Draft Greenhouse Gas Emissions Trading Scheme (Amendment) (No. 2) Order 2024

Roger Gale Excerpts

Monday 25th November 2024 General Committees

[Sir Roger Gale (in the Chair)]

Members may remove their jackets if they wish to, if they are hardy or foolhardy enough.

[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) (No. 2) Order 2024.

As always, it is a pleasure to see you in the Chair, Sir Roger. The draft order was laid before Parliament on 22 October 2024. To give a bit of background, the UK emissions trading scheme was established under the Climate Change Act 2008 by the Greenhouse Gas Emissions Trading Scheme Order 2020, as a UK-wide greenhouse gas emissions trading scheme contributing 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 Government and the devolved Governments. Our aim is to be predictable and responsible guardians of the scheme and its markets.

We have introduced this statutory instrument to enable several important changes and improvements to the scheme. It resets the UK ETS cap to be in line with the top of the net zero-consistent range. The cap sets a limit on how many allowances can be created over the trading period, which runs from 2021 to 2030, and in each year. That level reduces over time to drive down total emissions. When the scheme was established, the cap for the legislated period of the UK ETS—from 2021 to 2030—was set at 5% below the UK’s expected notional share of the EU ETS cap for the same period. However, that was not consistent with the UK’s net zero trajectory for the traded sector. This statutory instrument brings the overall UK ETS cap in line with our net zero target and carbon budgets under the Climate Change Act.

The statutory instrument also reduces the industry cap, which is the total number of allowances that can be made available to existing installations for free if no cross-sectoral correction factor mitigation is applied. The SI reduces the absolute level of the industry cap while increasing its proportion of the overall cap. While the share of allowances set aside for this purpose will increase from 37% to 40%, the reduction in the overall UK ETS cap means that the industry cap will fall. That will help to mitigate the risk of carbon leakage across participating sectors while maintaining an effective incentive to decarbonise.

The statutory instrument creates a flexible reserve of allowances for maintaining market stability and sufficient carbon-leakage mitigation. In addition to allowances specifically created for the reserve, unallocated free allowances from the industry cap and designated free allowances that are returned by operators due to changes in participant eligibility or activity level reductions will also stock the flexible reserve. The flexible reserve can be used to increase the allowance supply for market-stability purposes if the cost-containment mechanism is triggered. The flexible reserve can also mitigate the application of the CSCF through a uniform reduction to all eligible existing participants’ free allocation if the eligibility for free allocation exceeds the industry cap.

I will move on to venting and flaring. Under current legislation, carbon dioxide released through flaring in the upstream oil and gas sector is included in the UK ETS, as it is within the scope of the regulated activity of combustion. This SI introduces CO₂ that is released through venting in the upstream oil and gas sector into the scope of the UK ETS for installations already covered by the scheme. That means that such emissions will also be subject to a carbon price.

The controlled processes of venting and flaring can sometimes be essential for safety purposes. They are also used in more routine situations where the oil and gas hydrocarbons are unable to be used, exported, or reinjected without CO₂ being removed. The removed CO₂ can then be released in the process of flaring, when waste gas, including the stripped-out CO₂ as well as combustible elements, is ignited, or in the process of venting, when unignited gas is released through a vent. The legislation will remove a perverse incentive whereby operators could routinely vent gas that contains carbon dioxide without it being subject to a carbon price, even though it would, if flared, constitute reportable emissions for the purpose of the scheme.

I will now move on to Northern Ireland. In line with the original policy intent, the statutory instrument extends legislative amendments made by the Greenhouse Gas Emissions Trading Scheme (Amendment) (No. 2) Order 2023 to Northern Ireland. The amendments include capping the aviation free allocation at 100% of emissions, clarifying the treatment of carbon capture and storage plants, and freeing the allocation rules for electricity generation.

In 2022, a memorandum of understanding between the UK and Swiss Governments was signed, setting out the intention to include flights from the UK to Switzerland in the UK ETS. Such flights were brought into the UK ETS scope on 1 January 2023 by the Greenhouse Gas Emissions Trading Scheme (Amendment) (No. 3) Order 2022. The statutory instrument extends the scope to cover flights that depart from an aerodrome in Northern Ireland and arrive at an aerodrome in Switzerland.

Scheme regulators are responsible for enforcing compliance, including operational functions such as the issuing of penalties. The statutory instrument makes a number of amendments to the levels of scheme penalties to ensure the consistency and proportionality of enforcement for all operators. It also introduces a new deficit notice, with an associated penalty, to strengthen the enforcement of the fundamental scheme obligation to surrender allowances equal to an operator’s annual emissions.

Finally, the statutory instrument makes several corrections and clarifications to existing legislation. The changes follow appropriate and comprehensive consultation with stakeholders. In the “Developing the UK Emissions Trading Scheme” consultation in 2022, the UK ETS Authority considered proposals on changes to the rules for sectors covered by the UK ETS to ensure that more greenhouse gas emissions were covered by the scheme, along with changes to the cap.

The authority response to the consultation was published in two parts, in August 2022 and July 2023. A majority of respondents agreed with the UK ETS Authority proposals on creating a flexible share reserve of allowances, on bringing venting in the upstream oil and gas sector into the scope of the ETS, and on the addition of a new penalty and deficit notice. Several respondents expressed concern regarding the reduction of the cap and the changes to the industry cap; an assessment of these responses informed the decision to set the cap at the top of the net zero-consistent range.

Between 23 February 2024 and 8 March 2024, the UK ETS Authority ran a targeted consultation on the minor penalty amendments. The responses to this consultation were in broad agreement with the proposals, or noted that they were not affected by them. The authority response has been published in advance of the laying of this statutory instrument.

The changes in the draft order will deliver on commitments made by the UK ETS Authority and improve the operation of the scheme. The alterations to the UK emissions trading scheme will support its role as a key pillar of the UK’s climate policy. They show that we will take action to extend and improve the scheme where necessary. I commend the draft order to the Committee.