As part of a consultation on Developing the UK Emissions Trading Scheme (UK ETS), the UK, Scottish, Welsh and Northern Irish governments (the Government) is considering whether to expand coverage of the scheme to include venting of CO2 and methane, as well as reviewing the minimum combustion threshold for participation in the scheme. 

Background

The UK ETS already covers reported emissions from certain upstream oil and gas activities, namely, "Combustion of fuels on a site where combustion units with a total rated thermal input exceeding 20 megawatts are operated". This includes the production, flaring and transport of hydrocarbons, but not venting or non-combustion processes.

The only regulated gas is carbon dioxide (CO2), leaving methane (CH4) and nitrous oxide (N2O) emissions outside of the scheme. Currently, only around 89% of emissions from upstream oil and gas production are priced within the UK ETS. Government is committed to increasing the emissions captured by the scheme, in line with its policies and international pledges.

CO2 venting 

Government is considering extending the scheme to CO2 emissions from venting (the release of unignited gas). This could involve amending the existing monitoring, reporting and verification (MRV) regime, which requires installations to have meters to measure emissions covered by the UK ETS, to make it mandatory to measure emissions from CO2 vents.

It could be a standard requirement to have such meters on new installations, while existing installations could be subject to feasibility or cost-benefit analysis. If installing a meter is either not technically feasible or disproportionately expensive, given the scale of emissions, an alternative calculation approach could be used to estimate the emissions.

The new obligation could be made applicable to a section of emitters only, by setting a threshold: either applying the existing 20 MWth combustion threshold, or an alternative threshold, specific to vented CO2. Installations could fall within the scope of the UK ETS for their vented CO2 emissions only, If an alternative threshold or no threshold were adopted.

No free allocation of allowances is being proposed for CO2 venting.

Methane 

The consultation proposes including methane emissions from venting, cold flaring, methane slip and fugitive emissions in the UK ETS. This is to build on the UK's commitment under the Global Methane Pledge and the offshore sector's Methane Action Plan 2021.

For methane venting, the existing MRV regime could be extended, by requiring meters to measure vented methane emissions and gas composition through analysis of hydrocarbon vents. Such meters would be standard on new installations, while existing installations would be required to install a meter or justify use of an alternative calculation method based on unreasonable costs.

Methane slip (the quantities of methane which evade combustion and enter the atmosphere as unburnt methane), could potentially be measured using existing MRV data, with no need for new metering. 

The methane could be converted to its CO2 equivalent by multiplying the mass of methane emissions by the appropriate Global Warming Potential (GWP) or by using an alternative method. Currently, the UK reports GHG emissions using methane's GWP of 25, but from 2024 this will increase to either 28 or 35, depending on the methodology chosen. 

The requirement to report vented methane could be subject to a threshold: either the existing 20 MWth combustion threshold or an alternative threshold for this activity. 

By extending the compliance obligation to venting, Government intends to avoid incentivising the use of venting as an alternative to flaring. Venting is currently a lower cost option because it is not subject to carbon price.

Responsibility for compliance

The operator of the installation would be responsible for additional UK ETS obligations, including the cost of installing a meter where this is necessary. This is consistent with the current approach,

Relevance to other sectors

Although the majority of vented CO2 and vented methane occurs in upstream oil and gas, expanding the scheme coverage would capture other sectors, including chemicals and petrochemicals manufacturing where such venting is also used.

Thresholds

Under the current rules: 

• combustion activities fall under the UK ETS if combustion of fuels in units with a total rated thermal input exceeds 20 megawatts; and 
• only combustion units with a rated thermal input above 3 MW are included in the calculation of the total rated thermal input.

The rationale is to protect small installations from compliance burdens of the UK ETS. However, there is evidence that exempting small emitters from the carbon price may encourage fragmentation in industry, with the concentration of small installations increasing while the overall emissions remain static.

This also impacts capacity markets, where a rising proportion of generators smaller than 20 MW is awarded Capacity Market agreements. One possible reason is the competitive advantage afforded to the smaller generators by avoiding the cost of compliance because they fall beneath the UK ETS threshold.

Government is considering whether a change in the threshold would create a more level playing field by bringing more installations under the compliance obligation.

Safety flaring and venting

The consultation invites views on how safety flaring, which currently receives free allowances, should be interpreted for the purposes of the UK ETS going forward, so that only flaring which is necessary for safety reasons continues to receive free allocation, to ensure that unsafe behaviour is not incentivised. 

Remaining upstream oil and gas emissions

To help it decide how to regulate the remaining emissions in the oil and gas sector, Government is seeking evidence on how such emissions could be reliably quantified and audited: 

• emissions from non-combustion processes, such as process emissions, terminal storage and oil loading; and 
• emissions from the gas nitrous oxide, including from combustion, non-combustion processes and flaring.

Next steps

Subject to the outcome of the consultation, any changes to expand the UK ETS to CO2 venting would be brought in by 1 January 2024.

Any changes to include methane venting and/or methane slip could be brought in by January 2026, but Government will consult further prior to finalising its decisions and will consider whether to align with the milestones of the Methane Action Plan.

If there is enough evidence that the current combustion thresholds should be modified, there will be a further consultation on any policy and legislative changes.

Conclusion

Building on the North Sea Transition Deal, which commits the North Sea to becoming a net zero basin by 2050, the proposed extension of the UK ETS is intended to provide an additional driver for the decarbonisation of upstream oil and gas, and possibly other sectors where venting or flaring occurs.

A change in the compliance thresholds could bring smaller installations, which are currently exempt, within the scope of the UK ETS. If an activity specific threshold is decided upon, some installations could fall under the scheme for only limited types of emissions. 

This raises the question of the cost of compliance for those businesses with increased obligations or who are brought within the scheme for the first time. Such costs should feature in long term financial planning for businesses in the relevant sectors. 

The data obtained from MRV should improve our understanding of particular types of emissions and help plan abatement measures. This will inform Government's thinking on how to regulate the remaining emissions; we can expect further proposals in the coming years.

Closing date

The consultation closes on 17 June 2022. For more information or if you need help in submitting a response, please contact one of us listed below.