The UK's ETS has been established on a similar model to the EU ETS, following Brexit. This report outlines a wide range of proposed updates to the system to ensure it plays an effective role in the UK's net zero transition. We also comment on proposed support for nature based solutions and greenhouse gas removals.
Q1: Do you agree with the Authority’s proposed range for the net zero consistent cap? (Y/N) Please explain your answer.
The proposed cap is well justified and generally consistent with the UK’s net zero plan. However, the distribution of unallocated allowances and the concern with smoothing the transition reduces the ambition of the cap in the short term. The UK ETS is one of the leading policies motivating decarbonisation in the UK in this decade, and will be relied upon to drive very ambitious decarbonisation needed for net zero pathways and to meet the UK’s international climate obligations. Furthermore, decarbonization achieved sooner will have a more positive cumulative impact on climate change. The introduction of the cap has already been proposed to be delayed by one year, from 2023 to 2024. We recognise the challenges of the rapid decarbonization required under the unsmoothed transition, but also that this is an urgent challenge that will present difficulties at whatever point it is introduced. The transition could be smoothed in the short term through the wider use of other instruments which still achieve a positive climate benefit, such as greenhouse gas removals or other carbon credits - provided they are of sufficiently high quality.
Q34: Are there other drivers of evolving market conditions that future UK ETS markets policy should take into account? (Y/N) If so, what are they? What evidence do you have to support your view?
Yes. One of the major evolutions in carbon markets in recent years has been the rise of technologies, standards, methodologies, norms and codes of practice to ensure the underlying credits being traded, and the use to which they are put, are of unimpeachably high integrity. Much of the world’s climate policy is currently based on the misnomer that carbon credits are inherently of low or unknowable quality, and so the safest approach is to disallow their use entirely. While this may have been a well-evidenced position five (or even three) years ago, it is no longer the case. The evidence to support this view can be found in the prolific output of the IC-VCM, VCMI, CCQI, and even the rise of an entirely new economic segment, the carbon credit ratings agency, which did not exist until early 2020.
Another popular misconception is that credits relating to avoided or reduced emissions are inherently of lower quality than credits relating to carbon removals. Our in-depth analysis of the market - which we would be very happy to share with the relevant policy-markers, if helpful - has categorically shown that, while there are some high quality removals credits, and some low quality avoidance credits, the inverse is also true. The specific level of quality and environmental impact represented by a credit depends on the specific context of the project itself, and cannot be estimated using avoidance/removals as a proxy.
Q35: What impacts do you envisage that these drivers could have in the UK ETS in the coming years, particularly in relation to market stability and integrity? What evidence do you have to support your view?
Allowing for the limited inclusion of high quality carbon credits into the ETS would boost market stability by providing price stabilisation opportunities, and would also provide wider benefits towards the UK’s ambitions to be a global centre for carbon trading.
Q147: Do you believe the UK ETS could be an appropriate long-term market for GGRs? (Y/N) Please explain why, highlighting benefits and risks where possible.
Yes. The use of greenhouse gas removals will be an essential component of international strategies to reduce the impact of climate change in the long term. It is recognised in a number of emissions projections, including those from the IPCC, that these will be more significant in the 2040s onwards rather than now. There is currently a shortage of supply of GGRs, and significant investment is needed to help them scale to the extent needed in future. Whilst there is already widespread demand for removals credits in the VCM, and significant investment from the private sector, additional demand such as from inclusion of GGRs in the UK ETS would further boost the case for investment in this important area.
Following the mitigation hierarchy, the near-term priority for climate action should be the reduction of global emissions. There is an important role here for high quality emissions reduction/avoidance credits. These crediting projects generally achieve many of the co-benefits discussed in the consultation document. Short term inclusion of VCM credits in the ETS, for a strictly limited proportion of emissions, could both support these projects and smooth the transition to the net zero aligned pathway of market caps. In the longer term, this allowance for VCM credits could be phased out, or transitioned to an allowance for GGRs only.
Q148: How could the design of the UK ETS be adapted to include GGRs while still maintaining the incentive to decarbonise for ETS participants?
