UK to hand out 39.1 million free carbon allowances for 2021

The UK government will hand out 39.1 million free carbon allowances to industrial companies under the country's Emissions Trading System in 2021, its first year of operation, according to government figures released May 11.

The volume to be handed out for free is slightly lower than the volume UK companies received under the EU Emissions Trading System in 2020 – the last year that the UK participated in the European carbon market.

UK companies received 42.03 million mt of allowances in 2020, from a total eligible volume of 53 million mt, according to European Commission data updated May 15, 2020.

The latest figures suggest UK companies will receive 2.9 million fewer allowances in 2021 than in 2020 – a drop of 7% year-on-year, based on UK and EC data.

The UK's figures listed 461 installations in total that qualify for free allowances – with the rules closely matching those under the EU ETS to avoid unnecessary disruption for UK-based companies.

Free allowances under the EU and UK markets are designed to reduce the risk of carbon leakage – companies moving operations to avoid carbon costs.

"The initial approach to free allocation in the UK ETS will be similar to the EU's proposed approach for Phase IV [2021-2030] of the EU ETS," the UK government said in documents updated May 5.

"This will ensure a continuation of emissions trading [and a] smooth transition for businesses in 2021," it said.

The benchmarks used to calculate free allocation entitlement in the UK will be the same as Phase IV of the EU ETS, the government said.

The UK ETS, which became legally effective Jan. 1, 2021, will start in earnest on May 19 with the first UK carbon auction and the launch of UK Allowance futures contracts on the ICE Futures Europe exchange.