The Greenhouse Gas Emissions Trading Scheme (Amendment) (No. 2) Order 2022

EXPLANATORY NOTE

(This note is not part of the Order)

The United Kingdom Emissions Trading Scheme (the “UK ETS”) was established by the Greenhouse Gas Emissions Trading Scheme Order 2020 (the “UK ETS Order”). The UK ETS runs for ten “scheme years” beginning with 2021, split into two five-year “allocation periods”. Operators of certain industrial installations and certain aircraft operators are required to monitor, submit verified reports on, and surrender “allowances” equivalent to, their greenhouse gas emissions in each scheme year. Allowances (which are tradable) are held in accounts in the UK ETS registry, and there is a cap on the number of allowances. Allowances are sold at auction, but some operators of installations and aircraft operators receive an allocation of allowances free of charge. Free allocation for installations may change from year to year depending on the installation’s activity level. For installations that meet the eligibility criteria, there are two opt-out schemes, one for “hospital or small emitters”, the other for “ultra-small emitters”.

This Order amends the UK ETS Order, Commission Delegated Regulation (EU) 2019/331 (the “Free Allocation Regulation”) and Commission Implementing Regulation (EU) 2019/1842 (the “Activity Level Changes Regulation”). Articles 24 and 25 of the UK ETS Order provide that Commission Implementing Regulation (EU) 2018/2066 (the “Monitoring and Reporting Regulation 2018”) and Commission Implementing Regulation (EU) 2018/2067 (the “Verification Regulation 2018”) have effect for the purposes of the UK ETS, with modifications, and this Order also makes further modifications.

The main changes made by this Order are as follows. Where necessary for free allocation for installations, allowances may be created from the flexible share (40,984,970 allowances) in addition to the annual cap (see amendment to article 20 of the UK ETS Order).

New values for the global warming potentials (in tonnes of carbon dioxide equivalent) of certain greenhouse gases covered by the UK ETS are adopted for the 2023 and subsequent scheme years (see new paragraph 38B of Schedule 4 to the UK ETS Order).

From 1 July 2024, verifiers of emission reports must be accredited to a new standard. New applicants for accreditation as verifiers must satisfy the new standard immediately, but until 30 June 2024 the verification opinions of verifiers accredited to either the old or the new standard may be accepted (see amendments to paragraphs 4(b) and 5 and substituted paragraphs 37 and 55 of Schedule 5 to the UK ETS Order).

Verifiers of aircraft operators’ emission reports may, with the approval of the regulator, carry out “virtual” site visits whether or not force majeure prevents a physical site visit (see amendments to paragraph 24 of Schedule 5 to the UK ETS Order).

Hospital or small emitters for the 2021-2025 allocation period may voluntarily exit the opt-out scheme and join the main scheme for the 2024 and 2025 scheme years (see new paragraph 23A of Schedule 7, and amendments to paragraphs 1 and 2 of Schedule 8A, to the UK ETS Order).

Where a “new entrant” installation to the UK ETS is an “electricity generator”, an application for free allocation in respect of measurable heat produced by means of high-efficiency cogeneration may not be made unless the installation has been operating (and has demonstrated the energy savings required for eligibility) for a full calendar year (see amendment to Article 5 of the Free Allocation Regulation).

The decision about whether free allocation for installations should be adjusted as part of the activity level changes process where questions of energy efficiency arise under Article 6(1) or (2) of the Activity Level Changes Regulation will be made by the UK ETS authority, rather than the regulator (see amendments to Article 6a of the Activity Level Changes Regulation).

For free allocation for the 2022 scheme year, operators of installations whose allocations would otherwise be reduced by the activity level changes process may apply for average activity levels (on which changes to free allocation are based) to be determined by reference to activity levels in 2019 and 2021 instead of those in 2020 and 2021 (see new Articles 5a and 5b of the Activity Level Changes Regulation). Where such an application is made, the regulator may withhold free allocation for the 2023 scheme year until the application is determined (see amendment to article 34W of the UK ETS Order).

Information about accounts held in the UK ETS registry (including details of emissions recorded in accounts and allowances surrendered), transfers of allowances between accounts and emissions of installations in the hospital and small emitters opt-out scheme is required to be published (see new paragraphs 31 to 34 of Schedule 5A, and new paragraph 22A of Schedule 7, to the UK ETS Order). Other scheme information may also be published (see new article 75BA of the UK ETS Order).

In addition, this Order makes other minor amendments to provide further for the process for apportioning free allocation between transferring and new operators in the case of mergers or splits of installations; to clarify, and remove duplicate or unnecessary requirements from, the permitting regime for installations; to modify further the Monitoring and Reporting Regulation 2018 and the Verification Regulation 2018 to make corrections to, or remove unnecessary wording from, the original text; to provide for when an emission factor of zero may be claimed for tallow used at an installation; and to clarify when an emission factor of zero may be claimed for aviation biofuel. This Order also corrects an incorrect cross-reference in paragraph 4(3) of Schedule 8A to the UK ETS Order and amends Article 26 of the Free Allocation Regulation to provide correctly for the scheme year in which free allocation ceases where an installation ceases to operate.

A regulatory impact assessment of the effect that the UK ETS will have on the costs of business, the voluntary sector and the public sector is available from the Industrial Energy Directorate, Department for Business, Energy and Industrial Strategy, 1 Victoria Street, London SW1H 0ET and is available alongside the UK ETS Order on www.legislation.gov.uk.