What is it?
The UK Emissions trading scheme was developed as the world's first bid-in economy-wide greenhouse gas emission trading scheme and helped UK organisations gain experience at trading prior to the introduction of the EU ETS.
The UK Emissions Trading Scheme was launched in 2002 and was designed to run until 2006, to achieve three objectives:
- to secure cost-effective GHG emissions reductions
- to give UK companies early experience of emissions trading, with a particular view to being ready for the European Union Emissions Trading Scheme (EU ETS)
- to encourage the establishment of an emissions trading centre in London
What's involved?
Thirty-four organisations ('direct participants' in the scheme) have voluntarily taken on a legally binding obligation to reduce their emissions against 1998-2000 levels, delivering over four million tonnes of additional CO2 equivalent emission reductions in 2006.
The scheme is also open to the 6,000 companies with Climate Change Agreements. Climate Change Agreement companies can use the UK Emissions Trading Scheme either to buy allowances to meet their targets, or to sell any over-achievement of their targets.
Participation was voluntary and open to both the public and private sectors. In order to establish a market for emissions allowances, the UK Government held an incentive auction in March 2002. By committing to reduce emissions of one or more of the six greenhouse gases, organisations were able to bid for a proportion of the total £215 million available as an ‘incentive’ payment over the lifetime of the scheme.
How does it work?
Thirty-two 'direct participants' (or DPs) successfully bid for a proportion of the funding available, committing to a total of 3.96Mt CO2e by 2006. Each organisation's target was determined relative to its 'baseline' emissions between 1998 and 2000. In addition to calculating and verifying their initial baseline data, DPs' annual emissions are verified and reconciled to record performance against their targets.
Once organisations had committed to an abatement level by 2006, annual targets were calculated linearly and the corresponding number of allowances awarded each year. Each transaction, including allocations and retirements, is recorded in a transaction log managed and subsequently published by Defra.
However in 2004, it had become evident that the total number of allowances available on the market considerably exceeded actual emissions from DPs. Defra consulted on the most appropriate way to address this surplus and entered into a voluntary agreement with six participants to reduce their targets by 8.9MtCO2e in total over the remaining years of the scheme.
CCA Link and UK ETS
Organisations that are part of a Climate Change Agreement (CCA) can also participate in the scheme. CCA companies are allowed to buy allowances to make up under-achievement against their CCA targets (or to sell allowances where they generated a surplus). This is required to ensure that the 80% discount on the CCL is still available.
Some CCA targets are determined in relative rather than absolute terms. This means that the level of energy use or emissions allowed under the target can increase as output increases, or vice versa.
A small number of other organisations have also traded allowances in the scheme, for instance, in order to purchase emissions to become 'carbon neutral'.
Latest Developments
Entrance to the UK ETS ended in December 2006. The scheme is still running for those registered participants and is likely to conclude in 2010.
UK ETS Carbon Costs
The current cost for Carbon in the UK ETS vary but are around £1.00 per tonne of CO2e in May 2009.
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