The Greenhouse Gas Emissions Trading Scheme Order 2020

Jurisdiction: UK

Commencement: 1st January 2021

Mini Summary

Following the UK’s exit from the EU, this Order establishes a UK Emissions Trading Scheme (UK ETS) covering greenhouse gas emissions from power and heat generation, energy intensive industries and aviation.

Summary

Following the United Kingdom’s (UK) exit from the European Union (EU), this Order establishes a UK Emissions Trading Scheme (UK ETS) covering greenhouse gas emissions (GHG) from power and heat generation, energy intensive industries and aviation. It replaces the European Union Emissions Trading System (EU ETS) for UK participants.

The UK ETS begins on 1st January 2021. Before the UK left the EU, the EU ETS was applied in the UK through The Greenhouse Gas Emissions Trading Scheme Regulations 2012. All UK operators that carried out an activity covered by the EU ETS were required to hold a permit, which was a licence to operate and emit greenhouse gases covered by the EU ETS. Activities covered by the EU ETS are any of the activities listed in Annex I to Directive 2009/29/EC to improve and extend the greenhouse gas emission allowance trading scheme of the Community (‘EU ETS Directive’).

The UK ETS does not significantly change the requirements for participating UK operators from those brought in by the EU ETS. Elements of the scheme will be familiar to operators. It is designed to maintain continuity with the EU ETS and to facilitate possible linkage in the future, however this is subject to ongoing trade negotiations between the UK and EU and would require further secondary legislation.

Key provisions included in this Order cover the scope of the scheme, monitoring and reporting requirements, the cap (the total level of emissions permitted) and the trajectory (the rate at which the cap declines) and the roles of the regulators in monitoring and enforcing the rules of the UK ETS. Secondary legislation will be introduced under the Finance Act 2020 to establish rules for the auctioning of emissions allowances.

The regulated activities covered by the UK ETS are listed in Schedule 2. Aviation activities are covered by the scheme and the definition of this is given in Schedule 1. The scheme covers electricity generation and heavy energy-using industries such as power stations, refineries, iron and steel, cement and lime, paper, food and drink, glass, ceramics, engineering, and the manufacture of vehicles. Other organisations, including universities and hospitals, may also be covered by the UK ETS depending upon the combustion capacity of equipment at their sites.

The UK ETS continues the principals of emissions trading by allocating and trading GHG emissions allowances. One allowance equals one tonne of carbon dioxide (CO2) equivalent. At the end of each year, installations must have enough allowances to account for their GHG emissions. They have the flexibility to buy additional allowances on top of their allocation, or to sell surplus allowances generated from reducing their emissions below their allocation.

Allocation periods

Phase I of the UK ETS will run from 2021-2030 and is split into two allocation periods:

• 2021-2025 allocation period; and
• 2026-2030 allocation period.

The regulators in each jurisdiction that the Regulations apply to are the following:

• the Environment Agency (EA) for installations* in England;
• Natural Resources Wales (NRW) for installations in Wales;
• the Scottish Environment Protection Agency (SEPA) for installations in Scotland;
• the chief inspector for installations in Northern Ireland; and
• the Secretary of State for offshore installations.

*’Installation’ means a stationary technical unit where one or more regulated activities listed in Schedule 2 are carried out. ‘Installation’ does not include any of the following (which are outside the scope of the UK ETS):

• an installation that uses only biomass as a fuel;
• an installation, or part of an installation, of which the primary purpose is research and development (including the testing of new products and processes);
• an installation, of which the primary purpose is the incineration of hazardous or municipal waste; or
• a relevant Northern Ireland electricity generator.

For qualifying aircraft operators the regulators depend on which jurisdiction the aircraft operator is registered in:

• the EA, if the registered office is in England;
• NRW, if the registered office is in Wales;
• SEPA, if the registered office is in Scotland; or
• the chief inspector if the registered office is in Northern Ireland.

