I beg to move,

That the Committee has considered the draft Greenhouse Gas Emissions Trading Scheme (Amendment) Order 2025.

It is, as always, a pleasure to see you in the Chair, Mrs Harris.

The draft order was laid before Parliament on 3 December 2024. I will set out some of the background. The UK emissions trading scheme was established under the Climate Change Act 2008 and the Greenhouse Gas Emissions Trading Scheme Order 2020 as a UK-wide greenhouse gas emissions trading scheme, to contribute to the UK’s emissions reduction targets and net zero goal. The scheme is run by the UK ETS Authority, a joint body comprising the UK and devolved Governments. Our aim is to be predictable and responsible guardians of the scheme and its markets.

Under the UK ETS, operators are required to monitor, report on and surrender allowances in respect of their greenhouse gas emissions. Most allowances are purchased at regularly held auctions, but operators in certain sectors at risk of carbon leakage are given a number of allowances free, to manage their exposure to the carbon price and the risk that business decarbonisation efforts could be undermined by higher carbon imports. Under the UK ETS, an “operator” is the person who has control over an installation. An “installation” is a stationary unit at which regulated activities take place, and sub-installations represent operations carried out at an installation in respect of which free allocation operators are required to report activity levels for ETS purposes.

The draft statutory instrument introduces the final year rule. We introduced it to enable important changes and improvements to be made to the scheme. Under previous UK ETS policy, when a sub-installation ceased operation, the free allowances were no longer distributed in respect of that sub-installation in the year after the year in which it ceased operation, but the operator was entitled to retain the full amount of free allowances made available in respect of the sub-installation, without recalculation to account for the permanent cessation of the sub-installation within the scheme year. In other words, if it ceased operations during a year, it still got the free allowances for the whole year.

That had the potential to result in the over-allocation of free allowances beyond the volume required for carbon leakage mitigation, and in the distribution of free allowances that were no longer associated with an activity resulting in emissions. The draft order ensures that the volume of free allocation that an operator is entitled to in the final year in which operations are carried out at one or more sub-installations is calculated by reference to the level of activity at the relevant sub-installation in that year. That is the final year rule.

To facilitate this change, the draft statutory instrument will require the operators to prepare an activity level report in respect of the final year in which operations are carried out. That activity level report will be used to recalculate the volume of free allocation that the operator is entitled to in the final year. Any over-allocation will be recoverable in accordance with the existing scheme rules.

There is an exception to the final year rule in circumstances where the permanent cessation of operations at a sub-installation is part of a series of changes that has resulted in a material reduction in the specified emissions per unit of production of those pre-cessation products which continue to be produced at the installation. The exception will incentivise decarbonisation, as operators that can demonstrate that the relevant requirements are met will continue to be entitled to the free allocation calculated in accordance with existing UK ETS rules, which is calculated in advance on the basis of historical activity levels.

The draft instrument also amends the circumstances in which an installation or sub-installation has “ceased operation” for these purposes. The previous definition was: at the point in time when it became technically impossible to resume operation. That definition was difficult to apply consistently in practice, though. The updated definitions provide that an installation has ceased operation when: all regulated activities in the case of an installation, or the relevant operation in the case of a sub-installation, have permanently ceased to be carried out at the installation. That amendment increases certainty for the scheme regulators and the operators.

The draft instrument also introduces a requirement for operators to notify the relevant scheme regulator of circumstances in which all regulated activities cease to be carried out at an installation by the end of the scheme year in which the cessation occurs, or within one month of the date of cessation, whichever is later; and to confirm whether the operator intends one or more regulated activities to resume at the installation. Operators are similarly required to provide details of the cessation of operations in respect of a sub-installation in annual activity level reports prepared in relation to the 2025 scheme year and thereafter. Requiring those reports will facilitate the application of the new final year rule.

The statutory instrument introduces a new power for regulators to issue a notice to an operator that determines that an installation or sub-installation has ceased operation for the purposes of UK ETS legislation. The new power is available in circumstances in which the regulator is not satisfied that the operator intends regulated activities to resume at the installation, or intends regulated operations to resume at the sub-installation level. That change will increase certainty for operators and facilitate equivalent treatment for all installations undergoing a cessation.

The changes follow comprehensive engagement and consultation with stakeholders. Between 18 December 2023 and 11 March 2024, the UK and devolved governments ran a consultation seeking views on proposals to alter the free allocation methodology for the UK ETS stationary sectors to better target those most at risk of carbon leakage and to ensure that free allocations are fairly distributed. The UK ETS free allocation review covered the provisions included in the statutory instrument on permanent cessations. The responses to the consultation were broadly in support of the proposed technical changes to the treatment of permanent cessation. The authority response to the consultation will be delivered in two parts. An early response to the proposals on permanent cessations was published last November.

