The new UK Emissions Trading System (ETS) has been stealing the energy market headlines recently with the first carbon trading auction taking place late May.
So what is it, who does it apply to, and why does it affect the price of your gas and electricity?
What is the UK ETS?
The UK government opted to leave the EU Emissions Trading System (ETS) and launched its own system on 31st January 2021 as part of its Brexit negotiations.
Emissions trading systems work by capping the total amount of greenhouse gases that can be emitted by certain sectors, such as steel, power and aviation to reduce emissions, and achieve climate change targets.
Under the new UK ETS, power plants and other energy intensive industries will be charged for every tonne of CO2e they emit beyond a certain limit. They will also be able to sell any excess reductions for profit to other companies that have failed to remain below their specific limits.
The UK scheme is set to cover 155 mega tonnes of CO2e in its first year.
Who is affected?
The UK ETS will apply to energy intensive users with a total thermal input exceeding 20MW (except in installations for the incineration of hazardous or municipal waste) including power stations, oil refineries, offshore platforms and industries that produce iron and steel, cement and lime, paper, glass, ceramics and chemicals.
Other organisations such as universities and hospitals may also be covered depending on the combustion capacity of equipment at their sites.
UK carbon trading
Similar to the EU ETS, the UK ETS works on the cap and trade principle allowing companies trade emission allowances (also known as carbon credits). Each company is given a maximum carbon pollution allowance and any unused allowances can be sold to other companies.
On May 19 the UK held its first emissions auction with the carbon price hitting £50 per tonne, making the cost of polluting in Britain higher than that in the EU.
How does carbon trading affect energy prices?
Because the major energy providers such as oil and power plants will need to purchase carbon credits, they will pass this cost on through to the consumer.
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