Energy & climate change

Climate change, a long-term shift in global and regional climate patterns, affects the balance of ecosystems, causes extreme weather events, and threatens the continued viability of human settlements. It has been conclusively attributed to anthropogenic activity, particularly increased carbon dioxide (CO2) concentrations in the atmosphere resulting from the consumption of fossil fuels. Climate change is characterised by threats to the global environment that, while uncertain, are likely to be severe even if stringent action is taken today to curb emissions. It is intrinsically linked to energy use, which affects all sectors of the economy. Climate change and energy security drive the need to improve energy efficiency as part of a low-carbon economy. Reducing energy use will reduce energy bills, make the energy system more sustainable, and drive down greenhouse gas emissions.


Climate change framework

An extensive set of laws and policies have been adopted to address climate change in the UK. These partly implement international and EU obligations, but also go further. Measures may be identified at two different levels: economy-wide measures that ensure policy alignment with international obligations; and discrete EU climate-related measures that require transposition, such as the EU Emissions Trading System (ETS). 

UK policymaking in respect of climate and energy is shaped by global developments. 

The international climate change regime was established under the 1992 United Nations Framework Convention on Climate Change (UNFCCC) and, more recently, the 2015 Paris Climate Change Agreement sought to introduce a state driven approach to greenhouse gas reduction commitments; see Appendix I for further background information. 
The EU has increasing aligned its energy and climate policies as a priority area for action. The Energy Union strategy sets out objectives to build an EU-wide system to ensure secure, sustainable, competitive and affordable energy. Measures have been introduced as part of the December 2008 Climate and Energy Package and the November 2016 Clean energy package for all Europeans; see Appendix II for background information and a list of all EU legislation in the Climate and Energy and Clean Energy packages.

The Climate Change Act 2008 enshrines long-term climate mitigation targets and governance processes to support the transition to a low carbon economy. Following amendments introduced under the Climate Change Act 2008 (2050 Target Amendment) Order 2019 (SI 2019/1056), it prescribes a net zero greenhouse gas emission target for 2050. 

Supplemental measures for Wales and Scotland have also been introduced under the Climate Change (Scotland) Act 2009 and the Part 2 of the Environment (Wales) Act 2016.

The pathway towards 2050 is signposted by legally binding carbon budgets (see Appendix III), which place a cap on the amount of greenhouse gases emitted over a five-year period. These are determined based on advice produced by the Committee on Climate Change (CCC).

The Carbon Budgets Order 2009 (SI 2009/1259) sets carbon budgets for the first three budgetary periods, until 2018-2022. It is supplemented by the Climate Change Act 2008 (2020 Target, Credit Limit and Definitions) Order 2009 (SI 2009/1258), as well as the Climate Change Act 2008 (Credit Limit) Orders 2011 (SI 2011/1602) and 2016 (SI 2016/786). Detailed accounting rules determine whether the UK is meeting its carbon budgets. Final statements for the first carbon budget period (2008-2012) and the second carbon budget period (2013-2017) were published in May 2014 and May 2019 respectively. The Carbon Budget Orders 2011 (SI 2011/1603) and 2016 (SI 2016/785) set the carbon budgets for the fourth and fifth budgetary periods respectively.

A carbon plan, describing how the government intends to meet the first to fourth carbon budgets, was published in December 2011. It identified ‘easy wins’ up to 2020, including: 

phasing out coal-first power stations, 
insulating cavity walls and lofts, and 
reducing new car emissions, 

before the need for ‘a change of gear’ in terms of deploying low carbon technologies. This view has been echoed more recently by the Committee on Climate Change (CCC). 

This was followed in October 2017 by the clean growth strategy, which describes proposals for decarbonising all sectors of the UK economy during the 2020s. The Committee on Climate Change (CCC) highlighted the inadequacy of the strategy’s carbon planning in its 2018 assessment.

The Climate Change Act 2008 also requires the government to publish a national adaptation programme (NAP) every 5 years to assess the risks arising from climate change. The most recent NAP was published in July 2018.

Anthropogenic greenhouse gases include: carbon dioxide (CO2), methane (CH4), carbon monoxide (CO), ozone (O3), nitrous oxide (N2), and several fluorinated gases, including chlorofluorocarbons (CFCs), hydrofluorocarbons (HFCs), and sulphur hexafluoride (SF6). CO2 is the largest contributor, whilst SF6 is the most potent.

Main sources of increasing atmospheric concentrations of greenhouse gases: combustion of fossil fuels; land use change, particularly deforestation; livestock rearing; biodegradable landfill waste; agricultural fertilizers; and chlorofluorocarbons (CFCs) in refrigeration and fire-retardant equipment.

Responsibility for energy and climate change policy falls within the remit of the Department for Business, Energy and Industrial Strategy (BEIS).