The changes in the draft order will deliver on commitments made by the UK ETS Authority, improve the operational fairness of the scheme and increase certainty for both regulators and operators; and the alterations to the UK ETS will support its role as a key pillar of the UK’s climate policy. These measures show that we will take action to extend and improve the scheme when necessary. I commend the draft order to the Committee.

--- Later in debate ---

[Kerry McCarthy]

I suppose I should welcome the shadow Minister to his place, but it is a bit depressing to hear him outline the Opposition’s position. In the last year or two that the Conservatives were in government, we saw them U-turn and row back on getting to net zero. We recognise that it is an integral part of our growth and industrial strategy, which will protect jobs and investment in this country, so to hear the Opposition’s position spelled out in such stark terms is disappointing.

Net zero is part of our growth strategy, and energy security is very much at the heart of what we do in the wake of Putin’s illegal invasion of Ukraine and other global factors. The shift away from volatile fossil fuel markets is not just about a desire to reach net zero, although of course that is really important—we see evidence of what happens if we do not tackle climate change around us every day. It is about protecting our security. The UK emissions trading scheme is a key pillar of the climate and net zero policy regime and our industrial strategy. It sets a cap on emissions in the sectors covered, which currently represent about a quarter of the UK’s emissions, and guarantees that those sectors will reduce their emissions in line with our world-leading net zero target.

We believe that maintaining a strong UK ETS will play a key role in making Britain a clean energy superpower, delivering on our mission of ensuring secure and clean electricity by 2030 and cutting bills. The ETS makes fossil fuel electricity generation face the costs of its pollution. It is only a small component of electricity bills, especially compared with wholesale gas prices. As power generation continues to shift to renewables and nuclear, and as we reduce our reliance on volatile international gas markets, the impact on bills will fall and the costs to consumers will be reduced.

Only fossil fuel electricity generation will be captured by the UK ETS, so the increasing uptake of renewables and nuclear power will reduce the costs for consumers. By driving green investment as part of our industrial strategy, the UK ETS will also help to deliver a just transition, growing the UK’s economy and securing good jobs for people across the country.

I think the shadow Minister is arguing that decarbonisation is coming too fast, but we are absolutely at the forefront of the new technologies and industries. My hon. Friend the Member for Redcar could wax lyrical about what that means for a constituency such as hers. Redcar has a strong industrial base but its future will be built on decarbonisation technology and the accompanying jobs.

Delivering an industrial strategy is the centrepiece of the Government’s growth mission. It will make us energy independent while creating jobs and providing investment in communities across the UK. A key part of that will be investing and creating the right conditions so that the green industries of the future can flourish, and the UK ETS is a vital element of that approach. It sets out a clear trajectory for emissions from the sectors covered and drives investment in decarbonisation.

In November 2024, the UK ETS Authority set out an early response on its proposals on permanent cessations. This draft statutory instrument will implement those changes and improvements to the scheme, following detailed consultation. These changes have the support of the four Governments of the UK. I think Scotland and Wales have already approved them, and Northern Ireland is about to consider them in the next few days, so there is consensus on advancing carbon pricing policy, which adds to the strength of the UK ETS. The shadow Minister mentioned the need for close co-operation with the EU, and we certainly want to achieve that.

To ensure the scheme continues to remain a key driver of decarbonisation, our intention is to expand its scope further. We have recently consulted on proposals to expand it to energy from waste and waste incineration, and we have recently consulted on expansion to maritime operators and on a regulatory framework for integrating non-pipeline transport for carbon capture, usage and storage. Beyond those new sectors, we are exploring options to build the UK ETS into the world’s first integrated market for carbon emissions and carbon removal. Subject to consultation, our intention is to include engineered greenhouse gas removals. That would support the new technologies we need to reach net zero while providing a sustainable path for industry to decarbonise and flourish.

We recognise the importance of long-term certainty to decarbonisation planning. The authority’s intention is to run the scheme until at least 2050. The authority published a long-term pathway for the UK ETS in December 2023, outlining our intention to consult on extending the scheme beyond its current date of 2030. We will consult on that and on any cap for future scheme phases in due course.

We are committed to being attentive to views and to bringing forward changes as required to ensure the scheme operates efficiently and achieves emissions reductions. It is an integral part of our journey on our path to decarbonisation coupled with industrial growth. I commend the order to the Committee.

Question put and agreed to.