Official Report: Minutes of Evidence

The Chairperson (Mr Butler): I welcome the following department officials to brief us today: Mr Richard Coey, head of emissions trading policy; and Ms Anna McMahon, deputy principal, emissions trading. The floor is now yours.

Ms Anna McMahon (Department of Agriculture, Environment and Rural Affairs): First, thank you for the opportunity to speak to the Committee today to give an overview of the Greenhouse Gas Emissions Trading Scheme (Amendment) (No. 2) Order 2025. If members are content, I will not go back over the details of the background and operation of the scheme, as the Committee will be familiar with the workings of the scheme from previous emissions trading scheme (ETS) background briefings. We will, however, be happy to clarify any aspect of the scheme, if members wish. I will instead focus on the changes to the scheme that will be made by the amending Order.

Members will be in receipt of a summary of the changes that was provided in the letter from the departmental Assembly liaison officer about the amending Order that the Committee noted on Thursday 6 February. The amending Order will make technical and operational amendments to the Greenhouse Gas Emissions Trading Scheme Order 2020. It was made as an Order in Council under the Climate Change Act 2008 at a meeting of the Privy Council on 5 February and was laid under negative resolution procedure in each UK Parliament, including the NI Assembly, on 12 February, with an effective date of 31 March 2025.

The provisions in the amending Order reflect commitments made by the UK ETS Authority in response to two separate consultations targeted to the affected parties. Those were the 'Moving the UK ETS Second Free Allocation Period' consultation undertaken in September 2024, to which the authority's response was published on 16 December 2024; and a technical and operational consultation, also undertaken in September 2024, to which the response was published on 30 January 2025. I will now explain the detail of those provisions.

The UK ETS Authority published the 'UK ETS Free Allocation Review' consultation on 18 December 2023 to seek views on proposals to ensure that free allocation methodology better targets the sectors that are most at risk of carbon leakage. To recap on free allocation, some stationary installations receive a proportion of their allowances for free. That is to help prevent carbon leakage, which is the industry moving away to relocate to other parts of the world that do not have costs for carbon emissions or have a lower carbon price. The UK ETS Authority received a significant number of responses to the free allocation review consultation indicating a preference for any changes to the methodology resulting from the consultation to align with the introduction of the UK carbon border adjustment mechanism (CBAM) in 2027. That alignment is to ensure a consistent approach to carbon leakage mitigation.

The scheme currently has two legislated allocation periods, which are from 2021-25 and 2026-2030, in which free allocation is calculated and provided to operators. That approach gives certainty to the operators about the level of free allowances they can expect during each period. To align any changes resulting from the free allocation review consultation and the introduction of the UK CBAM in 2027, an amendment to the current allocation periods will be necessary. The first provision in the amending Order addresses that necessary amendment and relates to commitments made in the 'Moving the UK ETS Second Free Allocation Period' consultation by extending the first free allocation period to include the 2026 scheme year and moving the start of the second allocation period from 2026 to 2027 — a move supported by the scheme participants.

The amending Order also makes three changes to other aspects of the scheme that relate to commitments made in response to the technical and operational consultation, which focused on registry transaction publication, information disclosure and ultra-small emitters (USEs) policy. I will now explain the detail of each of the three changes.

On registry transaction publication, the 2020 Order required the UK ETS Authority to publish annual reports summarising transactions made in the UK ETS registry after a three-year delay. The amending Order changes the requirement so that, instead of summarising, the authority is required to publish annual reports listing each individual transaction made during the relevant period. Examples of such transactions would include an operator surrendering allowances to comply with their obligation or a trader transferring allowances to an operator following a purchase. That is in line with international standards, including the EU ETS. The change will improve market transparency and support effective market analysis.

The second change is in relation to information disclosure. The 2020 Order prohibits the disclosure of information obtained or held under UK ETS legislation, with certain exemptions where it is justifiable to disclose the information to support policy development or implementation. The amending Order extends the exemption in three specified policy areas:

We anticipate that this is likely to apply in the first instance to disclosure of data to Treasury and HM Revenue and Customs (HMRC) to support the development and implementation of the UK CBAM. The amending Order also introduces an exemption permitting disclosure of UK ETS information to the Climate Change Committee to support the Committee in performing its statutory functions.