The EA is the default regulator for new aircraft operators that do not have a registered office or place of residence in the UK. From 2026, the regulator for aircraft operators will be one of the four above and depend on the jurisdiction where the highest proportion of emissions occur.

Duties

Scope of the scheme

Installations must be part of the UK ETS if they conduct a regulated activity.
As there are no changes to this list of regulated activities from the EU ETS, if operators were part of the EU ETS then they remain part of the UK ETS.

Regulated activities under the UK ETS are stated in Schedule 2:

Activities	Greenhouse gases
Combustion of fuels on a site where combustion units with a total rated thermal input exceeding 20 megawatts are operated.	Carbon dioxide
Refining of mineral oil.	Carbon dioxide
Production of coke.	Carbon dioxide
Metal ore (including sulphide ore) roasting or sintering, including palletisation.	Carbon dioxide
Production of pig iron or steel (primary or secondary fusion) including continuous casting, with a capacity exceeding 2.5 tonnes per hour.	Carbon dioxide
Production or processing of ferrous metals (including ferro-alloys) on a site where combustion units with a total rated thermal input exceeding 20 megawatts are operated.	Carbon dioxide
Production of primary aluminium.	Carbon dioxide and perfluorocarbons
Production of secondary aluminium on a site where combustion units with a total rated thermal input exceeding 20 megawatts are operated.	Carbon dioxide
Production or processing of non-ferrous metals (including production of alloys, refining and foundry casting) on a site where combustion units with a total rated thermal input (including fuels used as reducing agents) exceeding 20 megawatts are operated.	Carbon dioxide
Production of cement clinker in rotary kilns with a production capacity exceeding 500 tonnes per day or in other furnaces with a production capacity exceeding 50 tonnes per day.	Carbon dioxide
Production of lime or calcination of dolomite or magnesite in rotary kilns or in other furnaces with a production capacity exceeding 50 tonnes per day.	Carbon dioxide
Manufacture of glass including glass fibre with a melting capacity exceeding 20 tonnes per day.	Carbon dioxide
Manufacture of ceramic products by firing, in particular roofing tiles, bricks, refractory bricks, tiles, stoneware or porcelain, with a production capacity exceeding 75 tonnes per day	Carbon dioxide
Manufacture of mineral wool insulation material using glass, rock or slag with a melting capacity exceeding 20 tonnes per day.	Carbon dioxide
Drying or calcination of gypsum or production of plaster boards and other gypsum products on a site where combustion units with a total rated thermal input exceeding 20 megawatts are operated.	Carbon dioxide
Production of pulp from timber or other fibrous materials.	Carbon dioxide
Production of paper or cardboard with a production capacity exceeding 20 tonnes per day.	Carbon dioxide
Production of carbon black involving the carbonisation of organic substances such as oils, tars, cracker and distillation residues on a site where combustion units with a total rated thermal input exceeding 20 megawatts are operated.	Carbon dioxide
Production of nitric acid.	Carbon dioxide and nitrous oxide
Production of adipic acid.	Carbon dioxide and nitrous oxide
Production of glyoxal and glyoxylic acid.	Carbon dioxide and nitrous oxide
Production of ammonia.	Carbon dioxide
Production of bulk organic chemicals by cracking, reforming, partial or full oxidation or by similar processes, with a production capacity exceeding 100 tonnes per day.	Carbon dioxide
Production of hydrogen (H2) and synthesis gas by reforming or partial oxidation with a production capacity exceeding 25 tonnes per day	Carbon dioxide
Production of soda ash (Na2CO3) and sodium bicarbonate (NaHCO3).	Carbon dioxide
Capture of greenhouse gases from other installations for the purpose of transport and geological storage in a storage site	Carbon dioxide
Transport of greenhouse gases by pipelines for geological storage in a storage site.	Carbon dioxide
Geological storage of greenhouse gases in a storage site.	Carbon dioxide

Organisations that carry out in-scope aviation activities must be part of the UK ETS. Aviation activities are fully defined in Schedule 1 and are summarised below:
An aviation activity consists of the following activities other than excluded flights*:
a) a flight departing from an aerodrome situated in the UK and arriving in an aerodrome situated:

• in the UK;
• in an EEA State;
• in Gibraltar; or
• on an offshore structure in the UK sector of the continental shelf or an offshore structure in the continental shelf of an EEA State.

b) a flight arriving in an aerodrome situated in the UK from an aerodrome situated in Gibraltar.

