Climate Change Bill: consultation

Annex A: The EU Emissions Trading System (EU ETS)

Launched in 2005, the EU ETS is the world's first and largest cap-and-trade system for greenhouse gas emissions. ^[15] The EU ETS represents the central pillar of the EU's climate change policy, and will deliver a 21% emission reduction on 2005 levels by 2020 and 43% by 2030.

The ETS caps the level of emissions from energy intensive industry, the power sector and aviation, across the EU. The cap is represented by allowances to emit one tonne of greenhouse gas emissions, with the total number of allowances reducing each year.

The system covers close to half of the EU's emissions across the 28 member states as well as Iceland, Liechtenstein and Norway with approximately 80 participants in Scotland. Participants are required to obtain and surrender allowances to cover their annual emissions. Participants can purchase allowances at auction or trade them amongst themselves, which allows the market to find the most cost-effective way to reduce emissions. Industrial sectors considered at risk of carbon leakage (whereby carbon costs would make them uncompetitive prompting industry to relocate outside the EU) receive a proportion of allowances for free.

The EU ETS has contributed to emission reductions from energy generators and heavy industry. However, the oversupply of allowances in the EU ETS, due to the inability of the EU ETS to adjust supply to falls in production during the recession, has suppressed the carbon price and has failed to stimulate significant carbon abatement in many sectors. New measures to strengthen the operation of the ETS, to make it more responsive to future changes in demand and supply, are being introduced, such as the new Market Stability Reserve in 2019 ^[16] , and negotiations for the next phase to 2030 are nearing conclusion.

The Paris Agreement makes provision for the development of carbon markets globally, envisaging an eventual linking of carbon markets across the world. ^[17] Carbon trading schemes exist in New Zealand, Australia, Kazakhstan and between certain Canadian provinces and US states. Further carbon trading schemes will be launched in South Korea and across China during 2017, and are under consideration in several other countries including Japan.

Whether the UK will continue to participate in the EU ETS after the UK leaves the EU single market is currently unknown. Powers exist under the UK Climate Change Act 2008 to create emissions trading schemes in the UK.

The Scottish Government continues to support participation in the EU ETS as a key delivery mechanism for emission reductions from industry. We consider the EU ETS to be the most cost-effective way to achieve emission reductions, requiring comparative effort across the EU and providing industry with the level playing field of access to larger carbon markets, including protection against carbon leakage.

Progress to the climate change targets set under the 2009 Act are assessed against the Net Scottish Emissions Account ( NSEA). The NSEA accounts for the effect of the sale and purchase of relevant carbon units (tradable emissions allowances) in the EU ETS. The EU ETS element of the NSEA is calculated by taking the difference between Scotland's national share of the overall EU ETS cap, and the number of emissions allowances surrendered from the traded sector in Scotland in a given year, as well as an estimate of emissions surrendered from Scotland's share of domestic and international aviation. This amount is then added to non-traded net emissions to get the NSEA.