The UK ETS has been running since May 2021. Significant changes will be coming in from 2024. This FAQ page gives answers to 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 tradable allowances. This is also known as the “cap-and-trade” approach. In practice, a certain quantity of emissions is allowed before most sectors start paying for carbon, known as the free allocation. These free allocations are intended to reduce over time as overall emissions from each sector are reduced.
Why does the UK emissions trading scheme work the way it does?
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.
Why does the UK have its own ETS?
The UK used to be part of the EU’s own 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.
The broader reason for having an emissions trading scheme at all is climate change and the need to reduce emissions. In 2019 the UK made a legally binding pledge to reduce its emissions to net zero by 2050. The government believes that the UK ETS will make a “significant contribution” to meeting this target.
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 moment (2023), the UK ETS applies to three specific sectors:
- Energy-intensive industries (such as steelmaking and meat processing);
- Power generation;
- Aviation
But the scope of the scheme is set to expand to include more high-emitting areas of the UK economy.
- From 2026: the scheme will be applicable to large maritime vessels of 5000 gross tonnage and above.
- From 2028: the scheme will include waste incineration and energy generated from waste.
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 first allowance auction took place on 19 May 2021 and since then they have taken place every other Wednesday on the ICE Futures exchange. ICE publishes the auction calendars every year.
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.
One important difference is that the UK scheme is slightly more ambitious about emissions reductions. At the time of the scheme’s launch in 2021, the emissions cap for the UK was 5% lower than it would have been under the EU scheme. In 2022, the government consulted on how to set a cap that is consistent with delivering net zero, and this will be implemented for 2024. The EU is taking a slightly different approach and aiming for a reduction of 2.2% each year in phase 4.
What does the scheme mean for aviation?
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.
From 2026, the UK ETS authority will be phasing out free allocations for flight operators under the scheme. Aviation businesses will need to buy allowances for every tonne of carbon they emit. This is because aviation is one of the fastest-growing sources of greenhouse gas emissions.
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. There is official guidance for aircraft operators, but this may be updated soon – the direction of travel is for tighter limits on emissions in all sectors.
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 has been working on replacing it.
The plan is to move to a new digital permitting, monitoring, reporting and verification (PMRV) system designed specifically for the UK. This was originally supposed to launch in autumn 2022, but was delayed until 2023 and a new launch date has not yet been announced. Any business within the UK ETS should continue to use the ETSWAP system – but you are advised to ensure you have copies of any documents you have uploaded to ETSWAP, just in case they get lost in the eventual transition.
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). The logic behind this is that the government doesn’t want to discourage businesses from starting up or investing in new capacity.
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;
- the Cost Containment Mechanism, or CCM.
The ARP sets a minimum price for a UK allowance. Bids below this price will not be accepted. At the time of writing (summer 2023) it is set at £22 and the government does not intend to change this price – but it does intend to withdraw the ARP entirely at some point in the future as the market matures.
The CCM doesn’t set a maximum price, but it allows the UK ETS authority to intervene if prices are too high for a sustained period. The authority uses a reference period of the previous two years as a basis for what “normal” looks like. Then it looks at the futures contracts being offered for UK allowances. If the futures contracts start hitting three times the average price of a UK allowance in the reference period, this is a sign that prices might be getting too high. If this happens for three consecutive months, the CCM is triggered.
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. It has plenty of leeway about how to act, but if there is no agreement within the UK ETS authority then the Treasury will take over making the decision.
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.