The Committee on Climate Change (CCC), an executive non-departmental public body sponsored by BEIS, advises the government on emissions targets and reports to Parliament on progress made in reducing greenhouse gas emissions. It was established under the Climate Change Act 2008.

The Committee on Climate Change (CCC) has raised concerns regarding the 2050 pathway. The 2017 report on meeting carbon budgets identified that progress is stalling with emissions reductions now largely confined to the power sector whilst the 2019 progress report on reducing UK emissions found that action to curb greenhouse gas emission is lagging behind what is needed to meet legally-binding emission targets.

Emissions reduction

Various instruments have been introduced to reduce greenhouse gas emissions from energy production and industry.

Emissions trading

The EU emissions trading system (ETS), established under ETS Directive 2003/87/EC, is an emissions cap and trade system, which aims to reduce emissions across Europe. It operates in all Member States plus Iceland, Liechtenstein and Norway and limits emissions from more than 11,000 heavy energy-using installations, as well as airlines operating between these countries, covering around 45% of EU greenhouse gas emissions.

It is transposed into UK law under the Greenhouse Gas Emissions Trading Scheme Regulations 2012 (SI 2012/3038).

A cap is set on the total amount of certain greenhouse gases that can be emitted by installations falling within the system. Within the cap, companies receive or buy emission allowances (along with limited amounts of international credits from emission-saving projects around the world), which they can trade.

After each year, companies must surrender enough allowances to cover all its emissions; surplus allowances may be banked or sold. Trading is thought to bring flexibility that helps ensure emissions are cut where it costs least to do so.

Sectors at risk of ‘carbon leakage’ – where climate policy costs lead to businesses to transfer their operations to countries with lesser constraints – are listed in EU Delegated Decision 2019/708/EU; these sectors receive free allowances (up to 100% of the benchmark).

The EU ETS affects businesses from energy-intensive sectors, covering:

• carbon dioxide (CO2) emissions from power and heat generation, energy-intensive industry sectors, including oil refineries, steel works and production of iron, aluminium, metals, cement, lime, glass, ceramics, pulp, paper, cardboard, acids and bulk organic chemicals, and commercial aviation;
• nitrous oxide (N2O) emissions from the production of nitric, adipic and glyoxylic acids, and glyoxal; and
• perfluorocarbons (PFCs) from aluminium production.

It is important to note that:

• in some sectors only plants above a certain size are included;
• certain small installations can be excluded if governments put in place fiscal or other measures that will cut their emissions by an equivalent amount; and
• in the aviation sector, the EU ETS will apply only to flights between airports located in the European Economic Area (EEA) until 31 December 2023.

Post-Brexit Arrangements

A new UK Emissions Trading System (ETS) is due to be introduced from January 2021 onwards; it is currently unclear whether this will operate in conjunction with the existing EU ETS. Recent policy discussion has suggested a carbon emissions tax instead. See also below for information on the Climate Change Levy.

Key changes introduced for phase three of the EU ETS include:

- a single, EU-wide cap on emissions in place of the previous system of national caps;

- allocating allowances by auction (as opposed to free allocation), and harmonised allocation rules;

- the introduction of more sectors and gases; and

- 300 million allowances set aside in the New Entrants Reserve to fund the deployment of innovative, renewable energy technologies and carbon capture and storage (CCS).

- Recent amendments ahead of phase four focus on:

- strengthening the EU ETS as an investment driver by increasing annual reductions in allowances and reinforcing the market stability reserve;

- continuing the free allocation of allowances as a safeguard for the international competitiveness of industrial sectors at risk of carbon leakage; and

- helping industry and the power sector to meet the innovation and investment challenges of the low-carbon transition via several low-carbon funding mechanisms.

Carbon capture and storage

Carbon capture and storage (CCS) technologies capture up to 90% of carbon dioxide (CO2) emitted from fossil fuels used in electricity generation and industrial processes. The CO2 emissions are transported and securely stored in depleted oil and gas fields or deep saline aquifer formations.

The EU CCS Directive 2009/31/EC establishes a legal framework for the environmentally safe geological storage of carbon dioxide (CO2). Various UK provisions transpose these requirements:

• the Storage of Carbon Dioxide (Licensing etc.) Regulations 2010 (SI 2010/2221); 
• the Storage of Carbon Dioxide (Termination of Licences) Regulations 2011 (SI 2011/1483); 
• the Storage of Carbon Dioxide (Access to Infrastructure) Regulations 2011 (SI 2011/2305);
• the Storage of Carbon Dioxide (Inspections etc.) Regulations 2012 (SI 2012/461); 
• the Storage of Carbon Dioxide (Amendment of the Energy Act 2008 etc.) Regulations 2011 (SI 2011/2453)
• the Storage of Carbon Dioxide (Licensing etc.) (Scotland) Regulations 2011 (SSI 2011/24); 
• the Energy Act 2008 (Storage of Carbon Dioxide) (Scotland) Regulations 2011 (SSI 2011/224)
• the Storage of Carbon Dioxide (Licensing etc.) Regulations (Northern Ireland) 2015 (SR 2015/387); 
• the Storage of Carbon Dioxide (Access to Infrastructure) Regulations (Northern Ireland) 2015 (SR 2015/388)

CCS is also covered under the environmental permitting and associated regimes.

