Why the regulated UK Emissions Trading Scheme could impact farmers in future

Thursday, 2 February 2023

The UK Emissions Trading Scheme is part of the compulsory carbon market and currently applies to energy intensive industries including the power generation sector and aviation. Now this regulated carbon market scheme is established, the UK government wants it to evolve to include greenhouse gas removals, potentially impacting farmers.

On 1st of January 2021 the UK Emissions Trading Scheme (UK ETS) replaced the UK’s participation in the EU ETS. This carbon market scheme is collectively led by the UK, Scottish and Welsh governments and Northern Ireland Department of Agriculture, Environment and Rural Affairs authorities.

The scheme is part of a wide range of policies and proposals aimed at decarbonising all sectors of the UK economy to meet our legally binding net zero target by 2050. This requires any greenhouse gas emissions (GHGs) to be reduced as much as possible and for any residual emissions to be counter-balanced within the UK. We are already seeing this in the agriculture industry, whereby policy and regulatory changes are being made to mitigate climate change. Therefore, it is as important as ever that land managers have all the information at their fingertips to make informed decisions about what is best for them going forwards.

What is the UK Emissions Trading Scheme?

The ETS is the UK’s commitment to carbon pricing as an effective tool that will help fulfil our climate change objectives. This is wholly focussed on UK industry as well as preventing the shift of emissions to other countries which might have lower emission targets, known as carbon leakage.

As mentioned in our previous article in this series, two types of carbon market exist, and the UK ETS is part of the compulsory carbon market. 

It works on a cap-and-trade system which is a market-based price mechanism to incentivise and control the reduction of emissions in a cost-effective way. The government sets a cap for the total level of greenhouse gas that can be emitted by a company over a set time period, the cap is divided into allowances whereby companies can then buy and sell to one another. This creates a carbon market with a carbon price signal to incentivise decarbonisation. If a company is below their allocation (cap), they can sell their spare allowance to a company that would otherwise exceed their limit and vice versa. Companies that exceed their limit are legally required to purchase offsets; this is regulated by the Environment Agency in England. The cap is gradually reduced over time, so that total emissions must fall. This scheme is essential in that it incentivises and enforces carbon reduction whilst also generating a competitive robust market.

So how does the UK Emissions Trading Scheme (ETS) affect agriculture and land management?

Currently the UK ETS only applies to energy intensive industries, the power generation sector and aviation. It does not cover agriculture. It is only where the compulsory scheme is linked to voluntary offsetting schemes that there may be some opportunities for farmers. However, it is good to have a basic understanding of compulsory schemes as they are a significant part of overall carbon markets, and pricing on these markets may influence prices on the voluntary markets.

The UK government is also committed to expanding the scheme to include other sectors, including agriculture. Already steps are being made for proposals to expand the scheme to include waste incineration and energy from waste by the mid to late-2020s’s. In addition to this, the 2022 consultation for the UK ETS sets out expanding the scheme to include greenhouse gas removals (GGR), it includes agriculture within this. It is worth noting this is currently at the very early stages of development and no commitments have been made yet to do this, but if it is added to the scheme, it could affect you.

Greenhouse gas removals are being considered for the scheme because although ambitious decarbonisation strategies are being undertaken, there will be sectors such as agriculture and aviation that will be difficult to completely decarbonise by 2050. In comes GHG removals, whereby compensations can be made for the residual emissions. The UK ETS is now seeking to understand how it can support the growth of GHG removals sector and how this will fit in with the current ETS. Agriculture is a key consideration because of the additional benefits it can provide such as nature-based approaches which include biodiversity, water quality and climate adaptation.

But a lot of things need to be taken into consideration for the inclusion of GHR in the UK, particularly when it comes to agriculture as there are a lot of complexities to consider. Determining things such as how emissions can be suitably measured, reported, and verified and the avoidance of double counting will be key before anything goes ahead. But in the event it is, farmers could be obliged to enter the market.

As a farmer or land manager already interested in the carbon market or actively reducing their GHG emissions already, the addition of agriculture to the UK ETS as a form of GHG emissions reduction, could work in their favour if they are below the cap. But equally it should serve as something to think about even as a farmer who isn’t considering the carbon market, that it is worth learning more and being as prepared as possible especially if the responsibility to decarbonise no longer becomes optional to take part in.

If you are a farmer who is interested in the carbon market now, then the next best step is finding out more about the voluntary marketplace, as this is the most relevant market to you right now. The new AHDB carbon webpage will be updated with relevant content such as key watch points and considerations before carbon trading, as well as some of the voluntary market opportunities available to you in the UK.

AHDB will continue to monitor the development of the UK ETS scheme as it happens and update levy payers on an ongoing basis.

Want more information? See our previous article on why you should care about carbon markets, and what prices carbon credits can fetch  

We’ll be producing more analysis in the months to come. In the meantime, you can read our Head of Environment's Carbon Outlook. 

Do you have a question regarding carbon markets? To get in touch with us, contact our email address: carbon.markets@ahdb.org.uk.