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Letter: Development of the UK Emissions Trading Scheme (UK ETS)

1. Outline

This is a letter from Lord Deben, Chairman of the Climate Change Committee, to Graham Stuart MP, Minister of State at the Department for Business, Energy and Industrial Strategy. It outlines the Committee’s advice on development of the UK Emissions Trading Scheme (UK ETS) in response to a request from the then Minister, Rt Hon Greg Hands MP, for advice on the UK ETS cap, on matters relating to free allocation of allowances and on wider questions relating to the future role of the scheme.

2. Key messages

  • The proposed new cap, for implementation in 2024, is appropriate given it is in line with the pathway towards Net Zero set out in the Net Zero Strategy. Releasing excess allowances means that the downward path for emissions will not be as steep as it appears.
  • The Committee supports in principle the proposal to reduce the level of the industry cap and bring to the market previously unallocated free allowances, provided their scale is designed so that they ensure no carbon leakage from the UK. Recommendations are made on avoiding carbon leakage as well as the need to consider carbon border adjustment mechanisms together with the UK ETS in future.
  • The letter sets out three key principles to consider in relation to extending the scope of the UK ETS: the need for incentives to decarbonise; removal of distortions and significant risks of adverse impacts.
  • The letter applies those principles to specific sectors on which advice was requested: shipping, waste, engineered greenhouse gas removals (those based on carbon capture and storage) and biological removals (from tree planting and peatland restoration).