Official Report 779KB pdf
Greenhouse Gas Emissions Trading Scheme (Amendment) Order 2025 [Draft]
Agenda item 2 is the consideration of a draft statutory instrument. The instrument will make changes to the permanent cessation policy in the United Kingdom emissions trading scheme. The Delegated Powers and Law Reform Committee has made no comment on the instrument in its report.
I welcome to the meeting Gillian Martin, the Acting Cabinet Secretary for Net Zero and Energy, and the Scottish Government officials who join her. We have Nanjika Nasiiro, unit head for net zero economy and carbon markets; Mariana Cover, emissions trading scheme team leader; and Kenneth MacDermid, head of critical energy infrastructure.
The instrument is laid under the affirmative procedure, which means that it cannot come into force until the Parliament approves it. Following the evidence session, the committee will be invited to consider a motion to recommend that the instrument be approved. I remind everyone that the Scottish Government officials can speak under this item but not in the debate that follows.
I invite the acting cabinet secretary to make a short opening statement.
Thank you, convener, and good morning to everyone. Today, I am providing evidence on the Greenhouse Gas Emissions Trading Scheme (Amendment) Order 2025, which is an instrument to amend the Greenhouse Gas Emissions Trading Scheme Order 2020.
As you are aware, emissions trading scheme participants must purchase an allowance for each tonne of CO2 emitted. However, some allowances are given for free to sectors that are at risk of carbon leakage, which is when emissions are offshored. Those free allowances are currently the main policy tool to mitigate that risk.
The Scottish Government, as part of the emissions trading scheme authority, is reviewing the free allocations policy. Between December 2023 and March 2024, we jointly consulted other UK nations on proposals to adjust the free allocations policy to better support sectors at risk of carbon leakage. Among the proposals were changes to free allocation rules when operators permanently cease activities of a sub-installation, which are the amendments contained in today’s instrument.
I will present the changes that we propose to make. Currently, sub-installations that permanently cease activities can retain their free allowances for the final year of operation. However, that can result in overallocation of allowances, unintentionally allowing businesses to profit from the emissions trading scheme. Therefore, the instrument introduces new rules to ensure that businesses do not receive more free allowances than they are entitled to after permanently ceasing activities; that operators investing in decarbonisation are not penalised; and that gaps in the definition of permanent cessations are addressed to prevent inconsistencies in its application.
In practice, the changes to the rules would mean that operators that are permanently ceasing activities will report emissions for the final year, allowing regulators to align free allocations with actual emissions and reclaim overallocated allowances.
To support decarbonisation efforts, an exemption will apply to operators whose sub-installations permanently cease activities as part of changes that materially reduce the carbon intensity of production, such as electrification of plants, thereby ensuring that the free allocations policy effectively supports decarbonisation efforts.
The instrument also updates the definition of permanent cessations, particularly addressing situations in which temporary cessations become permanent, to ensure clarity and consistency in the allocation process.
It is important to note that, once the instrument comes into force, changes will apply to all operators. The new rules are designed to ensure fairness and accuracy in free allocation distribution, ensuring that support is targeted to those sectors that are at risk of carbon leakage. I am happy to answer any questions.
Thank you, cabinet secretary. The first question is from me. Have you taken into account the situation in which a plant ceases operations and those operations are transferred to another plant, which might slightly increase its carbon output?
The allocations would be for a particular plant. In other words, each plant would have its own allocations. I am trying to think of a scenario where that kind of transfer would happen. If, for example, a plant started doing the operations associated with another plant, the second plant would have its own allocations.
I am trying to identify whether there is an issue with a plant closing and another plant within the same group picking up its activity, which may increase the latter’s emissions. Has that been taken into account?
If my previous answer has not addressed that question, I can bring in Mariana Cover to do that. However, I do not think that it is an issue.
Free allocations are calculated on a yearly basis. If the activity of a closed sub-installation is passed to another sub-installation under the same operator and that increases the latter’s emissions, there is a threshold of 15 per cent for recalculating the free allocations. So, if the activity goes up by more than 15 per cent, the free allocations will be recalculated.