The CCS competition was closed in January 2016 after facilitating capital was withdrawn in late 2015.

The government’s current approach to CCS – referred to as carbon capture, usage and storage (CCUS) – is outlined under the October 2017 clean growth strategy.

Energy framework legislation

Framework Acts include:

• the Electricity Act 1989
• the Gas Act 1986
• the Utilities Act 2000
• the Petroleum Act 1998 

The Sustainable Energy Act 2003 outlined a sustainable energy policy for the UK; though it has been extensively amended by subsequent energy acts, it remains in force.

The Climate Change and Sustainable Energy Act 2006 made changes to the electricity market, in particular in relation to microgeneration, efficiency, carbon emission reduction targets and community energy. 

The 2007 “Meeting the energy challenge” white paper set out modern UK energy policy on two main axes: reducing CO2 emission levels, and supplying reliable, clean and affordable energy. 

A number of energy Acts continue to shape energy legislation:

• the Energy Act 2004, covering nuclear decommissioning and the nuclear industry, regulation of the gas and electricity industries, and renewable energy;
• the Energy Act 2008, the main framework Act, making provision across renewable energy, oil and gas, nuclear power, low-carbon electricity generation, energy metering, etc; 
• the Energy Act 2010, which set the framework for financial assistance for commercial-scale CCS demonstration projects;
• the Energy Act 2011, which set out key provisions about the Green Deal (cancelled in 2015), the Energy Company Obligation (ECO), and other energy security and efficiency measures;
• the Energy Act 2013, which reformed the energy market through feed-in tariffs to promote low carbon electricity generation; and
• the Energy Act 2016, which created the new Oil and Gas Authority (OGA) to regulate the oil and gas industry.

Energy networks and generation

The Energy Act 2013 set the framework for the reform of the energy market. 

Capacity Market

The Electricity Capacity Regulations 2014 (SI 2014/2043) established a capacity market for Great Britain. It is designed to ensure security of electricity supply at least cost to the consumer, through capacity agreements arranging for payments to capacity providers by the settlement body in return for energy providers supplying electricity or reducing demand when asked.

The Capacity Market Rules detail the implementation framework of the capacity market. 

Contracts for Difference

Contracts for Difference (CFD) represent the government’s main mechanism for supporting low-carbon electricity generation. It incentivises investment in renewable energy by providing developers of projects comprising high upfront costs and long lifetimes with direct protection from volatile wholesale prices and protects consumers from paying increased support costs when electricity prices are high. 

Key legislation includes the Contracts for Difference (Definition of Eligible Generator) Regulations 2014 (SI 2014/2010); the Contracts for Difference (Allocation) Regulations 2014 (SI 2014/2011); the Contracts for Difference (Standard Terms) Regulations 2014 (SI 2014/2012); the electricity Market Reform (General) Regulations 2014 (SI 2014/2013); and the Contracts for Difference (Electricity Supplier Obligations) Regulations 2014 (SI 2014/2014).

Other mechanisms

The Renewable Obligation and the feed-in tariffs (FITs), both now closed to new entrants, were also designed to develop the renewable energy sector, through:

• the Renewables Obligation Order 2015 (SI 2015/1947)
• the Renewables Obligation (Scotland) Order 2009 (SSI 2009/276)
• the Renewables Obligation Order (Northern Ireland) 2009 (SR 2009/154)
• the Feed-in Tariffs Order 2012 (SI 2012/2782)

Renewable energy Directive

The EU Renewable Energy Directive (RED) 2018/2001/EU, which replaces the EU Renewable Energy Directive 2009/28/EC from 1 July 2021, establishes a framework for the promotion of renewably sourced energy across the EU. It also sets a binding target stipulating that energy from renewable sources makes up a 32% share of total EU consumption of energy in 2030.

In the UK, requirements of the EU RED are implemented under:

• the Promotion of the Use of Energy from Renewable Sources Regulations 2011 (SI 2011/243)
• the Renewable Transport Fuels Obligations Order 2007 (SI 2007/3072, as amended by SI 2011/2937), in relation to the transport element of the EU RED. Under the Energy Act 2004, the Renewable Transport Fuels Obligations Order 2007 imposes the Renewable Transport Fuels Obligation on UK transport hydrocarbon fuel oil suppliers, requiring them to prove that a set amount of renewable transport fuel has been supplied.
• the Renewable Obligation (detailed above) also implemented parts of the original EU RED.