The new limits have been announced in a package of reforms presented by the UK Emissions Trading Scheme Authority (UK ETS), the joint body comprising the UK Government, Scottish Government, Welsh Government and the Department of Agriculture, Environment and Rural Affairs in Northern Ireland.
The scheme has been in place since 2021 to replace the UK's participation in the European Union's ETS. It puts a limit on the total amount of greenhouse gases aviation, power and other energy-intensive industries can emit. However, from next year, the limits will be tightened to ensure industries bring their emissions down at the rate needed to reach net zero goals.
The programme incentivises decarbonisation through a process of buying and selling emissions allowances, which companies must obtain for every tonne of emissions they produce each year.
Its goal is to incentivise industries to move away from costly fossil fuels and invest in energy efficiency and cleaner, or renewable technologies, which can boost energy security and help the UK reach its net zero targets.
To help smooth the transition, the UK ETS Authority said the cap will be set at the highest level of the range consulted on, allowing maximum flexibility for industries. In addition, extra allowances will also be made available to the market between 2024 and 2027, while the current levels of free allocation of allowances for industry has been guaranteed until 2026.
"With the recent rises in energy prices, it is more important than ever that we accelerate the transition away from costly fossil fuels, towards greener and more secure energy," the UK ETS Authority said in a statement.
"Our UK Emissions Trading Scheme, along with other interventions, forms part of a wider strategy to provide a long-term framework to incentivise UK industries to decarbonise – seizing the huge opportunities that are arising from a rapidly expanding clean energy sector, and providing the certainty that industries need to invest in new green technologies.
"The decisions taken here will not only put us on the path to net zero but will also support crucial industries on their path to long-term sustainability."
As part of the announcement, the UK ETS Authority revealed that domestic maritime transport, waste incineration and energy from waste will be added to the scheme for the first time in the coming years.
The scheme will be applicable to large maritime vessels only, of 5000 gross tonnage and above, and will expand to cover the domestic maritime transport sector from 2026, as well as the waste incineration and energy from waste sectors from 2028.
Moreover, the government also revealed its plans to phase out free allocations for aviation in 2026. Instead, aviation businesses will be required to buy allowances for every tonne of carbon emitted under the scheme.
Last week, trade body UK Steel warned that EU carbon costs could 'crush' the UK steel market and almost 23 million tonnes of non-EU steel could flood the UK market without government action.
In addition, a recent survey of aviation experts has shown that the majority are not convinced that the sector will become carbon-neutral by the stated 2050 goal.
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