The third change relates to ultra-small emitters. USE status is available for operators that emit less than 2,500 tons of carbon dioxide equivalent per year, exempting them:

The 2020 Order did not permit applications for USE status from operators that began operating after the start of the scheme on 1 January 2021. It is appropriate that such operators should be able to apply for USE status. Therefore, the amending Order updates the criteria so that operators which started operation between 2 January 2021 and 1 January 2024 are eligible to apply for USE status for the 2026-2030 period. There are currently no installations in Northern Ireland which qualify for USE status.

Those are the main elements of the amending Order. The amendments are of a technical and operational nature and do not extend the scope of the scheme to additional industrial sectors.

I thank members for their time and interest in the scheme and in the amending Order. My colleague Richard Coey and I are happy to take any questions that members may have.

The Chairperson (Mr Butler): Thank you so much. The Committee has discussed this a few times. I have just a couple of questions, and then we will see if there are any from other members. I will ask both of them, if that is OK, rather than bat them back and forward.

Some of the amendments relate to data publication and data sharing. Would you say a bit more about that, please? Has it been recognised that data sharing and publication has not been sufficient to date?

The second point is around some of those operational changes. I am interested in the ultra-small emitter status. Obviously, the eligibility period has been extended. In Northern Ireland, have we a list of ultra-small emitters? Who are they, and how will they be affected?

Mr Richard Coey (Department of Agriculture, Environment and Rural Affairs): Thank you for your questions. Are you happy if I answer, Anna?

Ms McMahon: Yes, go ahead.

Mr Coey: Publication of data and of more detailed information relating to transactions was always the case when we were participants in the EU emissions trading scheme. The reason that we could not immediately implement that on the implementation of the UK emissions trading scheme in 2021 is that we need to allow a three-year delay before we publish that transactional data, to ensure that there is no current market transaction data that might affect commercial confidentiality, trading behaviour and that sort of thing. It is to increase market transparency but balancing that with the need to protect the financial transactions of individual participants. We could not do that with the implementation of the scheme in 2021, because we obviously did not have that three-year period. Now that we have three years' data, we can start to publish data from the implementation of the scheme. That is why we are making that change now. It is to align with what the policy was under the EU scheme, and this is the first time that we have been in a position to make that change and bring the operation of the UK ETS in line with the EU ETS. I hope that that addresses your first question, Chair.

As to your second question, we have no ultra-small emitters in Northern Ireland at the minute. To qualify as an ultra-small emitter, you have to meet the minimum 20 MW thermal input threshold for inclusion in the scheme, and you must have an annual volume of emissions of less than 2,500 tons of carbon dioxide per year. We have no installations currently that meet those criteria. Anybody in Northern Ireland who meets the 20 MW threshold emits more than the 2,500 tons and so does not qualify for the ultra-small emitter scheme. Some qualify for the hospital and small emitter scheme, which is for installations that have annual emissions of 25,000 tons per year or less. The hospitals are members of that scheme, and we have a few other installations that are members of it, but we have nobody in the ultra-small emitters scheme.

The Chairperson (Mr Butler): With regard to future-proofing, I imagine that that is why it is in here: to future-proof the legislation to allow for that to be included in the scheme. Is there any anticipated emergence of ultra-small emitters with regard to renewable energy space or whatever? Where could that pop up?

Mr Coey: There is always the potential. There are ultra-small emitters in the rest of the UK, which is why the change is being made, because we already have some installations. I do not have an example of who they are at the minute. With regard to whom it might apply to here, I do not want to second-guess that. I am not immediately aware of any, so I do not want to speculate on that. I suppose there is always the potential that we could have installations that qualify for that.

The Chairperson (Mr Butler): OK. I have just one final question. With regard to the full gamut of this, how successful is the scheme in reducing carbon leakage, for instance, and ensuring that those participants take part?

