Energy Systems Catapult welcomes the opportunity to respond to this Department for Energy Security and Net Zero Consultation on the UK Emissions Trading Scheme carbon leakage consultation.

Key points:

• Support for progress: We support the Authority’s decision to move beyond the ‘do nothing’ option, as well as the proposed parameters for adjustment.
• Phasing free allocation: We advocate for phasing out free allocation starting in 2027, aligning with the implementation of the UK Carbon Border Adjustment Mechanism (CBAM). A seven year transition (2027–2034) using an EU-aligned S-curve trajectory would offer initial protection against carbon leakage, provide firms time to adapt, and send a clear signal of the CBAM’s long-term role.
• Addressing export leakage risks: We believe export leakage risks for high-export installations require more attention. A rebate mechanism for exported goods could be an alternative to free allocation, although potential challenges under WTO rules and risks of incentivising high-carbon exports must be carefully assessed. If a rebate system is implemented, we recommend a phased reduction of free allocation to zero over time.
• Assessment criteria: We agree with the proposed criteria but recommend including an additional criterion to minimise the administrative burden on installations. For instance, disaggregating data submissions for CBAM and non-CBAM products could be streamlined to reduce complexity while maintaining robust reporting.
• Prioritisation of criteria: We rank the assessment criteria in order of importance as follows:
  • Mitigating carbon leakage risk for imports.
  • Impact of free allocation adjustment on ETS effectiveness.
  • Technical feasibility of the methodology.
  • Affordability for government and administrative burden minimisation.
  • Mitigating carbon leakage risk for exports.