Have your say on changes to the UK ETS and CPS compensation schemes
The government is considering the redesign of two schemes which compensate energy intensive industries for costs passed on to them from the UK Emissions Trading Scheme (UK ETS) and carbon price support mechanism (CPS).
The costs arise because power stations are obliged to buy emission allowances under the ETS and pay a tax on the carbon content of the fossil fuels they use to generate electricity. This increases their costs, which are passed on to the wholesale electricity market, and ultimately onto end user bills.
Reasons for the review
The two schemes were brought in around eight years ago help the UK manufacturing sector stay competitive globally and avoid “carbon leakage” – where production and emissions are moved to other regions with less stringent climate policies.
Since then, the government has set legally binding targets to reach net zero emissions by 2050 and cut emissions by 78% by 2035. So, the challenge is to create a thriving industrial sector aligned with net zero, without pushing emissions and business abroad.
The review will look to establish whether there continues to be a rationale for compensation, and if so, the conditions and timeframe under which that need might fall away.
A key priority is understanding the real risk of carbon leakage, and whether mitigating this risk provides wider benefits, such as levelling up and supporting jobs and ensuring business viability.
What does the consultation cover?
The scope of the review is limited to the UK ETS and CPS compensation schemes. It doesn’t cover other schemes, such as the EII exemption scheme which exempts heavy industry from the costs of renewable energy policies.
However, BEIS says it will shortly be publishing a separate call for evidence on energy bill costs and fairness issues.
The consultation is open until 9th August 2021. You can have your say here.
UK ETS free allocations
A separate call for evidence recently ran on the UK’s use of free allocation as part of the UK ETS.
The review is assessing how free allowances can better incentivise emissions reduction and protecting energy intensive industries from the risk of carbon leakage.