Explainer - What is Britain's new emissions trading system?

By Susanna Twidale and Kate Abnett

LONDON/BRUSSELS (Reuters) - Britain will this week begin selling carbon permits in its domestic emissions trading system (ETS), as part of its efforts to meet a climate target of net-zero fossil fuel emissions by 2050.

WHAT IS AN ETS?

An ETS sets a gradually decreasing cap on the amount of emissions that a sector, or group of sectors, can produce. It creates "carbon permits" for those emissions, which companies must buy for each tonne of CO2 they emit.

WHO IS COVERED?

Britain's ETS will include British companies that were previously covered by the European Union's ETS, which Britain left at the end of 2020 as part of its departure from the EU. The scheme covers around 1,000 power plants, factories and airlines representing around a third of Britain's emissions. Northern Irish power plants remain part of the EU ETS.

WHEN DOES IT START?

The scheme officially launched at the beginning of the year but the first auction of permits -- the first time supply will be available to the market -- is scheduled for May 19 on the ICE exchange. A total of 83 million permits will be auctioned in 2021.

The ICE will also on May 19 launch futures contracts for December 2021, March 2022, December 2022 and December 2023, with a daily futures product to be launched on May 21.

HOW MUCH WILL PERMITS COST?

The price is not yet known, since no trades have taken place. Some analysts expect prices initially to track the cost of EU permits, which have recently hit record highs over 56 euros a tonne. Others say the limited supply of permits in the UK scheme could push prices above EU levels.

ARE THE BRITISH AND EU SCHEMES THE SAME?

There are similarities but Britain, unlike the EU, has set a minimum price for auctioned permits, at 22 pounds a tonne. It also has a "cost containment mechanism", which could lead to more permits being auctioned sooner to guard against rapid price spikes.

Britain has also said it could limit the size of auction bids or of participants' permit holdings to curb price rises.

WILL IT LINK WITH THE EU SCHEME?

As part of their post-Brexit trade agreement, Britain and the EU agreed to consider linking their carbon trading schemes. Negotiations on a link have not yet begun.

(Reporting By Susanna Twidale in London and Kate Abnett in Brussels; Editing by Kevin Liffey)