An emissions trading system (ETS) aligned to long-term climate targets, combined with funding mechanisms and carbon leakage protection, are key levers in the UK's industrial decarbonisation strategy on the pathway to achieving net zero emissions, the government said today.
The government's strategy aims to cut UK industrial emissions by two-thirds by 2035, and by 90pc by 2050, compared with 2018 levels, as part of efforts to achieve the country's legally binding target to reach climate neutrality by mid-century.
The strategy "will send a clear signal to the market by setting out how the government expects decarbonisation to happen, while improving investor confidence to unleash the private capital necessary to reach net zero by 2050", the government said today.
The strategy positions the UK ETS, and in particular an "ambitious" supply cap for the system, as a key lever for encouraging investment in industrial decarbonisation.
The UK ETS, set up at the beginning of this year following the country's exit from the EU's system at the end of 2020, has an initial cap of 155.7mn allowances for 2021, 5pc lower than the UK's notional share of the EU ETS phase 4 (2021-30) cap.
But the government has already indicated that it intends to review the cap later this year to align it with the UK's net-zero goal.
Other aspects of the system to be reviewed include the free allocation of carbon allowances to sectors deemed at risk of so-called "carbon leakage", whereby companies relocate to other jurisdictions to avoid carbon costs.
The free allocation of UK ETS allowances is the government's preferred approach "in the immediate future" to protect sectors from carbon leakage, it said in today's strategy.
But "we recognise this approach may overcompensate for the risk of leakage", the government said, committing in the strategy to developing a more targeted approach to the issue. A call for evidence on possible changes to the system of free allocation opened today.
It will consider alternative approaches in the longer term, the government added. This includes encouraging other jurisdictions to put in place similar levels of climate ambition through climate diplomacy, the "treatment" of imports from regions with less ambitious regimes, and improvements to UK business productivity with a view to increasing its competitiveness.
The strategy acknowledges that the UK ETS alone will not be sufficient to drive the necessary private investment in carbon capture, usage and storage (CCUS) and hydrogen technology while investment risks remain high, or in the event of low carbon prices. So the government plans to use funding mechanisms to "overcome market failures", it said.
This includes the implementation from 2022 of an industrial carbon capture contract, which will be modelled on existing contracts for difference. The government will also consult in the second quarter this year on low-carbon hydrogen business models, and is additionally "considering the role that fuel standards can play".
Infrastructure investment
The government announced the allocation of £171mn ($237mn) of funding from its industrial decarbonisation challenge scheme as part of the strategy, which also aims for at least 3mn t of CO2/yr to be captured within industry by 2030.
This includes roughly £33mn for the hydrogen and CCUS project HyNet North West, £31mn for Scotland's Net Zero Infrastructure project, and £52mn for Net Zero Teesside and the Northern Endurance Partnership CCUS projects.
Some £21mn has been awarded to the Zero Carbon Humber Partnership project, which includes a hydrogen plant and hydrogen and CO2 pipelines, £12mn for the planned carbon capture and hydrogen hub Humber Zero, and £20mn for hydrogen and CCUS development at the South Wales Industrial Cluster.
Today's strategy announcement follows on from the publication in November of the government's 10-point plan for an industrial revolution, which included a pledge for an additional £200mn of investment in carbon, capture and storage, and set out a target to remove 10mn t of CO2 using the technology by the end of the decade.
