How can the UK use its ETS to help reduce global emissions?

Comment by Dr. Danial Sturge

Carbon Policy Practice Manager - Markets, Policy and Regulation

Twenty twenty-one is an important year for UK carbon policy as we introduce our own independent UK Emissions Trading System and host COP26 in Glasgow this November. This blog focuses on the many areas where UK experience has international relevance.

If the UK can make genuine progress to align its new ETS with its legislated Net Zero target, then it can claim to be a global leader in carbon policy. This could be bolstered by progressing the expansion of sectoral coverage, and eventual linking of domestic and international carbon markets alike. The introduction of a Carbon MRV and Accounting Regulator would be a game-changer for ensuring emissions reduction and removal are actually occurring, as well as opening up global cooperation in the fight against climate change. We have argued that the challenges of expanding sectoral coverage are likely to be best handled through a sector-led approach, based on policy packages that create incentives for emissions reduction from buildings to transport, industry to agriculture, and the development of negative emission technologies. Given the real-world challenges that impede the introduction of theoretically attractive economy-wide policies, the UK has an opportunity to show global leadership in developing and implementing a judicious set of sectoral policy packages across all major emitting sectors.

If we are to achieve no more than 1.5C in global warming as laid out in the Paris Agreement, then we will need progress in implementing effective carbon policies across economies throughout the developed and developing world. Knowledge exchange and the international diffusion of good practice is likely to be key. The UK has already shown leadership in implementing our Climate Change Act and creating an independent advisory body in the form of the Climate Change Committee – a model that has influenced other jurisdictions around the world. The UK has already helped develop good practice, but now is not the time to rest on our laurels, the hardest work is yet to come.

The COP Presidency provides us with a unique position, an opportunity, to move the debate forward and to accelerate global progress. But first, we must join up our own thinking, ramp up our own ambition, and lead by example.

The Government’s promised Net Zero Strategy, in combination with the various sectoral strategies, will help. It must, however, be followed by action – with the UK ETS sitting as an exemplar, showing to the world how more coherent policies that enable decarbonisation can be rolled out to drive action by all major emitters. The UK having its own ETS gives it real freedom and opportunity to expand scope in ways that are tailored and carefully designed to particular sectoral issues, using partial linkages to the currently uncovered sectors on a pathway to a fully linked, economy-wide system.

Notwithstanding that global cooperation is going to be key for agreeing a way forward on international shipping and aviation – two sectors that no single jurisdiction can take responsibility for. Global cooperation will also be fundamental in bringing developing nations along the transition, especially those who were not able to benefit from the fossil-fuelled industrial revolution. A global green industrial revolution, full of innovation, changes in behaviour and society for the better, can only happen with the coming together of nations.

As I said in the first blog of this series, now is the perfect time for the UK to act on its ambitious targets, by upping its carbon policy game and building a Net Zero policy framework that is genuinely world-leading.

What is the UK ETS?

The UK Emissions Trading System (UK ETS) came into operation on 1 January 2021 following the UK’s departure from the European Union’s ETS – covering electricity generation, heavy industry, and domestic flights. Under the ‘cap and trade’ principle, an upper limit of emissions is set – the cap – for all participating installations. Allowances for emissions within the system are auctioned off or allocated for free. Trading of allowances between installations can occur if an installation exceeds or outperforms its limit. In this way, installations are able to achieve emissions reduction in the most cost-effective way that meets their business needs. Government have said the emissions cap will soon be aligned with the UK’s 2050 Net Zero commitment.

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