The aim of the new consultation, ‘Moving the UK ETS Second Free Allocation Period’, is to gather feedback on the Authority's intention to delay the change in free allocation rules for stationary installations from 2026 to 2027.
The new timeline will ensure changes to free allocation will be coordinated with the introduction of a UK Carbon Border Adjustment Mechanism (CBAM), which is planned to start in 2027.
The CBAM will impose an embedded carbon cost on certain imported products and as a tool to tackle carbon leakage, the mechanism will target products within the scope of sectors on the carbon leakage list in the UK ETS.
Following calls from industry stakeholders, the Authority now proposes that new free allocation rules apply from 2027 instead of 2026.
Whilst it makes sense to delay the free allocation and harmonise with CBAM policy, cuts to free allocation are now expected to be pushed back by one year.
At the current annual emissions (97mt CO2e in 2023), the cap combined with the free allocation is resulting in a growing surplus of allowances.
This proposal is expected to further sustain the oversupply of allowances that are accumulating, prolonging the peak. However, it could also result in much steeper cuts to free allocation, from 2027.
Sectors with no carbon leakage risk could face the complete removal of free allocations (similar to adjustments for the aviation sector from 2026), while sectors on the carbon leakage list may see significant reductions, as any competitiveness concerns should be protected by the new CBAM.
Since coming into power in July, the Labour government has remained tight-lipped about its plans for the UK ETS. This is the first insight into the Government's position on UK ETS, suggesting a considered and long-term approach will be taken on ETS policy.
Whilst this proposal is bearish in the short term and has resulted in a near 10% fall in the UK Allowance price since it was announced, stakeholders are still awaiting the government's position on several other consultations.
This includes Labour’s response to the consultations ‘UK ETS Long-Term Pathway’ and ‘Future Markets Policy’, which could result in an overall increase of ambition under the scheme, particularly in view of Labour’s goal to fully decarbonise the power sector by 2030.
The reform package to the UK ETS, underway since 2023, is complex.
Whilst many participants and commentators would like to see the UK ETS linked back to the larger EU ETS, it is apparent that UK policy is diverting further from the EU (the EU CBAM starts in 2026). This is likely to extend the wait for a carbon market link.
As UK ETS specialists, our team supports a range of organisation covered by carbon policy, providing insight and support to businesses across a range of industries.
If you have any questions on what this policy means for the future of the UK ETS and your business, contact us here, now.
In the UK and across Europe, Tim Atkinson and his award-winning team are playing a pivotal role in the decarbonisation of major industries as part of the carbon compliance team at CFP Energy, having traded over 100m carbon allowances in the past three years alone.
As part of the European-wide effort to achieve net zero, drive the energy transition forward and create a more sustainable world, CFP Energy is working to support organisations based in Germany covered by the national Emissions Trading System (nationales Emissionshandelssystem) (nEHS).
