This would replace the EU’s Emissions Trading System (ETS), which we’re due to leave at the end of this year when the transition period ends. Full details can be found on the government website.

An emissions trading system is a form of cap and trade, where an emissions cap is set and then carbon allowances are bought and sold. It is similar to a carbon tax in that it sets a price on carbon emissions, but unlike the more straight forward carbon tax, businesses can’t be sure what the price of carbon will be so it can be more difficult for them to plan ahead. The EU system has suffered from a surplus of carbon allowances, meaning the carbon price has been too low to have much impact on emissions, though…

The situation has improved and prices have recovered since the EU ETS Market Stability Reserve (MSR) began to absorb excess allowances off the market at the beginning of 2019. However, the MSR was designed to handle past oversupply accumulated over the yearsIt is not fit for purpose to deal with current or future surplus.

Carbon Market Watch

Energy minister Kwasi Kwarteng said

This new scheme will provide a smooth transition for businesses while reducing our contribution to climate change, crucial as we work towards net zero emissions by 2050.

The government claims its system will be more ambitious than the EU one it replaces, however, they point out that like the EU system it will only cover a third of the country’s emissions. They also say

The UK would be open to considering a link between a UK ETS and the EU ETS, if it suits both sides’ interests. This is subject to the ongoing trade negotiations between the UK and EU. In any event, the UK has robust domestic carbon pricing options including these emissions trading system proposals, or a Carbon Emissions Tax.

The Carbon Emissions Tax was proposed in 2018 in case we left the EU without a deal:

All emissions that exceed the annual allowance would be taxed on a carbon equivalent basis at a rate for 2019 of £16 per tonne.