* Excluded flights are flights for specific purposes such as military flights and search and rescue flights. The full list of excluded flights can be found in Schedule 1.

Aircraft operators carry out aviation activities. The requirements for aircraft operators under UK ETS are summarised separately, further below, under the heading ‘aviation’.

Hospitals and small emitters

Under EU ETS, the UK had a ‘Small Emitter and Hospitals Opt-out Scheme’ to reduce the administrative burden on these installations. For Phase 3 of EU ETS (1st January 2013 to 31st December 2020) installation operators applied to join the Small Emitter and Hospital Opt-out Scheme in 2012 and ‘excluded installation’ permits were granted on 1st January 2013 to those operators whose applications were successful. Under UK ETS this provision continues, allowing hospitals and small emitters to continue to be subject to simplified monitoring, reporting and verification.

A small emitter is an installation:

• with reported annual emissions less than 25,000 tonnes of carbon dioxide equivalent (excluding emissions from biomass); or
• where a combustion activity is undertaken, a net rated thermal input below 35MW.

A hospital installation is an installation that primarily provides services to a hospital, if at least 85% of the heat produced by the installation in that year is used by or supplied to one or more hospitals.

Hospitals and small emitters included in the UK ETS are already decided for the 2021-2025 allocation period. A list of these can be accessed here. An operator of an installation can apply to be classed as a hospital or small emitter for the 2026-2030 allocation period, by submitting an application to the regulator in accordance with Part 2 of Schedule 7.

Ultra-small emitters

Installations that emit less than 2,500 tonnes of carbon dioxide a year (not including emissions from biomass) are classed as ‘ultra-small emitters’ and the installations classed as ultra-small emitters are those stated in the ultra-small emitters list for the 2021-2025 allocation period. An operator of an installation can apply to be classed as an ultra-small emitter for the 2026-2030 allocation period by submitting an application to the regulator in accordance with Schedule 8.

Installation permits

A permit must be held by the operator of an installation before a regulated activity is carried out at an installation.  Permits are either greenhouse gas emissions permits, hospital or small emitter permits. Permits authorise the regulated activities set out in the permit to be carried out at the installation and the permit conditions must be complied with.

Conversion of greenhouse gas emissions permits issued under EU ETS

For installations holding permits issued under EU ETS and The Greenhouse Gas Emissions Trading Scheme Regulations 2012, this Order requires the regulator to convert the permit into a greenhouse gas emissions permit that meets the requirements of paragraph 4 of Schedule 6 and authorises the regulated activity to be carried out at the installation from 1st January 2021. The regulator must notify the operator of the installation of this conversion.

For installations included in the hospital and small emitter list for 2021-2025, this Order requires the regulator to convert the permit into a hospital or small emitter permit that meets the requirements of paragraph 11 of Schedule 7 and authorises the regulated activity to be carried out at the installation from 1st January 2021. The regulator must notify the operator of the installation of this conversion.

Greenhouse gas emissions permits

Greenhouse gas emissions permits can be applied for, varied, transferred, surrendered and revoked.

Applications for permits must be done in accordance with Part 1 of Schedule 6. A greenhouse gas emissions permit may only be issued if the regulator considers that the operator of the installation will be capable of monitoring and reporting the installation’s reportable emissions in accordance with the monitoring and reporting conditions of the permit. The information that permits must contain is set out in Part 1 of Schedule 6.

Operators must apply to vary their permits whenever there is a change that needs approval, i.e. changes to the capacity, activity level or operation of the installation. Changes that the regulator must be notified about, will be stated in the content of the permit. Regulators have the power to vary permits at any time.

