The UK Emissions Trading Scheme: frequently asked questions
The UK ETS has been running since May 2021. This FAQ page offers a quick explainer for each of the most common questions the Hub gets about the scheme. If your question isn’t answered here, get in touch and we’ll do our best to help.
What is the UK Emissions Trading Scheme?
The UK Emissions Trading Scheme (ETS) is a government-run scheme designed to reduce greenhouse gas emissions. The government sets a maximum level for total emissions, and every unit of emissions up to this maximum is considered to be part of a system of tradeable allowances. This is also known as the “cap-and-trade” approach.
What is the point of the UK ETS?
The UK government has made a legally binding pledge to reach net zero emissions by 2050, and the ETS is intended to make a “significant contribution” to meeting that target. Cap-and-trade systems like the UK ETS are compatible with a free market economy because they don’t seek to control how and where emissions are created – they just allocate a financial value to each unit of emissions and let the market do the rest. Crucially, every year the overall cap is lowered, which means the cost of emissions allowances goes up. This is intended to incentivise emissions cuts and investment in less polluting technologies.
When did it start?
The UK used to be part of the EU’s own emissions trading system, which was launched in 2005. When we left the EU at the end of 2020, we replaced it with the UK ETS. The UK ETS came into force on 1 January 2021, but the carbon market didn’t actually open for trading until May 2021.
Who does the UK Emissions Trading Scheme apply to?
The UK ETS applies to three specific areas of the UK economy:
- Energy-intensive industries (such as steelmaking and meat processing);
- Power generation;
How does the UK ETS work?
Trading under the UK’s Emissions Trading Scheme is done through auctions of carbon allowances. The first allowance auction took place on 19 May 2021 and since then they have taken place every other Wednesday on the ICE Futures exchange.
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. So while the EU ETS covers all flights within the EEA, the UK ETS only covers UK domestic flights, flights between the UK and the EEA and flights between the UK and Gibraltar.
At the time of writing, the main difference is that the UK ETS is somewhat more ambitious than the EU ETS, with a price cap 5% lower than it would have been under the EU ETS.
What units does the ETS trade in?
One allowance under the UK ETS is called a UK allowance, or UKA. This gives your organisation permission to emit one tonne of carbon dioxide equivalent, or CO2e. The UK government publishes spreadsheets allowing you to convert emissions-intensive activities into CO2e.
What paperwork do you need?
Organisations carrying out activities in scope of the UK ETS will need a greenhouse gas emissions permit. If you are an aircraft operator, you will need an emissions monitoring plan. Full guidance for aircraft operators
How do you apply for a UK ETS permit?
You apply for a greenhouse gas emissions permit through the ETSWAP portal on the Environment Agency’s website (if you need some help with your application, get in touch). This portal was originally created when the UK was part of the European Union’s emissions trading scheme, but the government is working on replacing it. The new digital permitting, monitoring, reporting and verification (PMRV) will hopefully be soft-launched in autumn 2022, but there are no definite dates for this.
Are all emissions from industries in scope covered by UK ETS trading?
No. The designers of the UK ETS system wanted to guard against the risk that carbon-intensive businesses would respond to increased carbon costs by transferring operations to countries with fewer regulations and lower costs. (This counterproductive phenomenon is known as “carbon leakage” and the design of the EU ETS also takes it into account.) For this reason, the UK ETS allocates a certain number of free allowances for energy-intensive businesses.
There are also a number of free allowances set aside for new operators (or existing operators who have significantly increased their capacity). This is known as the New Entrants Reserve (NER).
Can my organisation opt out of the UK ETS?
You can opt out if your organisation is classed as a small emitter or a hospital/service provider for hospitals. If either of these is the case, you will need a “hospital or small emitter” (HSE) permit.
Energy suppliers can get a HSE permit if at least 85% of the heat produced by your installation is supplied to hospitals.
Organisations qualify as “small emitters” if they:
- emit less than 25,000 tonnes of carbon dioxide equivalent (CO2eq) 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)
Organisations do not automatically qualify for exemption, even if they meet the criteria. You will need to check eligibility carefully and then submit your application for exemption within a specific window of time. Applications for exemption in the period 2021 to 2025 are now closed and applications for the next period open in April 2024. Read the full guidance for hospitals and small emitters here.
Aircraft operators never qualify as small emitters, but certain flights are exempt from ETS obligations, such as military and search & rescue flights. Read the full guidance for aircraft operators here.
Has the UK government set a minimum or maximum price for ETS permits?
The government has put two mechanisms in place to guard against extreme highs and lows in pricing: the Auction Reserve Price, or ARP, and the Cost Containment Mechanism, or CCM.
The Auction Reserve Price, currently £22, sets a minimum price for a UK allowance. Bids below this price will not be accepted.
The Cost Containment Mechanism allows the UK ETS authority to intervene if prices are too high for a sustained period. The “trigger level” for the CCM changes every month because it is based on what prices have been doing during a reference period of the previous two years. If the UK ETS price hits double the reference period average and then stays there for three consecutive months, it’s time to intervene.
If the CCM is triggered, the UK ETS authority will take steps to bring prices down. This might mean increasing the number of permits on the market by bringing forward some of next year’s allowance, or releasing some of the permits earmarked for the New Entrants’ Reserve.
What is the price of a UK ETS permit at the moment?
The website of the ICE Exchange, where UK ETS trading takes place, has a list of all the UK emissions auctions that have taken place since trading opened in May 2021. This includes the price of a UK allowance at each auction.