All questions

Climate change

The Climate Change Act 2008113 lays out regulation regarding greenhouse gas (GHG) emissions. It requires the United Kingdom to reduce its GHG emissions to 80 per cent below 1990 levels by 2050. The relevant GHGs include carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulphur hexafluoride. The Greenhouse Gas Emissions Trading Scheme Regulations 2012 also apply to monitor the reduction of GHG emissions. The Regulations set out the requirements to obtain and comply with GHG Permits.114

There are three primary methods used by the government to restrict GHG emissions:

  1. the Climate Change Levy;
  2. the Emissions Trading Scheme coupled with the Carbon Price Floor; and
  3. Climate Change Agreements.
i Climate Change Levy

Adding approximately 15 per cent to energy bills of businesses and public sector organisations, the Climate Change Levy (CCL) is a carbon tax designed both to encourage the use of energy from renewable resources, and to encourage the use of less energy more generally. There are four categories of taxable commodities that are subject to the CCL: electricity; natural gas as supplied by a gas utility; petroleum and hydrocarbon gas in a liquid state, including liquid petroleum gas; and solid fuels. Solid fuels are categorised as: coal and lignite; coke and semi-coke of coal or lignite; petroleum coke; and low value solid fuel with an open market value of no more than £15 per tonne. However, exemptions were introduced in 2014 for energy used in metallurgical and mineralogical processes, and for solid fuels used in certain gasification processes. The rate of CCL has increased almost every year since 2007, broadly in line with inflation determined with reference to the retail price index.115

ii Emissions Trading Scheme and Carbon Price Floor

The Carbon Price Floor (CPF), introduced in April 2013 as part of the government policy of Electricity Market Reform, places a minimum price on GHGs emitted by the power sector. The CPF is designed to supplement the EU ETS transposed into the United Kingdom's domestic GHG Emissions Trading Scheme Regulations 2012, which require companies to buy permits to emit greenhouse gases while generating electricity. Since the price of these permits can fall, the incentive to reduce emissions decreases. The CPF therefore imposes a minimum price that companies must pay in order to pollute, providing a baseline incentive for companies to cut emissions. In the 2014 budget, the government declared that the Carbon Price Support (CPS) rate (i.e., the difference between the future market price of carbon and the floor price that acts as one component of the CPF) would be capped at £18 per tonne/CO2 from 2016 to 2020.116 This cap was extended in the autumn 2018 budget until 2021.117 From 2021 to 2022, the government has indicated that it will seek to reduce the CPS rate if the total carbon price remains high (i.e., the sum of the CPS rate and the EU ETS price).118

In December 2017, the government passed amending regulations to bring forward the 2018 deadlines for UK-issued allowances under the EU ETS.119 As a result of the amendments, UK-regulated operators were required to report their 2018 emissions and surrender allowances for those emissions by 15 March 2019. Following Brexit, the European Commission confirmed in November 2020 that UK-accredited verifies can continue having access to their accounts up until 30 April 2021. UK operators were still part of the EU ETS throughout the transition period. The applicable deadlines for the 2020 scheme year will be 31 March 2021 to submit the Verified Annual Emission Reports, and 30 April 2021 to surrender allowances of the 2020 verified emissions.120

The government announced that following the end of the transition period, it would be open to considering a link between any future UK ETS and the EU ETS. The government published a Carbon Emissions Tax Consultation but has not yet published a response to the consultation.121

iii Climate Change Agreements

For energy-intensive businesses looking for discounts on the CCL, climate change agreements (CCAs) were introduced in 2012. These are voluntary agreements made between the Environment Agency and sector associations and their members. The agreements set targets for industries to improve energy efficiency or reduce CO2 emissions. Meeting set targets makes the industry eligible for the discount CCL tax rate. From 1 April 2013, the discount received is 90 per cent on electricity bills and 65 per cent on other fuels. However, failure to meet the set targets under a CCA can result in the imposition of a financial penalty. If operators of CCAs fail to meet their requirements, they can continue to be eligible for the discounted tax if they pay a buyout fee to cover the deficit.

The Committee on Climate Change (CCC), established as part of the Climate Change Act 2008, is an independent body that advises the government on how it should meet its carbon budgets and carries out annual assessments as to whether the government is meeting its requirements. In 2017, UK emissions were 43 per cent below 1990 levels.122 In its latest June 2020 Report, the CCC confirmed that in 2019 the UK saw a reduction of 3–4 per cent in emissions to 480 MtCO₂e, amounting to the seventh year in a row with falling emissions.123 For the United Kingdom to cut its emissions by 80 per cent below 1990 levels by 2050, domestic emissions must continue to be reduced by at least 3 per cent a year.124 The CCC Report proposes two main recommendations to UK government departments:

  1. for public money to support only the sectors that can contribute to a net zero economy; and
  2. for carbon taxation to be progressed, in order to bring behavioural changes to businesses.
iv The UNFCCC, the Kyoto Protocol and the Paris Agreement

The United Kingdom is also a party to the UNFCCC,125 and accordingly a signatory to the Kyoto Protocol126 and most recently to the Paris Agreement,127 which entered into force on 4 November 2016. The Paris Agreement places various requirements on its signatories. This includes limiting global temperature increases by, among other things:

  1. developing and implementing nationally determined contributions (NDC);
  2. peaking GHG emissions as soon as possible and progressing towards zero net emissions;
  3. minimising the loss and damage from climate change; and
  4. supporting climate change adaptation.

This also requires that signatories provide financial support to developing countries and cooperate with other signatories to transfer technology, achieve their NDCs, build capacity of developing countries and improve public awareness and transparency.

However, the decarbonisation target under the Paris Agreement was agreed at an EU level, and therefore an allocation must take place to assign an NDC to the United Kingdom that may be affected by Brexit. Nevertheless, the UK government has itself committed to a legally binding target of cutting carbon emissions to 57 per cent below 1990 levels by 2032, following the end of a fifth carbon budget period.128 Furthermore, several of the United Kingdom's decarbonisation initiatives, such as the closure of coal-fired power plants, are domestic in origin and should not be affected by any change in circumstances following the end of the transition period.