The UK ETS: frequently asked questions

What is the point of free allocations?

Making businesses pay for their carbon emissions is supposed to encourage them to cut carbon and move to greener ways of working. But there’s a risk: when costs increase too much, businesses might respond by moving to countries where they don’t have to pay. That’s bad for the UK economy and does nothing to actually cut emissions. This counterproductive phenomenon is known as “carbon leakage” and it’s a concern for any country or trade bloc when setting climate policy. Free allocations are designed to soften the impact of carbon pricing on UK businesses.

But there is a concern that being too generous with free allocations could undermine the UK ETS in its aim of reducing overall emissions. So the government has to strike a careful balance. There is a predetermined overall ‘pot’ of free allocations and the plan is to gradually reduce the allowance available to businesses up to 2030.

The government has split the administration of free allocations into two periods. This is so it can use data and what it’s learnt from the first period to determine the most effective way of handling the second one. The two periods were originally 2021-2025 and 2026-2030. But the government recently decided to shift the start of the second period from 2026 to 2027, so that free allocations can align with the forthcoming Carbon Border Adjustment Mechanism (CBAM).

The CBAM could be a game-changer because up to now, free allocations have been the government’s main mechanism for avoiding carbon leakage. The CBAM will be another important mitigation mechanism.

Why does the UK have a trading scheme and not just a cap on emissions?

Cap and trade systems like the UK ETS are considered compatible with a free-market economy because they do not seek to control how and where emissions are created. By allocating a financial value to each unit of emissions, it leaves that up to the market. Crucially, every year the overall cap is lowered, which means the cost of emissions allowances goes up and the financial case for decarbonisation gets stronger.

Why does the UK have its own emissions trading scheme?

The UK used to be part of the European Union’s emissions trading system, the EU ETS, but we left it when we left the EU at the end of 2020. The UK ETS is what we created to replace it.

When did the UK ETS start?

It came into force on 1 January 2021, but UK operators were still bound to comply with the EU ETS until the end of the scheme year in April 2021. So the carbon market didn’t actually open for trading until May 2021.

Who does the UK ETS apply to?

At the time of writing (September 2025), the UK ETS applies to three specific sectors:

• Energy-intensive industries (such as steelmaking or glassmaking)
• Power generation
• Aviation

Two further sectors are set to join the UK ETS:

• Shipping
• Waste

The government has announced 1 July 2026 as the date for launching the UK ETS maritime regime. This will cover all domestic shipping journeys. The full details of how the UK ETS will work for the maritime sector are still being decided. The government’s interim Authority Response gives details of what we know so far.

The waste sector will be included in the UK ETS from 2028. From 2026 there will be a phase where emissions from waste industries are monitored but not actually traded, in preparation for this sector’s full participation.

How do you trade carbon on the UK ETS?

Trading under the UK’s Emissions Trading Scheme is done through auctions of carbon allowances. The ICE Futures Exchange has been appointed by the government to host these auctions and receives a small fee from successful bidders. There is guidance on how to participate.

The first allowance auction took place on 19 May 2021. Since then they have taken place every other Wednesday between noon and 2pm UK time. ICE publishes the auction calendars every year. The 2025 calendar is here.

How is the UK ETS different from the EU ETS?

The UK Emissions Trading Scheme works in a very similar way to the EU scheme, except that while the EU ETS applies to all countries in the European Economic Area, the UK ETS only applies to the UK.

Perhaps the biggest difference is in the approach to reducing emissions over time. The UK ETS started out in 2021 with a cap that was 5% lower than it would have been under the EU ETS. Now, as of 2025, it has a cap that is consistent with net zero. The EU’s approach is slightly different: it plans a Linear Reduction Factor (LRF) of 2.2% a year until the current phase ends in 2030.

What paperwork do you need?

Being part of the UK ETS requires your business to have an emissions permit or plan, plus an account with the registry. Here’s what that means.

Permits/EMPs

A business in scope of the UK ETS will need either:

• A greenhouse gas emissions permit, for power generators and energy-intensive businesses
• An emissions monitoring plan (EMP), for aircraft operators

The only exception would be if the organisation comes into the category of “hospital or small emitter”. We explain more about what that means further on.

The online portal to apply for permits or EMPS is the same one as for submitting emissions reports. It’s called the Manage your UK ETS reporting service, or METS.

OHA or AOHA account

The business also needs an account with the UK Emissions Trading Registry. The official guidance compares the registry to an “online bank account” because it basically works as a bank for both UK ETS allowances and Kyoto Protocol international units. You need to prove that you are “fit and proper” to hold an account and/or be granted access to it as an Authorised Representative.

Mandatory document requirements for Authorised Representatives are:

• A criminal records check
• Proof of identity
• Proof of address
• An Authorised Representative declaration from all nominated users

If your business is signing up for an account as a corporate entity, the mandatory document requirements are:

• A Letter of Authority from the account holder nominating a Primary Contact
• Official declaration of the Primary Contact
• Criminal records checks for the relevant directors

Other documents may also be required. A government webpage offers guidance on what you may be asked for.

Getting your account set up could take up to two months, depending on the country you’re applying from.

The accounts are called different things depending on your sector.

• Businesses in power generation or energy-intensive industries have an Operator Holding Account (OHA)
• Businesses in the aviation industry have an Aircraft Operator Holding Account (AOHA)

Can my organisation opt out of the UK ETS?

Hospitals and small emitters

Organisations can opt out if they are classed as a small emitter, an ultra-small emitter or a hospital/service provider for hospitals. If any of these definitions apply, you will need either a “hospital or small emitter” (HSE) permit or an “ultra-small emitter” (USE) permit.

Organisations qualify as “small emitters” if they:

• emit less than 25,000 tonnes of carbon dioxide equivalent (CO2e) each scheme year in the relevant period
• have a total rated thermal input of less than 35 megawatts (MW) in the relevant period (if applicable)

Hospitals and small emitters still need to report their annual emissions and stay below their emissions targets, but they don’t need to trade emissions allowances on the UK ETS. 

Ultra-small emitters (USEs)

Installations qualify as “ultra-small emitters” if they:

• emit 2,499 tonnes of CO2e or less per year

They don’t need to trade allowances on the UK ETS or hold a permit, but they do need to monitor their emissions and notify the regulator if they go over the USE threshold. 

How to opt out

Exemption from the UK ETS is not automatic. If your organisation meets the criteria, you still need to submit an application for exemption. The window to apply for HSE or USE status for the 2026-2030 period closed on 30 June 2025. The full list of exempt organisations will be published on 17 October 2025.

Energy suppliers can get a HSE permit if at least 85% of the heat produced by their installation is supplied to hospitals.

• Official guidance for hospitals and small emitters
• Official guidance for ultra-small emitters

Aircraft operators never qualify as small emitters, but certain flights are exempt from ETS obligations, such as military and search & rescue flights. The full list of excluded flights is in Schedule 1 of the relevant legislation.