UK Emissions Trading Scheme
Encyclopedia
The UK Emissions Trading Scheme was a voluntary emissions trading
Emissions trading
Emissions trading is a market-based approach used to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants....

 system created as a pilot prior to the mandatory European Union Emissions Trading Scheme which it now runs in parallel with. It ran from 2002 and it closed to new entrants in 2009. Management of the scheme transferred to the Department of Energy and Climate Change
Department of Energy and Climate Change
The Department of Energy and Climate Change is a British government department created on 3 October 2008 by Prime Minister Gordon Brown to take over some of the functions of the Department for Business, Enterprise and Regulatory Reform and Department for Environment, Food and Rural Affairs...

 in 2008.

At the time, the scheme was a novel economic approach, being the first multi-industry carbon trading system in the world. (Denmark ran a pilot greenhouse gas
Greenhouse gas
A greenhouse gas is a gas in an atmosphere that absorbs and emits radiation within the thermal infrared range. This process is the fundamental cause of the greenhouse effect. The primary greenhouse gases in the Earth's atmosphere are water vapor, carbon dioxide, methane, nitrous oxide, and ozone...

 trading scheme between 2001 and 2003 but this only involved eight electricity companies). It took note of the emerging international consensus on the benefits of carbon trading
Carbon trading
Carbon trading may refer to:*Carbon emission trading*Personal carbon trading*Emissions trading...

 that were being proposed in the mandatory Kyoto Protocol
Kyoto Protocol
The Kyoto Protocol is a protocol to the United Nations Framework Convention on Climate Change , aimed at fighting global warming...

, which had not been ratified at that time, and allowed government and corporate early movers and to gain experience in the auction process and the trading system that the later schemes have entailed.
It ran in parallel to a tax on energy use, the Climate Change Levy
Climate Change Levy
The Climate Change Levy is a tax on energy delivered to non-domestic users in the United Kingdom. Its aim is to provide an incentive to increase energy efficiency and to reduce carbon emissions, however there have been ongoing calls to replace it with a proper carbon tax.-Scope and...

, introduced in April 2001, but companies could get a discount on the tax if they elected to make reductions through participation in the trading scheme.

The voluntary trading scheme recruited 34 participants from UK industries and organisations who promised to make reductions in their carbon emissions, this has since expanded to 54 sectors of the UK economy. In return they received a share of a £215 million "incentive fund" from the Department for Environment, Food and Rural Affairs
Department for Environment, Food and Rural Affairs
The Department for Environment, Food and Rural Affairs is the government department responsible for environmental protection, food production and standards, agriculture, fisheries and rural communities in the United Kingdom...

 (DEFRA). Each agreed to hold sufficient allowances to cover its actual emissions for that year, and participate in a cap and trade system, with an annually-reducing cap. Each participant could then decide to take action to manage its emissions to exactly meet its target, or reduce its actual emissions below its target (thereby releasing allowances that it could sell on, or save for use in future years), or buy allowances from other participants to cover any excess.

From March 2002, DEFRA ran an auction of emission allowances to perform allocations to participants, after the start of the mandatory EU scheme.

Conclusions

The UK's National Audit Office
National Audit Office (United Kingdom)
The National Audit Office is an independent Parliamentary body in the United Kingdom which is responsible for auditing central government departments, government agencies and non-departmental public bodies...

and DEFRA's consultants ran reviews of the system in order to establish its basis and drew lessons from it.

They concluded that the scheme did achieve some emission reductions from the participants, although more could have been achieved had targets been more demanding.
  • The 34 companies that participated took advantage of the incentive fund to pay for reduction measures, and in practice most were incentivised to make additional efforts to further cut emissions beyond their targets. They gained experience in pricing strategies and were prepared in advance of the start of the mandatory scheme.
  • The companies that provided emissions trading brokerage and verification were able to establish their new businesses in the UK, and have since translated that first mover advantage to establish themselves on the European and wider international trading arena.
  • DEFRA discovered the issues and practicalities of negotiating and setting baselines and running an auction process.
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