So, the free allocation could be recalculated. That is helpful to know. Does any other member of the committee have questions?
How do these rules align with or differ from the European Union ETS? Are there similar mechanisms around free allocations and rules within the EU ETS?
We are keen for the UK Government to engage with the EU on its ETS scheme so that we have more consistency with the EU. The UK has already modified its ETS rules to be more in line with the EU—we are, effectively, catching up with it. It could be said that we had a loophole, as there could have been a situation in which a plant with free allocations had ceased operations and yet it still had those allocations, which have a value associated with them. So, the instrument tightens things up in a way that is very much in line with what the EU has done, but I am keen to see the new UK Government engage more with the EU on its ETS.
Okay.
What impact assessments have been done on the instrument and on what its entry into force will mean for businesses in Scotland?
We have not carried out a full impact assessment, because there is no regulatory provision for that to be done. The impact of changes to permanent cessation rules on businesses was published in November 2024 in an analytical annex to the initial authority response to the free allocation review consultation. You will be able to find the detail of the analysis in that document.
The main purpose of the instrument is to ensure that plants and operations that cease production do not have a valuable free allocation once the plant is no longer operational. There has been a lot of criticism of the potential for that situation to occur, as it would mean that operators that cease operations could profit from the free allocation. There has been a lot of criticism of that loophole in wider society and, indeed, in the media.
Are we not making the system too complex for businesses to understand? If we look at the comments from Jim Ratcliffe yesterday, when the ethanol plant in Grangemouth was closed, he said that he wants a carbon trading regime that
“supports industry and decarbonisation equally.”
Are we not in danger of making the system so complex that businesses will close and we will just offshore our emissions completely?
The ETS is in place in order to avoid carbon leakage and offshoring.
I saw the comments that Jim Ratcliffe made yesterday on the UK’s regulatory regime. There must be things in place to encourage the decarbonisation of high-emitting sectors. Surely, that is what the committee scrutinises; certainly, part of the drive for my Government portfolio is ensuring that we will not have the same level of industrial emissions in 20 years’ time.
The ETS has been set up to ensure that, too. Those who disagree with it have every right to do so. However, we are trying to get to net zero, to decarbonise our industry as much as possible, and to halt climate change.
Surely, we should not be getting to net zero by switching off our manufacturing industry. That is the basis of Jim Ratcliffe’s comments in the article that was published yesterday.
I will not comment any more on Jim Ratcliffe’s comments—he has a particular view and he has made that clear to the UK Government and in the press.
The ETS was set up with a provision for those high-emitting sectors to have free allocations. There was an acknowledgement that they should have free allocations, because there will always be some sectors that find it harder to decarbonise than others do. The ETS is there to ensure that there is not carbon leakage. That is all I really have to say on that. If we did not have systems like that in place and there were no free allocations, we would offshore our emissions.
The purpose of the instrument is to ensure that companies do not profit from the ETS when they are not operating.
So, you do not have any concerns that our manufacturing industry is closing down because of the regulations that have been put in place by the UK and Scottish Governments.
No, because the free allocations militate against that. I am talking about the particular instrument that we are discussing today, which is designed to close a loophole through which operators who have ceased production would benefit from a scheme in which they would have free allocations that would not be used by the operation.
As there do not appear to be any more questions, we will move to agenda item 3, which is a debate on the motion to recommend approval of the draft order. I invite the cabinet secretary to move motion S6M-15731.
Motion moved,
That the Net Zero, Energy and Transport Committee recommends that the Greenhouse Gas Emissions Trading Scheme (Amendment) Order 2025 [draft] be approved.—[Gillian Martin.]
Motion agreed to.
The committee will report on the outcome of the instrument in due course. I invite the committee to delegate authority to me, as convener, to approve the draft of the report for publication.
Members indicated agreement.
I thank the cabinet secretary and her officials. I suspend the meeting briefly to allow for a changeover of officials.
09:28 Meeting suspended.Air adhart
Budget Scrutiny 2025-26