Government agrees to align UK ETS reforms with UK CBAM introduction

27 September 2024

The Government has confirmed that it will align reforms to free allocations within the UK Emissions Trading Scheme (ETS) with the introduction of the UK Carbon Border Adjustment Mechanism (CBAM), delaying the UK ETS reforms to 2027.

This is a huge win for UK Steel, which has advocated that all carbon leakage policies should be aligned and strongly urged the Government to ensure that any changes to UK ETS and free allocations only happen in parallel with the introduction of the UK CBAM.

The current free allocation period ends in 2025, and the previous Government proposed to reform the free allocation methodology when the second allocation period began in 2026. A new consultation, published this week, proposes to move the start of the second allocation period from 2026 to 2027, extending the current allocation period to include 2026.

Without this alignment, UK Steel argued that the steel sector could have faced a reduction in free allocation, resulting in higher carbon costs, while imported steel would continue to avoid any carbon costs. With the delay to the UK ETS free allocation reforms, any reduction in protection that free allocations provide would have only occurred as the UK CBAM is implemented.

UK Steel is still very concerned about the risk of trade diversion when the EU CBAM takes full effect in 2026, which could divert high-emission steel towards to UK market. The delay of the UK ETS reforms will mean that at least the existing protections will not be reduced in 2026, helping to potentially lessen the trade diversion risk.

For more information on the UK CBAM and the ETS, please contact Frank Aaskov.