This article was reviewed and updated in October 2026.
Here at the Hub we get a lot of queries about the UK Emissions Trading Scheme (ETS), so we created this FAQ to answer the most common questions. 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 ETS is a system of carbon pricing and trading for UK businesses in energy-intensive sectors. It is run by the governments of the United Kingdom.
The UK ETS has been in place since 2021 and is currently planned to run until 2040.
What is the point of the UK ETS?
The point of all emissions trading schemes is to reduce overall emissions by putting a price on them, thereby creating a financial incentive to decarbonise. The UK government has a legally binding target to reach net zero emissions by 2050 and the UK ETS is one of the mechanisms it is using to help achieve this.
How does the UK ETS work?
It follows the “cap and trade” approach. A maximum level, or cap, is set on total emissions and trading for participating businesses happens below that ceiling. The unit for trading is called the United Kingdom Allowance (UKA). Each UKA is equivalent to a tonne of carbon dioxide or CO2 equivalent.
In theory, each UKA up to the maximum is part of the system of tradeable allowances. In practice, there is some wiggle room: every participating business gets to emit a certain quantity of carbon that isn’t included in the UK ETS so doesn’t have to be paid for. This is known as the “free allocation”.
In place as of 2024 is a rule that industries in the UK ETS will have to cut emissions at a rate compatible with net zero.
What is the point of free allocations?
Free allocations are designed to soften the impact of carbon pricing on UK businesses. Although the point of carbon pricing is to encourage decarbonisation, there’s a risk that it will make it too expensive for businesses to operate in the UK. Then you end up with the counterproductive outcome of ‘carbon leakage’: businesses moving abroad to avoid paying for their emissions.
So the government has to strike a careful balance: allowing a certain level of unpriced emissions so businesses can stay competitive, without undermining the overall aim of cutting emissions. It is continually reviewing and adjusting free allocation policy to ensure this balance, while maintaining a yearly decrease in the amount of ‘free’ carbon available.
The UK Carbon Border Adjustment Mechanism (CBAM) will change things when it comes into force on 1 January 2027, because it gives the government another mechanism for avoiding carbon leakage. Sectors covered by the UK CBAM will see a gradual phase-out of free allocations from 2027.
A targeted consultation about free allocation rules for hydrogen production closed in early October 2026. (Hydrogen is one of the sectors to be covered by the CBAM.)
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. (Free allocations go down each year too.)
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.
So the UK and EU ETS are separate, but in November 2025 negotiations began about linking the systems. On 7 October, Politico reported that an agreement has successfully been reached, and a deal is set to be unveiled at the planned UK-EU Summit in November.
Linked carbon markets will offer practical benefits for business by increasing ease of trade, reducing compliance costs, and increasing certainty on carbon pricing. We will update our readers on any developments.
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.
- Phase I of the UK ETS runs from 2021- 2030
- Phase II is scheduled to run from 2031-2040
In December 2025, the UK ETS Authority confirmed that businesses in the scheme can bank allowances between Phases I and II.
Who does the UK ETS apply to?
At the time of writing (October 2026), the UK ETS applies to the following sectors:
- Energy-intensive industries (such as steelmaking or glassmaking)
- Power generation
- Aviation
- Maritime
New joiner: maritime
Maritime is the newest sector to fall in scope of the UK ETS, joining in July 2026. The UK ETS currently applies to domestic vessels of 5,000 gross tonnage (GT) or above. There are a few exceptions, like search & rescue boats.
For the first two years (2026-2027), operators will benefit from a “double surrender” arrangement, whereby allowances for both years aren’t due until 30 April 2028 to help with compliance pressures.
Offshore ships will be included in the UK ETS from January 2027 and international maritime will also be included at some point – probably 2028.
Joining at some point: waste
The waste sector was originally scheduled to join the UK ETS in 2028, but in August 2026 the Authority confirmed that this would not happen. While we wait for a new timeline, there is a voluntary system in place where waste operators can report on their emissions under the UK ETS without incurring any cost for them.
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 2026 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 2026, it has a cap that is consistent with net zero. The EU’s approach is slightly different. It sets a yearly percentage decrease for the cap, known as the Linear Reduction Factor (LRF).
