UK Emissions Trading Scheme

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Consultation response · August 2024

The Negative Emissions Platform (NEP) is a Brussels-based partnership of European and international organisations focused on carbon removals. Our members are primarily technology companies, but also include project developers, investors, carbon marketplaces, and buyers of carbon removals. We provide a forum in which diverse like-minded organisations actively collaborate to improve political and public recognition of carbon removals.

The need for greenhouse gas removal (GGR) to achieve global climate targets became unequivocally clear when the IPCC confirmed in its 6th Assessment Report that in addition to steep emissions reductions, we will need globally up to 10 gigatonnes a year of carbon dioxide removal (CDR) by 2050. The UK has set a global benchmark to deploy at least 5 Mt a year of ‘engineered’ removals by 2030, potentially scaling up to 23 Mt by 2035 and 75-81 Mt by 2050.

We are currently, however, at 2 gigatonnes a year with over 99% of this number coming from conventional GGR (such as afforestation) rather than permanent GGR. To ultimately get to net-zero and sustainable net-zero, we will need to substantially scale up permanent GGR within a few decades. This presents a major challenge. Financing for GGR is currently limited with the sector relying today on a limited number of tools to launch early, first of its kind projects that have high capex costs. To address this, a suite of policy measures will be needed to scale this nascent sector.

The Negative Emissions Platform (NEP) is pleased to see the UK leading the way with assessing how GGRs can be integrated into the UK Emissions Trading Scheme (ETS). As a leader in this space, NEP expects that the UK’s decisions on how to integrate GGRs in the ETS will have significant climatic impacts as other countries and regions (like the EU) look for direction on adopting similar measures.

Although NEP sees integration of GGRs into the ETS as necessary to ensure that the ETS is net-zero and net-negative compatible, it is only one of a set of tools (including the GGR business model) to incentivise Final Investment Decisions (FIDs) and GGR projects. In order to scale the GGR industry in the next decades, it’s essential that permanent removals are included in compliance markets where permanent removals can deliver cost effective climate benefit. NEP would be pleased to provide more details on the opportunity for such an integration.

NEP welcomes the opportunity to provide feedback to the UK Government’s public consultation. You can find our responses to some of the questions and topics raised by the UK Government in the following sections.

Principles

NEP supports the approach taken by the UK Government in establishing the principles for designing the policy to integrate GGR into the UK ETS. Such an approach allows for a dedicated and intentional policy formation.

NEP supports the principles selected but calls on the UK Government to clarify and add the following:

  • Permanent GGR: NEP underscores that the like-for-like principle must be maintained and that only permanent GGR should be integrated into the UK ETS. Whilst there is a role to play for shorter-duration GGR in some climate and environment policies, when it comes to neutralising industrial emissions, the UK Government should only allow for the inclusion of permanent solutions. Shorter duration projects are typically more vulnerable to reversal and by focusing on permanent GGR, the UK would ensure both achievable and measurable long-term carbon neutrality.

  • International approach: The UK is appropriately considering how to march the ETS targets towards net-zero and the impacts of GGR integration and market liquidity for market participants. As we look towards net-zero, connection of demand and supply markets for GGRs will be essential to maintaining sufficient removals volumes and liquidity. As a result, we encourage DESNZ to allow entry of international removals (and export of domestic removals) so long as the quality standards of DESNZ are met (e.g. MRV). Given the cap design and the current cost disparity, this is highly unlikely to lead to any GGR volumes in the near term but would be an important signal to other jurisdictions that are considering establishing GGR integration into their ETS.

  • Incentivising GGRs in the near term: Whilst a compliance market for GGRs unlocks a portion of the cost to deliver GGRs, it will unlikely be fully sufficient in financing it. Therefore, it is essential that the integration of GGRs into the UK ETS is supported by additional financing tools in the near term. This could include a sub-mandate for removals within the ETS, the GGR business models, and inclusion of GGRs as eligible to reduce the carbon intensity of eligible SAF within the UK SAF mandate.

Cap

A cap serves as an important tool to set the ambition of the UK ETS, as well as to ensure the integrity of the market. NEP supports the UK Government’s preference for option 2 (maintaining the gross cap) in the initial phase with the objective to move to option 3 (setting a new net cap) at a later stage. The current priority should be on the initial integration. Given the uncertain future development of the market, the integration of GGR in the UK ETS should be reviewed periodically.