Permits can be transferred by the permit holder to a new operator, by both parties jointly applying to the regulator. This must be done in accordance with Part 2 of Schedule 6.

Where an installation ceases operation or where a regulated activity is no longer being carried out and it is not technically possible to resume operation, the operator must apply to the regulator to surrender the permit within 1 month of operations ending, or a later date can be agreed by the regulator if required. When an application to surrender is granted, a ‘surrender notice’ is issued by the regulator. This notice must set out the date on which the surrender of the permit takes effect and requires the operator to report their verified emissions for that year.

Where the operator of an installation fails to apply to surrender their permit on or before the date required, the regulator must revoke the permit as soon as reasonably practicable after that date. Permits can also be revoked due to non-compliance with permit conditions or with requirements set out in this Order.

Part 3 of Schedule 7 sets out the requirements around hospital or small emitter permits.

(Note that operators of aviation activities are not issued with permits, but must apply for emissions monitoring plans which fulfil some of the same functions.)

Allowances

Cap on allowances

The total level of emissions permitted across the UK under UK ETS is ‘capped’. The number of allowances created in a scheme year may not exceed the base for the scheme year multiplied by the relevant hospital and small emitter reduction factor for that allocation period. The reduction factor is set out in Article 21. Based on the UK’s share of emissions allocated in Phase IV (1st January 2021 to 31st December 2030) of the EU ETS. The cap on allowances each year of the UK ETS has been initially set at 5% lower than the share given in EU ETS for the same time period, due to the UK’s commitment to reach net-zero emissions by 2050.

Each operator has a number of allowances which must be surrendered to cover their emissions through monitoring and reporting. The rules on how allowances are to be issued are not covered in this Order and will be the subject of separate legislation on the allocation of allowances and auctioning.

Some operators receive a number of free allowances, depending on what activity they carry out. These are usually issued to participants most at risk of carbon leakage, to maintain competitiveness of certain sectors and support the transition towards a low-carbon economy. Carbon leakage occurs when businesses transfer production to other countries with less stringent emissions constraints. The approach to free allocation policy in the UK ETS is largely in line with the approach to free allocation under Phase IV of the EU ETS, so organisations should not expect any notable changes from how this has worked during the EU ETS.

Monitoring and reporting

Operators must monitor reportable emissions* each year, and in the following year, report them and surrender a number of allowances equal to those emissions. The reporting year runs from 1st January to 31st December each year.

*‘Reportable emissions’, in relation to an installation, means the total specified emissions (in tonnes of carbon dioxide equivalent) from the regulated activities carried out at the installation. Section 93(2) of the Climate Change Act 2008 (c. 27) defines ‘tonne of carbon dioxide equivalent’ which means one metric tonne of carbon dioxide or an amount of any other greenhouse gas with an equivalent global warming potential (calculated consistently with international carbon reporting practice).

To maintain continuity with EU ETS and facilitate possible linking, this monitoring and reporting must be done in accordance with Regulation (EU) 2018/2066 on the monitoring and reporting of greenhouse gas emissions (‘Monitoring and Reporting Regulation’), with some modifications which are set out in Schedule 4. The Monitoring and Reporting Regulation will not remain retained EU law, as defined in the European Union (Withdrawal) Act 2018 (c.16), due to when it came into force.

All annual emissions reports and monitoring are to be verified by an independent verifier in accordance with Regulation (EU) 2018/2067 on the verification of data and on the accreditation of verifiers (‘Accreditation and Verification Regulation’). A verifier will check for inconsistencies in monitoring with the approved monitoring plan (submitted at permit application stage) and whether the data in the emissions report is complete and reliable. The Accreditation and Verification Regulation will remain a retained EU law under European Union (Withdrawal) Act 2018 (c.16).

The deadline each year for submitting reports each year to the regulator is on or before 31st March in the following year.

Surrender of allowances

An operator must surrender allowances each year equal to the annual reportable emissions of the installation in accordance with their permit. This must be done on or before 30th April in the following year. Failure to do this by the deadlines may result in significant penalties.

