UK Emissions Trading Scheme: proposed amendments: impact assessment - Section 8. Conclusion

The UK ETS Authority carried out a 12-week public consultation from 25 March 2022 to 17 June 2022. The consultation was published in both English and Welsh on the UK Government’s website (gov.uk), with a link published on the Welsh Government’s website (gov.wales). 

Existing participants of the scheme were notified of the consultation via email and through existing stakeholder groups. Relevant NGO’s and wider stakeholders were notified through existing comms channels. All were offered the opportunity to meet Authority officials to discuss the proposals.

During the consultation process, a series of workshops were run on the various chapters of the consultation. These were open to everyone, and presentation materials were provided in both English and Welsh.  

Engagement activities such as individual meetings and attending existing stakeholder group meetings were continued after the consultation closed to ensure that all stakeholders views were considered as the policies were being developed.

There are three significant impacts that have been identified in assessing the proposals, which relate to the effect they will have on human health, business costs, and energy bills for consumers. 

The scheme is judged to have a positive impact by incentivising the abatement of emissions from the traded sector that are believed to be harmful to human health, such as nitrogen dioxide (NO2) and fine particulate matter (PM2.5). There is evidence to suggest these pollutants could both cause and aggravate existing health conditions and have a differential impact across groups (such as on children, older adults, and disabled people).

The costs to business associated with the scheme relate to both the cost of purchasing allowances (at higher prices than if no action was taken) or the cost of abatement motivated by the carbon price. The economic impact assessment, conducted for the Authority on behalf of the Department for Net Zero and Energy Security, estimates that the cost to business from the preferred option will be £2.4bn. These costs will be contingent on the delivery of other aspects of public policy, such as by the deep decarbonisation that could be achieved from the deployment of CCUS and hydrogen, as well as wider electrification of existing processes. If less public policy is delivered than expected, the need for business to find alternative abatement solutions (that will be more costly) will increase.

Finally, the impact on consumers via increased energy bills is judged to be complicated by the time-horizon the policy is assessed over. While the Authority was not able to credibly estimate the impact of the policy on household bills, in the short term any policy that increases the marginal cost of producing electricity using fossil fuels (such as natural gas) is expected to be passed onto consumers. Within the recent energy context, this impact is expected to be minimal compared to other factors. Over the longer-term the impact on energy bills is dependent on developments across the wider energy market – for example, how the cost differential between different forms of generation evolves. As the proposals should accelerate the adoption of cleaner forms of electricity generation, should these technologies prove more cost effective over their lifetime, these savings could be passed onto consumers. 

• maximise contribution to our well-being objectives and the seven well-being goals;  and/or,
• avoid, reduce or mitigate any negative impacts?

By accelerating the pace of decarbonisation within the traded sector, compared to if these changes were not made, this IIA finds that the proposals support three of the Welsh Government’s well-being goals; namely it supports our goals to be a resilient Wales, a healthier Wales, and a globally responsible Wales. 

Welsh Government’s net zero ambitions and tackling fuel poverty are compatible objectives. Our long-term ambition is to improve the energy efficiency of Welsh homes, ensuring we use only the energy we need, to keep homes comfortably warm at an affordable cost. The new Warm Homes Programme will continue to act as the Welsh Government’s primary mechanism to tackle fuel poverty. It will also contribute towards achieving a net zero Wales by 2050 and directly enable a just transition - ensuring we leave no-one behind as we move to a cleaner, stronger, fairer Wales, through the twin objectives of tackling fuel poverty and the climate emergency. 

Welsh Government is very conscious of the impacts of the high energy costs on the most vulnerable households and individuals. This is an area that is evolving daily, and we are continuing to develop plans to mitigate the impacts. Welsh Government's Tackling Fuel Poverty 2021 to 2035 Plan sets out steps we are currently taking, and we will continue to develop this as the issues evolve.

In Wales we expect the development and scaling up of technological options for industrial decarbonisation, such as fuel switching and carbon capture utilisation and storage, to have a transformative impact on emissions from the end of the 2020s and through the 2030s. This transition will be supported by collaboration with industrial clusters, a decarbonised energy network with enhanced grid infrastructure and access to UK-wide funding to implement decarbonisation plans.

The Climate Change Committee has assessed that by 2050 around 60% of the changes needed in Wales to achieve a pathway to net zero are influenced by powers mostly reserved to Westminster. For the industry sector the majority of powers and resources that will support industry to transition to net zero processes to meet our climate targets, such as hydrogen and carbon capture are reserved to the UK Government. To ensure Wales benefits from the support available we will continue to press the UK Government to develop and deliver their policies to ensure that businesses in Wales can credibly meet the ambitions set out in these proposals (such as the UK ETS cap trajectory) and receive access to the necessary infrastructure, investment, and to enable business to manage the costs associated with the changes we are making to the UK ETS.

In addition we will work with UK Government to maximise opportunities arising for Welsh industry and business from UK level initiatives including the Industrial Energy Transformation Fund (IETF) which provides grant funding for feasibility and engineering studies to enable companies to examine energy efficiency and decarbonisation projects prior to making an investment decision, the deployment of mature energy efficiency technologies that reduce industrial energy consumption and the deployment of deep decarbonisation technologies that reduce carbon emissions from industrial processes.

The UK ETS Authority is committed to evaluating the effectiveness of the scheme in driving emission abatement, as well as understanding the impact it has on participants and the wider economy. 

The Authority has commissioned a two-phase evaluation study.  The first phase, which is due to be completed in 2024, will focus on the process of establishing the scheme and what the outcomes have been in its initial years. This phase will seek to understand whether the transition from the EU ETS to the UK ETS has been smooth for participants while delivering a functioning carbon market.

The second phase of the evaluation is due to be carried out between 2025-2026 and will be focussed on the impacts of the scheme within its first four years, such as understanding the effect the scheme has had on the emissions intensity of participant processes or in being attributable to carbon leakage. This phase will not just focus on what impacts have been felt because of the scheme but also how these impacts have been delivered, as well as wider spill over effects.

This phase of the UK ETS is planned to finish in 2030 but the scheme will be expected to continue past this point. Therefore, no concluding evaluations have been committed to at this time.