Mr Coey: The simple answer is that we have not had any installations that have moved offshore and cited the carbon price as a reason. Carbon leakage is increasingly an issue as the carbon price in the UK and the EU potentially rises. There are potentially other jurisdictions across the globe that do not have that carbon price, which makes carbon leakage protection more important now. The purpose of the statutory instrument (SI) is to allow us time to account for future carbon leakage policy, which is the UK and EU CBAMs. Separate from the statutory instrument, we are, as an authority, consulting in the meantime on how free allocation policy within the UK ETS should be adjusted for the advent of the UK CBAM in 2027.

Mr McGlone: I have just a couple of quick questions. It says in the paper:

Who determines when it is necessary?

Mr Coey: There would have to be an application to the authority. It would be up to the authorities, as in us and the other Administrations of the UK, to determine whether an application for disclosure of information was necessary. As Anna mentioned during her presentation, the first instance where, we think, it will be required is to allow the HM Treasury to have access to more specific information about the operation of the scheme to support the development of the UK CBAM and the implementation of that. An application would have to be made to the authority.

Mr McGlone: Does freedom of information (FOI) not apply to the authority?

Mr Coey: Yes, FOI and the environmental information regulations (EIR) would all apply. Anybody who made a request to the authority or the individual administrations within the authority, under FOI, would still have to be considered under the FOI and EIR legislation.

Mr McGlone: What is the difference between disclosure of information in a request to what is referred to as "a national authority" and disclosure of information under FOI? What separates the two?

Mr Coey: Under FOI, there are exemptions. There might be a reason why you might not disclose some information under FOI, but some of the information that might be exempt for disclosure under FOI could be useful to the Treasury to help it support a fully informed CBAM policy.

Mr McGlone: I am kind of lost as to why an authority has to be set up to disclose information to Treasury that is not available through government from that authority or via FOI. What is the difference? Why would information not be disclosed to Treasury or a government Department?

Mr Coey: I do not want to speculate too much; I do not want to speculate at all, obviously. Under FOI, there are exemptions for —.

Mr McGlone: I get that. Maybe you want to think about it.

The words "where necessary" raise an issue. I would have thought that information and stuff would be available to Departments — Treasury or whoever it is — particularly if they have oversight of the scheme and the financial implications or otherwise. That raises an issue for me. I am not sure about that qualification "where necessary". If the "where necessary" does not apply to Departments, I would ask, "Why not?"

Mr Coey: To be honest, it is probably better that I think about that —

Mr McGlone: That is OK: reflect on it.

Mr Coey: — have a discussion across the authority and come up with a definitive answer for you.

Mr McGlone: Sorry for that — well, I am not really sorry. We will come back to it.

You mentioned the eligibility period for an ultra-small emitter. What is an ultra-small emitter?

Mr Coey: An ultra-small emitter is an installation that meets the criteria for inclusion in the ETS by virtue of the scale and capacity of the operation in that it has a total rated thermal input of 20 MW or greater but its emissions are at a low level. It is to minimise the administrative burden on a small installation, so, instead of having to fully comply with the ETS and buy and sell allowances, it will be set an emissions target that it has to meet.

Mr McGlone: Will you give me an example of an ultra-small emitter, just so that I can get it into my head? I am a wee bit slow on these things.

Mr Coey: As we have none in Northern Ireland, I am not sure.

Mr McGlone: Is it a small plane or a small something or other?

Mr Coey: It might be a small food-production factory. I am just thinking of the types of installation that are caught by the ETS. The likes of Moy Park are caught by the emissions trading scheme. It is an installation that, say, processes chickens or other food and has the thermal input capacity to qualify for the ETS but annual emissions of less than 2,500 tons.

Mr McGlone: That is grand. Thank you.

The Chairperson (Mr Butler): Are there any other questions from members? Patsy has put you through enough. [Laughter.]

There is certainly something in Patsy's first piece for you to come back on, through the Committee, if you are minded to do that.

Thank you for your time.

Ms McMahon: Thank you.