If an operator does not have enough allowances to cover their emissions for the reporting year, allowances can be purchased through auctions. Under EU ETS, the auctioning of allowances is governed by Regulation (EU) 1031/2010 on the timing, administration and other aspects of auctioning of greenhouse gas emission allowances (‘EU ETS Auctioning Regulation’). This covers the timing, administration and other aspects of auctioning to ensure it is conducted in accordance with legislation. The rules on how allowances are to be purchased or auctioned under UK ETS do not appear in this Order and will be the subject of separate legislation on allocation of allowances and auctioning.

UK Registry

A UK registry system will be used to ensure the accurate accounting of all allowances issued under the UK ETS. Operators will have accounts on the registry to surrender allowances. This UK registry is not covered in this Order and will be issued under separate legislation.

Aviation

As mentioned previously, aviation activities are covered by UK ETS, as they were by EU ETS. Aircraft operators are those carrying out aviation activities (defined in the scope section above). There are 2 exemptions, whose small level of activity means they are not required to be a participant in the UK ETS scheme:

• exempt commercial air transport operators: those operating less than 243 full-scope flights per period for 3 consecutive 4-month periods or those operating full-scope flights with total annual emissions of less than 10,000 tonnes of carbon dioxide; or
• exempt non-commercial air transport operators: those operating full-scope flights with total annual emissions of less than 1,000 tonnes of carbon dioxide.

Note there are simplified requirements for ‘small emitters’ as set out below.

Emissions monitoring plans

Aircraft operators must apply to the regulator for a plan setting out how the aircraft operator’s aviation emissions are to be monitored. This must be done within 42 days of commencing activities as an aircraft operator. Existing aircraft operators who were part of EU ETS will already have an emissions monitoring plan, issued under The Greenhouse Gas Emissions Trading Scheme Regulations 2012.

Monitoring and reporting

Aircraft operators required to monitor and report emissions of CO2 must do so in accordance with their approved emissions plan and the Monitoring and Reporting Regulation. The annual emissions report must be submitted to the regulator by the statutory reporting deadline, which is on or before 31st March in the following year. 

All annual emissions reports and monitoring are to be verified by an independent verifier in accordance with The Accreditation and Verification Regulation. A verifier will check for inconsistencies in monitoring with the approved emissions plan and if the data in the emissions report is complete and reliable.

Surrender of allowances

Aircraft operators must surrender, on or before 30th April in the following year, an amount of allowances equal to its aviation emissions of CO2 in that scheme year. If aircraft operators do not have enough allowances to meet their surrender obligation they can be purchased through auction. The rules on how allowances are to be purchased or auctioned under UK ETS do not appear in this Order and will be the subject of separate legislation on allocation of allowances and auctioning.

Small emitters

For aircraft operators whose aviation activities fall under the small emitter thresholds can use a simplified monitoring as there is no requirement for verification of their reporting of CO2 emissions. These thresholds are aircraft operators who have had emissions of carbon dioxide for that scheme year amounting to either:

• less than 25,000 tonnes from full-scope flights; or
• less than 3,000 tonnes from aviation activity.

Enforcement

Part 7 of the Order covers enforcement of the UK ETS. There are a number of enforcement requirements, which relate to a range of offences, such as failure to surrender allowance. Civil penalties are the main form of enforcement penalty for UK ETS and enforcement notices can be issued by regulators for non-compliance with the Order.

Requirements under the existing EU ETS scheme:

Note that under The Greenhouse Gas Emissions Trading Scheme Regulations 2012 during the transition period from 1st February to 31st December 2020, the UK remains a full participant in the EU ETS. This means that participating UK operators must still meet their 2020 compliance obligations under EU ETS.

The deadlines for UK operators participating in the EU ETS during the transition period are:

• 31th March 2021 – submit Verified Annual Emissions Report for 2020 emissions; and
• 30th April 2021 – surrender equivalent allowances to 2020 verified emissions.

 

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