The UK Emissions Trading Scheme (ETS) entered into operation on 1 January 2021, following the country’s departure from the European Union’s ETS. The UK Government is currently reviewing the scheme to align the emissions cap with the net zero target and has promised to explore expanding coverage to the two-thirds of emissions not yet covered by the UK ETS.

Authored collaboratively by Energy Systems Catapult and the Grantham Research Institute on Climate Change and the Environment, this report provides insights to inform the Government’s review on expansion, focusing on three sectors that might fall within the scope of future policy changes:

• Heat and buildings
• Greenhouse gas removal (GGR) techniques
• Road transport

The report is informed by discussions at roundtables – co-hosted by the Catapult and Grantham Research Institute – held in January 2022 with experts and key stakeholders from the sectors in question.

Headline points

• Political realities and multiple market failures necessitate a balance between carbon pricing and complementary policies in the effort to reach net-zero.
• In devising the right policy package, it is crucial to understand the intended role of the UK ETS in enabling decarbonisation in each sector.
• The extension of carbon pricing to sectors not previously covered by the ETS must be underpinned by equity and fairness.
• Without careful design, expanding the UK ETS to as-yet uncovered sectors could risk undermining the efficacy of the scheme as a whole.

Summary of high-level recommendations

• Any expansion of the UK ETS to heat and buildings must be developed as part of a wider package of complementary policies that address specific challenges, including fuel poverty and distributional impacts.
• The UK ETS requires wider system architecture changes to be able to incorporate greenhouse gas removal techniques.
• Including road transport within the UK ETS offers an opportunity for policymakers to enact broader fiscal reform of transport taxes, including fuel duty.
• Introducing well designed sector-specific markets, with eventual linking to the UK ETS, could be a pathway to an economy-wide UK ETS in the future.

Authors

This Policy Insight was written by Dr Danial Sturge, Carbon Policy Practice Manager at Energy Systems Catapult; Josh Burke, Senior Policy Fellow at the Grantham Research Institute; and Esin Serin, Policy Analyst at the Grantham Research Institute.