Public Policy: Using Market-Based Approaches - Department for ...

Public Policy: Using Market-Based Approaches
OBJECTIVES OF THE UK-ETS
The rationale for using a market-based mechanism as part of the CCP was that
this would allow a given reduction in emissions to be achieved at minimum cost.
Under a market-based mechanism (either a tax or a tradable permits scheme)
reductions will be made by firms who can reduce emissions at lowest cost. Firms
that face a high cost of reducing emissions will chose not to reduce emissions
and instead pay the tax or (in the case of the UK-ETS) purchase permits from
firms who have exceeded their targets for reducing emissions.
A further rationale for the launch of the UK-ETS was that the UK Government
expected it to create opportunities for UK firms to gain experience of an
emissions trading scheme and develop knowledge and expertise that would
provide the UK with a competitive advantage in future European and
international trading schemes. This objective included allowing participants in
the scheme (UK firms and public-sector organisations that produce greenhouse
emissions) to gain experience of participating in a tradable permits scheme. It
also included allowing firms who would provide services to the participants
(such as verifiers and traders) to develop expertise that could be used to provide
services to participants in European and international schemes in the future.
In summary, therefore, the UK-ETS had three main objectives:
● to secure a significant amount of cost-effective reductions in greenhouse gas
emissions;
● to give organisations in the UK early practical experience of emissions
trading, ahead of the launch of European and international trading systems;
and
● to establish the City of London as a centre for emissions trading.
DESCRIPTION OF THE SCHEME
The UK-ETS has four main phases:
● entry into the scheme;
● the allocation of allowances;
● the trading of allowances; and
● reporting compliance.
Entry into the Scheme
In order to widen the scope of participation in the UK-ETS, four ways for
participants to join the scheme were created. These four options were intended
to provide a wide range of participants with opportunities to participate. This
wider participation was expected to increase the likelihood of delivering larger
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