I thank noble Lords for their valuable contributions to this short debate, and for their broadly supportive comments on carbon pricing and this SI. I recognise the strength of feeling about the carbon emissions tax and reassure noble Lords that no decisions have been taken about it; I shall certainly make sure that their voices are heard.
The noble Lord, Lord Bilimoria, raised the need to ensure that our heavy industrial emitters receive free allocation to ensure competitiveness. Free allocation of allowances will continue to be the main policy instrument through which carbon leakage risk and competitiveness impacts are addressed in the UK emissions trading scheme. Our initial UK ETS free allocation approach will be similar to that of the EU ETS period 2021-30, to ensure a smooth transition for participants for the 2021 launch. In 2019, the value of those free allowances given to the UK installations was over £1 billion, taking an average EU allowance price of £22. The Government also compensate some energy-intensive industries for the indirect cost of the ETS and other climate policies passed on to electricity prices.
The noble Lord, Lord Bilimoria, also mentioned the CBI’s heat commission report. I welcome his commission’s thoughtful recommendations on how to decarbonise this too often forgotten sector, which the noble Baroness, Lady Bennett of Manor Castle, described as a Cinderella sector. As he will know, industrial heat processes are within the UK ETS, but heating in domestic and non-domestic buildings is not. The Government plan to publish a heat and building strategy in due course that sets out our immediate and long-term actions for decarbonising heating in buildings. An industrial decarbonisation strategy will be published in the spring.
My noble friend Lady McIntosh raised a series of important and detailed questions. Given time constraints, I will be happy to respond to them in writing, but she also raised the impact of Covid on the aviation sector, as did other noble Lords. Our absolute focus in government at this time is combating Covid-19. We recognise the challenges that Covid-19 has caused the aviation sector and are working closely with the industry to provide support, but it is important that we continue to work on our longer-term priorities, including tackling climate change. There should be a minimal impact on the sector, as the UK ETS will ensure that aircraft operators continue to face obligations for emissions on UK routes that will no longer be part of an EU ETS.
The noble Baroness, Lady Bennett of Manor Castle, rightly said that we should question whether we are going far enough. That is the right question to ask and why we are committed to consulting within nine months of receiving the Committee on Climate Change’s sixth carbon budget advice, to ensure that the cap is net-zero consistent.
My noble friend Lord Moynihan, the noble Baroness, Lady Bennett, and the noble Lords, Lord Bilimoria, Lord Bradshaw and Lord Grantchester, all raised linking a UK ETS with the EU ETS and the status of negotiations with the EU. As noble Lords will appreciate, negotiations are still ongoing and it would clearly be wrong of me to prejudice the outcome of those discussions. We are continuing discussions with the EU on carbon pricing, and we have also been clear with the EU that we are open to considering a link if it is in both sides’ interests. We have been clear that, whatever decisions we take on carbon pricing and whatever the outcome of those negotiations, we will ensure that the UK will have an ambitious carbon pricing system, in line with our net-zero commitments.
The noble Lord, Lord Grantchester, asked why the cap, while 5% lower than the EU ETS, has been set at 156 million tonnes above current emission levels. The cap we are setting at the start will enable a smooth transition from the EU ETS to the new UK ETS to provide certainty for business. Demand for allowances is expected to come from the banking of allowances for future years or as a hedge against price increases. As such, some headroom is crucial to allow for these behaviours to continue without risking price spikes in the early years of the system. This has been acknowledged by the Committee on Climate Change in its advice to us. This initial cap is already more ambitious than the UK’s notional share would have been if we had stayed in the EU ETS. I reassure the noble Lord that once we have received the Committee on Climate Change’s advice on the sixth carbon budget, we will consult next year on a net-zero consistent cap. It would not be right to set the level of the cap before we have received this advice, but I reassure him that we are seized of the urgency of making this decision once this advice has been received.
I confirm to my noble friend Lord Moynihan that international credits cannot be accepted for compliance with the UK ETS. This is the same as would have applied in the EU ETS during the same period. With the UK ETS we will continue to lead the world in carbon pricing, which is why we plan for the UK ETS to be the first truly net-zero consistent emissions trading scheme.
My noble friend asked how the devolved Administrations will be actively involved in the decision on the eventual carbon pricing mechanism. This concern was also raised by the noble Lord, Lord Bradshaw. We have worked closely with the devolved Administrations throughout the development of the UK ETS. Their views on the ETS and the potential carbon emissions tax have been communicated clearly and are understood by the UK Government. The final policy decision will be made collectively by the UK Government, but with full consideration given to the devolved authorities’ views. We will of course work with them to ensure that they have the support needed to implement either policy option.
My noble friend also asked for the likely date of the first UK ETS auction in 2021 and about the operation of a market stability reserve. The current proposed timing for introducing UK emissions allowance auctions is the second quarter of 2021. We will not bring in a supply management mechanism like the MSR from day one because an SAM cannot be operational in a stand-alone UK ETS until approximately mid-2022. This is due to the requirement for at least one year of verified UK emissions data. We will have a transitional auction reserve price in place to prevent very low allowance prices and ensure minimum price continuity. We will consult separately on the design of a stand-alone SAM if it is required in due course.
The noble Lords, Lord Grantchester and Lord Bradshaw, and others asked questions about whether the Government will proceed with the UK emissions trading scheme or a carbon emissions tax. We understand businesses’ need for policy certainty and will provide it as soon as we can. This instrument is required to establish a UK ETS, either stand-alone or linked. It is critical to ensure that this can be delivered for the end of the transition period.
I think I have answered most questions. I will read Hansard and, if I have not, I will reply in writing.
This Order in Council, laid under the Climate Change Act 2008, establishes a UK-wide greenhouse gas emissions trading scheme, which will drive cost-effective emissions reductions across our intensive industries, and our power generation and aviation sectors. As we reach the end of the transition period, this legislation will ensure that the UK has a domestic carbon pricing policy fit for the net-zero future that we have led the world in committing to. The UK was a pioneer in carbon pricing and trading almost 20 years ago and has taken a leading role in the continued development and improvement of the concept through our participation in the EU ETS. We have therefore designed the system with the benefit of that knowledge and experience.
In this way, many features will be familiar to businesses. We will fulfil our promise of a smooth transition to our future carbon pricing policy. At the same time, launching a UK ETS will allow us to have autonomy to pursue our climate goals in the way that works best for UK. In some areas, we have already taken the opportunity to make the system work better for the UK and we will continue to do this as the UK ETS evolves over time. Most crucially, we will consult on aligning the emissions cap of the UK ETS with our net-zero commitments. We will seek to implement changes by January 2023 and no later than January 2024.
Alongside the UK ETS, the Government have an ambitious range of policies in place to help industry to reduce cost and decarbonise while supporting a clean, green recovery from Covid-19. These schemes must of course be supported by an effective carbon pricing policy. With the EU ETS having covered around a third of UK emissions between 2013 and 2020, carbon pricing is a key tool for achieving our carbon emission reduction targets at the least cost to business.