Carbon pricing is an efficient tool for promoting decarbonisation and the UK Emissions Trading Scheme (ETS) will play a role in helping the UK achieve Net Zero emissions by 2050.
As the UK transitions to a Net Zero economy, the Government recognises the importance of addressing the risk of carbon leakage. Carbon leakage is the displacement of domestic production, and its associated emissions due to different levels of carbon pricing and climate regulations across jurisdictions.
A proportion of allowances under the UK Emissions Trading Scheme (ETS), worth several billion pounds a year at current prices, are already allocated for free to businesses at risk of carbon leakage to reduce their exposure to the carbon price.
The UK ETS Authority recently consulted on the development of the UK ETS including on setting an appropriate cap consistent with net zero by 2024, expanding carbon pricing to more sectors of the economy, and a proposal to ensure that there are no reductions to industry’s free allocations before 2026 at the earliest.
The best solution to carbon leakage would be for all countries to move together in the pricing and regulation of carbon emissions. However, international solutions will take time to develop, and so government is considering options for new domestic action in parallel.
Earlier this year, the Government announced its intention to consult on a range of carbon leakage mitigation options to ensure both the integrity of UK action to reduce its carbon emissions and that UK businesses are not disadvantaged. This will include whether measures such as product standards and a carbon border adjustment mechanism (CBAM) could be appropriate tools in the UK’s policy mix.