UK Emissions Trading Scheme: Business and Regulations Impact Assessment (BRIA)

6. Scottish Firms Impact Test

Across all elements of the UK ETS there were around 100 sites/installations regulated by SEPA in Scotland. Collectively they emitted around 7.6 MtCO₂e in 2021. Of these, there are 71 sites in Scotland in the UK ETS main scheme that will be affected by these changes. These are split across the sectors with industry accounting for 56 sites, power 14 sites and one aviation operator. If we break this down further we can see that nearly 70% of all sites are concentrated across four areas, these are oil and gas (15 sites), power generation (14 sites), food & drink (12 sites) and manufacturing and construction (8 sites). The remaining sites come under the Hospital and Small Emitter opt-out scheme. These sites have a different approach to compliance where an emissions target is set for each year, if the target is exceeded a penalty is paid to cover the difference between the target and the reported emissions. They are not required to purchase allowances to comply as with the main scheme. These sites will see an impact on the calculation of their targets, which will be reduced, as a result of the changes to the cap, which may impact on their ability to comply with tighter targets set.

Businesses were primarily informed the development of this policy through the Authority consultation. Scottish Government also worked with sector teams who regularly engage business to understand specific issues and concerns to inform the analysis and policy development.

A total of 300 stakeholders responded to the UK ETS consultation. The Authority included a summary of responses as part of the Government Response . The following high-level summary considers the views of the from over 120 stakeholder organisations identified as relevant for Scotland by policy colleagues across the Scottish Government.

A summary of consultation responses in relation to the cap trajectory, industry cap and unallocated allowances which were considered relevant to Scotland are summarised below.

Cap trajectory (or NZ cap)

• Out of 52 Scottish stakeholder responses to the cap trajectory questions, 23 (44%), agreed and 23 (44%) disagreed with the cap range, while 6 (10%) did not state a clear position. However, around a quarter of those that agreed also highlighted concerns with the proposal. These included issues on impact on carbon markets, rate of decarbonisation, access to technologies and interaction with other decarbonisation policy.

Industry Cap

• Out of 43 Scottish stakeholder responses, just over half (22 respondents) disagreed with the minded position in the consultation to reset the industry cap in line with the overall cap. However, the majority, 65% (20 out of 31 respondents) believed this proportion should be higher than the 37% industry cap proposed by the Authority.
• The main reasons for these preferences were that reducing the availability of free allocation by significantly reducing the industry cap would:
  • Increase carbon leakage risk and disadvantage the UK industry compared to international competitors; and
  • Reduce investment in decarbonisation initiatives and increase carbon prices and compliance costs –which raised again the need for further government support for industrial decarbonisation
• Of the respondents 70% (26 out of 37 respondents), agreed with the proposed future changes to the free allocation policy, which includes evaluating the methodology (phase 2 Free Allocation Review). While 11 respondents (30%), did not agree with this proposal, including one respondent who suggested that the methodology should be the same as the EU ETS.

Unallocated Allowances

• Out of 34 Scottish stakeholder responses, over 70%, agreed with auctioning a portion of the unallocated allowances or flexible share to smooth the transition to a tighter cap and to mitigate against the application of a cross-sectoral correction factor (Additionally, 58% (of 31 respondents) believed that unallocated allowances should be used for supporting market liquidity before 2024.

For Aviation it is more appropriate to examine what has been said as a sector as a whole, further details of which can be found in Chapter 4 of the Government Response.

• As highlighted in the Government Response the majority of respondents 74% (of 23 respondents) agreed that the risk of carbon leakage is minimal for the UK aviation sector under the current scope of the UK ETS. Additionally, 60% (of 30 respondents) agreed that if there are minimal risks of carbon leakage for the aviation sector, free allocation should be withdrawn or phased-out. While 17% of respondents disagreed, and 23% did not directly respond to the question.