The UK Government will, nevertheless, need to consider the following elements: 1) price point of GGRs; and 2) the transition between options 2 and 3.

Price point

The current price of GGRs needs to be carefully evaluated. The price of UKAs is relatively low in contrast to the cost of permanent GGR activities. There is a risk that the low price may act as a disincentive for market participants to adopt GGRs. Thus, the UK Government needs to consider carefully how to determine the price point for GGRs, to also encourage their uptake and integration into the market. To achieve a significant price differential and thereby optimal pricing of GGRs to encourage supply, implementing a sub-mandate is likely necessary. Additionally, it is essential that GGR integration works in conjunction with the GGR business models.

As previously mentioned, it is insufficient to solely rely on ETS-integration to cover the significant price gap we are seeing of where we are now and the significant cost reductions that will be needed in the GGR sector. To effectively drive the adoption of GGRs as well as bring down their costs, other mechanisms and policies must be introduced. These may include additional compliance tools such as under the UK SAF mandate, as well as other financing initiatives in the near term (e.g. direct government procurement of CDR credits, subsidies).

By stacking various financial tools, the UK Government can create a more comprehensive and supportive framework for the GGR sector. Financial stacking also helps to diversify revenue streams for GGR projects, ensuring that they are not overly reliant on a single source of income. This strategy not only helps bridge the current price gap but also promotes innovation, market stability, and long-term investment in the GGR sector.

Setting the cap

NEP supports the UK Government’s preference for option 2 in the preliminary phase of GGR integration. There is insufficient knowledge to adjust the cap at this point in time. The current design allows the option to use GGRs while the sector is in its nascent stage and ensure that integration does not risk any increase in emissions.

NEP also supports transitioning to option 3 at a later point, in particular to ensure the efficient allocation between emissions reductions and removals as the cap moves to zero. As the ETS cap tightens and remaining emissions trend more and more towards residuals only, there will be an improved business case for GGRs. However, if DESNZ is interested in growing a sustainable market for removals, NEP suggests the consideration of a sub-mandate within the context of the ETS to require that hard to abate sectors counterbalance a share of their ETS-covered emissions with GGRs.

Moreover, NEP highlights that the transition between option 2 and option 3 would need to be carefully managed to avoid market instability. The transition should be gradual and well-communicated to provide the GGR sector with the certainty needed for investment and planning. Clear timelines and guidelines are essential to prevent market disruptions and to foster confidence among investors and stakeholders in the GGR sector. It's worth noting that if a sub-mandate is implemented, there would be no need to transition between different options, as the ETS would ultimately become solely focused on the GGR market to address residual emissions.

Allowance design, differentiation & route to market

Ex-post / ex-ante

NEP strongly supports the decision that GGR allowances should be issued ex-post (i.e. after the removal has taken place), as we consider that it is only appropriate to compensate emissions that have already taken place with removals that have already taken place.

Nevertheless, the GGR sector requires more certainty that a credit it generates is eligible for the UK ETS. Supply controls should be designed to facilitate offtake agreements, which can offer this certainty by offering long-term commitments, payment upon delivery, and still resulting in ex post GGRs. The UK Government should also set out its standard as soon as possible and, in the meantime, approve existing methodologies or registries that they deem as acceptable for the ETS. This is already being done by the EU in the context of the Carbon Removal Certification Framework.

Differentiation between GGRs and UKAs

Given the price difference between UKAs and GGRs, NEP believes it is important to clearly distinguish between the two. The GGR price point does not need to be technology specific, so long as the standard of permanence is maintained.

Differentiating between UKAs and GGRs is also essential for visibility within the cap design. As the UK ETS approaches zero emissions, the reliance on GGRs is expected to increase. Clear differentiation helps in tracking and managing this transition, ensuring that GGRs are effectively integrated into the system.

To further support the integration of GGRs, NEP proposes specific obligations and mechanisms. One consideration should be an obligation on polluters to ensure sufficient demand to decarbonise and to boost demand for CDR. The UK Government could consider introducing a sub-mandate where it sets the proportion of allowances to GGRs. For instance, they could begin with a small percentage of UKAs that must be met with GGRs, such as 2%, and gradually increase this percentage over time.