Options would include limiting the proportion of emissions against which GGRs can be used, limiting the absolute number of GGRs that can be used, (either as a whole within the market, or by each individual covered entity), and setting floor prices for GGRs which may or may not track the price of allowances, and could vary in percentage.
Q149: To what extent could the UK ETS price signal incentivise development of the full range of GGRs, including engineered and nature-based GGRs, given the expected differences in the project costs?
One option that could be considered here is the application of ton-year accounting.
Q150: What impacts or opportunities could arise for the UK voluntary carbon markets, if GGRs were included in a compliance market like the UK ETS? For example, what impacts, or opportunities could there be for voluntary carbon market schemes such as the Woodland Carbon Code?
A strong demand signal from the UK ETS would clearly be a major boost to the UK’s VCMs, both internally and internationally. Among other things, this move would boost the development of technologies and expertise essential for this market, and these capabilities would then be in high demand around the world, giving the UK a competitive edge.
Q153: Do you think there are other eligibility requirements we should consider and what are these?
In addition to the requirements for robust MRV, permanence, and liability outlined in the consultation document, GGR credits must be additional (meaning that removals achieved would not have happened in the absence of the project).
Furthermore, if international credits are permitted, the requirements should take a clear position on the importance of corresponding adjustments.
For any credits (GGRs or avoided/ reduced emissions) that are included, it is important to consider the fact that credit quality is a spectrum. In the case of GGRs, it cannot be guaranteed that credits reliably represent one additional ton of CO2e permanently removed from the atmosphere. Any organisation using GGRs/ credits within the ETS should have to demonstrate an appropriate level of due diligence on the quality of these credits, to minimise risk to both climate and the legitimacy of the Uk ETS. This might include using the IC-VCM’s Core Carbon Principles, and third party data providers including ratings agencies.
Q154: What MRV criteria need considering for GGRs and what steps need to be taken to ensure a framework of criteria is robust, cost-effective, and scalable?
a) For Nature-based GGRs
The essential criteria are that GGRs must be additional, real, independently verified, and permanent (within a climatically significant timescale). However the application of ton-year accounting could also be considered (in order to address concerns around permanence). Environmental and social co-benefits should also be considered.
b) For Engineered GGRs
The essential criteria would be the same as for nature-based GGRs, with the addition that the full life-cycle costs and impacts of the technology must be factored into the cost-benefit analysis.
Q155: For GGRs that have a risk of carbon being re-released into the atmosphere, are there any potential solutions we should consider enabling market participation?
Based on the risk of a reversal event (carbon being re-released into the atmosphere), registries keep a proportion of credits in a buffer pool. This mitigates some of the risk of reversals. However, if this was not enough of a solution, the ETS might consider requiring a percentage contribution to its own buffer pool by any organisation using GGRs.
Q156: What are challenges of integrating non-permanent removals alongside permanent removals in the UK ETS and how can these be overcome?
The challenges in this regard are often overstated, and risk diverting attention from the urgency of tackling the climate crisis. Given the need to reduce emissions aggressively, globally, within this decade, there is likely to be greater climatic benefit in investing in avoidance / removals activity, and short-term removals, provided the integrity of these options is high, the accounting robust and the cost low - especially if these options are available at scale and can be repeated over the coming years - than in spending significantly more to achieve a smaller number of removals with greater permanence.
That said, one simple way to address the challenge of comparing carbon credits in general, and removals in particular, on the issue of permanence is to implement - either in parallel or as the sole metric - ton-year accounting.
Q162: Should any GGR approaches, or methods be considered for earlier inclusion in a market than others? Why should we consider these?
Given the urgency of the climate crisis we believe these options should be implemented as soon as is practicable.
Q166: What are the barriers to implementing robust Monitoring, Reporting and Verification of greenhouse gas emissions, and how can we improve record-keeping?
• In the agriculture sector
Soil is both a significant source and sink of carbon, and this can be significantly impacted by agricultural activity. Soil MRV is currently very limited in scale and accuracy. Integrating remote sensing is a particular area that would facilitate the scaling of soil MRV, but this is very challenging and will require significant investment into R&D.