My Lords, I beg to move that the regulations, which were laid before the House on 8 March in draft, be approved. This statutory instrument, laid under the European Union (Withdrawal) Act 2018, makes consequential amendments to financial services law and related matters to provide for the safe and effective operation of the market in UK emission allowances as part of the establishment of a UK Emissions Trading Scheme.
At the end of the transition period, the UK ceased to be part of the EU ETS. As of the start of this year the UK has established its own ETS, which has been designed to ensure a consistent price for carbon. This SI was preceded by legislation laid last year under the Climate Change Act 2008 which legally established the UK ETS. In implementing the UK ETS, the Government have drawn on the best of the EU system, which the UK was instrumental in developing. At the same time, however, we are making improvements where needed to ensure greater flexibility, so that this scheme is properly designed for the UK. The new scheme allows for a smooth transition for businesses while reducing our contribution to carbon emissions from day one. Reducing emissions while supporting UK industry is central to the Government’s mission to deliver our world-leading net-zero target. The UK ETS is key to achieving that target.
Emissions trading schemes work on the cap and trade principle. This is where a cap is set on the total amount of certain greenhouse gases that can be emitted by installations and aircraft covered by the scheme. Within the cap, participants receive or buy emission allowances which they can trade with one another as needed. This cap is reduced over time, so that overall carbon emissions fall. Participants are required to monitor their emissions during a calendar year and surrender one emissions allowance for every tonne of carbon dioxide equivalent—CO2e—that they have emitted at the end of each reporting year. Thus the ETS is underpinned by the creation of a market for emission allowances. The auctioning and trading of allowances leads to the discovery of a market price for greenhouse gas emissions and will in turn drive cost-effective emissions reductions across our intensive industries, power generation and aviation sectors.
This statutory instrument amends existing financial services legislation so that it works in the context of the creation of a UK ETS. In doing so, it ensures that the Financial Conduct Authority can oversee the auctioning and trading of emission allowances and ensure the soundness and integrity of the market. This instrument is being introduced now so that it is in force in time for the first auctioning of UK emission allowances in May. In particular, this SI establishes the activity of bidding in an emission allowance auction as a “regulated activity” and establishes UK emission allowances as “financial instruments”. This means that the FCA has oversight of bidding in allowance auctions and ensures that the allowances themselves are subject to the appropriate regulatory treatment with regard to issues such as market abuse. The instrument also amends financial promotion legislation so that the promotion of investments in UK emission allowances can be undertaken only by persons with the correct permissions.
To properly empower the FCA to oversee the regime, the SI updates rules around the disclosure of confidential information so that the FCA can correctly discharge its functions with regard to the disclosure of information relating to the UK ETS and emissions allowance holdings. It ensures that the FCA has the investigation and enforcement powers to fulfil its duties with regard to preventing financial misconduct in the context of the auctioning and trading of emission allowances.
Finally, this SI amends the UK market abuse regulation so that it covers the primary and secondary market trading of UK emission allowances, and the secondary market trading of EU emission allowances where these activities are within the territorial scope of UK MAR.
This instrument will ensure the integrity of the UK carbon emission allowance market to facilitate ETS carbon pricing policy in the UK. This is integral to the Government’s ambitions to encourage cost-effective emissions reductions and, ultimately, achieve our goal of net zero.
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