Location of eligible GGRs

The UK GGR ecosystem is currently small, and while demand is expected to grow in the coming years, it may not be able to meet the supply requirements that ETS integration would entail. Therefore, NEP strongly encourages the UK government to consider allowing non-UK-based GGR credits in the longer-term to be eligible under the ETS, provided they meet the high-quality standards set by the UK government and are retired in the UK for the purposes of the UK ETS. Restricting participation to UK-based GGRs alone is likely to severely limit supply and create economic inefficiencies.

Nevertheless, it is important that the introduction of international credits does not lead to a loss of control over the price point, which could risk undercutting the development of the UK GGR industry. Therefore, the UK ETS should incorporate a review mechanism to assess how non-UK GGR credits can be integrated. This review mechanism would help ensure that international credits complement rather than compromise the domestic market.

To address concerns about the quality and oversight of these non-UK-based GGR credits, the UK could regulate the entities issuing the credits (registries), similar to the regulatory framework established by the EU under the CRCF. In the EU’s system, registries must be certified by the European Commission to issue CRCF-compliant credits. By adopting a similar certification process, the UK could ensure that all GGR credits retired for ETS purposes maintain high standards of integrity and environmental benefit.

Furthermore, the UK Government should consider the potential for future linkages with other ETSs, particularly the EU ETS. The EU is also currently deliberating on how to integrate CDR into its system. Harmonisation between the UK and EU ETSs would be crucial to ensure market liquidity and stability. Such alignment would facilitate a smoother flow of credits and foster a more robust, interconnected carbon market.

Permanence

Defining permanence

NEP believes it is essential to establish a clear definition of permanent GGR that follows the like-for-like principle and is supported by the latest scientific findings. The like-for-like principle sets out that fossil emissions will need to be compensated by GGR that stores greenhouse gases for at least as long as these gases would have remained in the atmosphere. This principle ensures that GGR is genuine neutralisation of those emissions and not merely a temporary measure.

If the IPCC come forward with a definition for permanent CDR, it is essential that the UK Government updates its own definition to align with it, ensuring that it remains scientifically robust and up-to-date with the latest advancements and understanding in climate science. By adhering to the IPCC, the UK can maintain credibility in its climate policies and help support informed decision-making.

Given potential linkages of compliance markets in the future, harmonisation with other jurisdictions must also be considered, as it would provide greater certainty for the GGR sector. The UK Government should therefore review and harmonise, where appropriate, with other jurisdictions such as, but not limited to, the EU, UNFCCC Article 6.4, Japan, and California. Simultaneously, the UK should be an active participant in international discussions, using the ETS to lead the way toward a strong and defensible definition of permanent GGR across jurisdictions.

MRV: GGR methodologies

NEP supports the objective of the UK Government to ensure the GGR activities that are integrated to the UK ETS be supported by high-quality methodologies. This is crucial for fostering trust and transparency in the GGR sector and maintaining the integrity of the UK ETS. It is important that the UK government announce, and then develop, methodologies for as many pathways as possible. Developing such methodologies is important to enable the growth of the sector: we have already seen buyers losing confidence in some pathways due to the lack of clarity from the European Commission over whether they will be included in CRCF, and the long timelines for methodology development.

The science around GGR is developing quickly, as companies deploy GGR projects in the field and the sector learns from the increasing amount of data being generated. Methodologies for GGR developed by private registries are updated regularly to reflect the latest science (in many cases, updated every ~3 months), and it is important they remain adaptable to avoid stifling development of the sector. However, it is also vital that methodologies set appropriately rigorous rules to ensure that credits can only be issued for activities that represent GGR that is additional, permanent, etc.

In developing methodologies for different GGR approaches, the UK should therefore focus on key policy judgments required to ensure GGR activity is sufficiently high quality, while leaving space for private registries to develop rules around specific points of detail. For example, a government methodology could require field/lab tests but leave rules on sensor design/placement to private registries. This approach will set a high bar for quality while ensuring methodologies are adaptable to changes in science and technology and can be more easily kept up to date. Such flexibility is essential to enable the government to produce methodologies for as many pathways as possible.