What paperwork do you need for the UK ETS?
You need:
- an emissions permit or emissions monitoring plan (EMP)
- a holding account for your UKAs
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 or maritime 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.
Holding account
For UK ETS compliance, you need a holding account with the UK Emissions Trading Registry. This is sometimes called an Operator Holding Account (OHA). You can use this account to trade allowances in the UK ETS markets.
When you have been issued with your UK ETS permit or monitoring plan, the Registry Administrator will open a holding account for your business. Then you need to appoint Authorised Representatives to the account, or sign up the business as a corporate entity.
Gaining access to the account as an Authorised Representative requires proof that you are a “fit and proper” person. This means going through various checks, including ID and criminal records. The whole process could take up to two months.
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
It is now too late to apply for exemption for the 2026-2030 period. The application window closed on 30 June 2025. Lists of exempt organisations can be downloaded from the government website.
- List of organisations with Hospital and Small Emitter (HSE) exemption
- List of organisations with Ultra Small Emitter (USE) exemption
If your organisation is already on the HSE or USE list but stops meeting the criteria because things have changed, then you must notify the regulator by 31 March of the scheme year. The guidance explains what will happen next.
Energy suppliers can get a HSE permit if at least 85% of the heat produced by their installation is supplied to hospitals.
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.
Has the UK government set a minimum or maximum price for ETS permits?
The government doesn’t dictate the price of UKAs, but it has two mechanisms to keep it within a certain range:
- 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. As of April 2026, the ARP value is £28.
The CCM doesn’t set a maximum price, but it allows the UK ETS authority to intervene if prices are too high for too long. Here’s how it works:
- Establish what ‘normal’ looks like by taking a monthly average from the past two years
- Compare the futures contracts on offer for UKAs against ‘normal’
- If the prices on offer hit triple the ‘normal’ baseline for six consecutive months, trigger the CCM
When the CCM is triggered, the UK ETS Authority might intervene to increase the number of permits on the market and bring prices down. It could do this by bringing forward some of next year’s allowance, or releasing some of the permits earmarked for new entrants to the scheme.
So far the CCM has been triggered twice, in December 2021 and January 2022. Both times the UK ETS authority decided not to do anything.
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 UKA at each auction.
How many permits are there?
The carbon allowance auction calendar for 2026 shows 2,075,000 tradeable permits for every fortnightly auction up to the end of the year. The first auction was on 14 January, so this year will see 25 auctions in total.
The point of the UK ETS is to reduce overall emissions. So every year the total number of carbon allowances available for purchase gets smaller.
In 2023 the UK ETS authority pledged to cut total allowances to around 44 million by 2027 and around 24 million by 2030. A policy overview published in August 2025 suggests that this target is still in place.
Who runs the UK ETS?
It is run by the UK ETS Authority, which has four constituent members:
- The UK Government
- The Scottish Government
- The Welsh Government
- The Department of Agriculture, Environment and Rural Affairs for Northern Ireland
How will the UK ETS change in the future?
Broader sector coverage
The number of sectors covered by the UK ETS has already expanded, with maritime businesses the latest to join. Next we can expect the inclusion of:
- International shipping
- Waste and energy from burning waste
Fewer free allowances and a strong carbon price signal
As you’ve read, sectors covered by the CBAM will have their free allocations phased out from 2027. For other sectors, free allocations are reducing every year. This means more of a company’s emissions carry a cost, sending a stronger price signal.
Linking with the EU ETS
It is very likely that the UK ETS will be linked with the EU ETS in the future. A deal has reportedly been reached and will be unveiled at the planned UK-EU Summit in November 2026.
Aligning with CORSIA
The UK government still faces the headache of aligning the UK ETS with CORSIA (the Carbon Offsetting and Reduction Scheme for International Aviation). Both schemes involve requiring airlines to buy emissions credits. A consultation on CORSIA closed in February 2025, but so far there hasn’t been much progress on dealing with the inconvenient overlap between the two schemes.
This FAQ section is updated regularly and we will report on any significant changes as they happen. For advice on compliance with the UK ETS, get in touch with Sustainable Energy First.