The body in charge of the UK Emissions Trading Scheme (ETS) is consulting on how the scheme can incorporate greenhouse gas removal.
Background
The UK ETS has been up and running since 2021 as a key part of the UK’s strategy to tackle climate change and reach net zero emissions. It works by setting an overall limit for the emissions certain businesses are allowed to produce, then allowing them to trade within that limit. (Our UK ETS FAQs have a lot more detail; if your specific question isn’t answered there, let us know.)
But to reach net zero by 2050, we can’t just rely on cutting emissions. We also need ways to take greenhouse gases out of the atmosphere – so-called greenhouse gas removals, or GGRs. These come in two forms: technological and nature-based. We need both kinds to meet our climate targets.
The UK ETS trades in units known as UK allowances, or UKAs. One UKA gives your organisation permission to emit a tonne of carbon dioxide equivalent, or CO2e. Bringing GGRs into the UK ETS would mean that if your organisation does something to remove carbon from the atmosphere, it would qualify for extra allowances. The consultation currently open is about how exactly that should work.
A complement, not a substitute
The UK ETS is a market-based solution to the problem of reducing emissions in carbon-intensive sectors. The government wants to minimise state intervention in this market, but still ensure that the design of the market delivers the intended outcomes. (It is facing a very similar challenge with the ongoing reforms of the GB electricity markets.)
The point of the UK ETS is to encourage businesses in scope of the scheme to decarbonise. The inclusion of GGRs should not undermine this. The consultation document is clear: “GGRs must act as a complement rather than a substitute for emissions abatement.”
Setting the cap
One of the biggest issues around the integration of GGRs into the UK ETS is how this should affect the overall cap. Carbon allowances have already been cut to their lowest level as of January 2024. The UK ETS Authority now needs to decide whether the existing cap should include GGRs (Option 1). This would effectively raise the gross cap (because negative emissions give more room for actual emissions). Or it could simply apply the existing cap to GGRs as well, which would mean net emissions reduce (Option 2).
A third option is to set a new, lower cap but not apply it to GGRs. Carbon-intensive sectors would have a lower level of permissible emissions in the first place but this would be effectively raised by the introduction of GGRs. Option 3 is basically the same as Option 1, but this built-in lower level of starting emissions would be more likely to get us on track for net zero.
Valuing GGRs
It is relatively straightforward to measure a tonne of CO2e emitted and say that is equal to one UKA. The challenge for the UK ETS Authority is to create a tradeable, interchangeable unit for CO2e removed. And this is somewhat trickier.
A GGR that takes a tonne of CO2e out of the atmosphere for 100 years is less useful for our climate goals than a GGR that removes the same emissions for 10,000 years. The durability of the removal technology should therefore affect the value of the emissions removed. It is very likely that GGRs with a longer storage period and more proven technology will command a significantly higher market price.
The Authority has already set a minimum standard that all GGRs to be included in the UK ETS should be “highly durable”. But there is currently no consensus on what time period this means in practice.
The Authority is also proposing that operators of carbon removal technologies should:
- Prove they can store carbon for a minimum period;
- Accept liability for the possibility that the carbon stored is re-released.
Risk of reversal
The consultation deals in depth with the possibility of GGRs being traded on the market and then re-releasing the “removed” carbon at a later date. It asks questions such as:
- How do we assess the risk of reversal when considering a GGR for inclusion?
- How do we take this risk into account when valuing carbon storage for the purposes of the market?
- What obligations should we put on GGR operators in relation to this risk?
- How do we guard against the possibility of reversals happening in a future where the UK ETS no longer exists? Should we require the operators to purchase negative emissions now to compensate for this possibility?
- How do we allocate responsibility for carbon re-release when GGRs usually involve multiple stakeholders?
Integrating greenhouse gas removals into the UK ETS is a big step and the consultation asks many complex questions. If you have views on how this transition should be managed, you are encouraged to share your thoughts. It closes on 15 August 2024.