There is a degree of urgency here and establishing MRV standards needs to happen as soon as possible. Without having clarity on the requirements, it will be challenging for GGR companies to sign offtake agreements with UK compliance entities. In the context of the EU Carbon Removal and Carbon Farming Certification Framework (CRCF), the European Commission is already drafting methodologies for some permanent GGR activities this year. Given that the objectives of both jurisdictions are aligned, namely the deployment of high-quality GGRs, NEP would call on the UK Government to consult the EU methodologies and align where possible. This alignment also helps GGR companies, who are currently mainly made up of start-ups, operating on both markets to ensure that they are complying with the same high standards.

Monitoring and liability rules

GGR activities are varied, and this must be reflected in their monitoring and liability rules. In the case of GGR activities that are reliant on geological storage, the UK Government should align with the requirements already laid out in the EU CCS Directive which has been transposed into UK law. For GGR activities that do not rely on geological storage, activity-specific monitoring and liability rules will need to be established.

Additionally, the UK Government should design liability rules where developers are liable for reversals but can use insurance providers to manage the risk, facilitating accurate risk pricing in the market. To prevent the introduction of less permanent methods that do not adequately offset fossil fuel emissions, fungibility measures should be avoided.

Buffer pools

NEP would argue that the use of buffer pools depends on the GGR activity in question, in particular depending on the risk of reversal of the activity. If a buffer pool is deemed essential, NEP would encourage the UK Government to consider a refundable buffer pool approach. The rate of the buffer pool should be commensurate with the scientifically established risk of reversal. In a refundable buffer pool approach, credits allocated to the buffer pool, where no reversal occurs, can either be reimbursed or redirected for supporting new projects. This approach ensures adaptability, provides financial incentives for maintaining permanent storage methods, and promotes the efficient use of carbon credits without stalling progress.

Overall, measures to address the risk of leaks from what is expected to be permanent storage are appropriate and supportable. However, this is different than devising a framework of multipliers of buffer pools to create requirements for continual replacement of a temporary removal in order to approximate permanence. The latter is not robust to shifting policy landscapes and therefore cannot be made permanent on geologically relevant timescales. As a result, this type of removal and framework should not be included in the ETS if environmental integrity is to be maintained.

Pathway to integration

Supply controls

NEP concurs with the UK Government’s evaluation that, provided the gross cap remains in place, supply controls won't be necessary to prevent mitigation deterrence. However, given that GGRs are expected to remain expensive in the coming years, it may be advantageous to set a forward-looking supply projection to boost developer confidence. Developers must be assured that their credits will be accepted by the UK ETS, as any uncertainty could undermine the crucial demand signal that currently supports GGR developers in securing offtake agreements.

Voluntary market

The voluntary carbon market (VCM) is likely to remain important for GGR credits for the foreseeable future. This is particularly important given the substantial current price difference between UKRs and UKAs, which means companies are likely to prioritise buying UKAs over UKRs. If the UK government assumes the role of an intermediary or offtaker, it will be supporting the VCM as it would essentially be behaving as a VCM buyer.

Project developers are expected to prefer having the option to sell their GGR credits either to the VCM or to a compliance market. Therefore, any integration of GGRs into the UK ETS should allow for this flexibility. For instance, if a GGR project developer meets the required standards and becomes eligible to sell into the ETS, developers should still have the option to sell their credit to either the VCM or the ETS until they are transferred to a compliance entity's registry account and officially enter the ETS. At this point, the UK Government can then withdraw a UKA, as outlined in Option 2.

Demand controls

As mentioned previously, there will be price discrepancies between UKAs and UKRs. Consequently, demand controls will therefore be needed to ensure that there is certainty in the market, in particular for larger projects. This could be in the form of a sub-mandate or quota which would provide that level of certainty.

Timing of integration

A compliance market for GGRs is expected to be critical for deployment of GGR projects at scale, especially at a time when the voluntary carbon market remains nascent. Therefore, NEP strongly urges the UK Government to ensure the integration of permanent GGRs into the UK ETS by 2028 at the latest. This timeline would still allow GGR project developers and sectors subject to the compliance market sufficient time to prepare. It would also allow for a transitional period for integration, giving more time for supporting market mechanisms to be established. By 2030, as the market scales, compulsory purchase requirements (i.e. quotas) can take effect once sufficient supply from large-scale projects is available.

The next several years will be critical for preparing the sector for this integration. Some of the key steps include establishing robust monitoring, reporting, and verification (MRV) rules for various permanent GGR activities to ensure accountability and transparency. Additionally, efforts must be made to significantly reduce the costs associated with GGRs, making these technologies more financially viable.