United Kingdom Emissions Trading Scheme (UK ETS)

The UK ETS was created after Brexit, as a piece of exclusively UK-oriented legislature. Originally a highly-influential founding member of the EU ETS in 2005, it was important for the UK to establish its own Emissions Trading Scheme post Brexit after leaving the EU to keep greenhouse emissions to a minimum, as well as to keep the UK competitive in a green global market. Hence, the UK ETS went into effect on 1 January 2021 but trading on the carbon market opened in May 2021.

The UK version of the scheme continues to target the same key goals as the EU: which is to make the country’s carbon pricing policy more ambitious whilst helping UK businesses stay competitive in an increasingly green market. Therefore, the UK government has made a legally-binding pledge to reach net zero emissions by the year 2050, and ETS scheme is one of the practical means of reaching this goal.

The entry process to the UK ETS is similar to the EU ETS. The UK system operates on the ‘cap and trade’ system. This terminology refers to a cap on the total amount of certain greenhouse gases that can be emitted by assets covered by the system. The cap is reduced little by little over time, so that total emissions decrease in accordance with the UK’s net zero target.

Whatever the cap is for a given year, it is converted into tradable emission/carbon allowances. These allowances are based on a businesses level of energy consumption and greenhouse gas emissions. With each of these allowance, the holder has the right to emit one tonne of CO2 (or its greenhouse gas equivalent). At the end of each year, large energy users must forfeit the correct number of allowances to cover all their emissions, or they will incur a financial penalty such as a fine.

Every business that applies, it will gain a number of allowances for free to put towards eligible installations (typically energy-intensive industries, or aviation) depending on their existing energy consumption levels. This follows the same method as the EU ETS. If businesses are likely to emit more than their allocation of allowances, they can either reduce emissions or purchase additional allowances.

Businesses that have sites with combustion equipment above the 20MWth limit must monitor and report their emissions each year. To compensate for emissions that fall outside of their allotment, they must give up a specific number of their allowances.

Alternatively, if a company keeps its emissions to a minimum and does not use its allowances to the greatest extent, it can hold on to its remaining allowances for the following year or sell them.

It is thanks to the ETS that commercial and industrial emissions are more closely monitored than ever before – and because of the ETS scheme that reductions have occurred over the years as businesses become more carbon aware. In fact, since the launch of the EU ETS, emissions from installations have reduced by roughly 35%.

We can expect to see stricter restrictions on emissions, especially for businesses that have high amounts of energy consumption.

UK EST Timeline:

• 1 January 2021
  • Launch of UK ETS
  • Start of annual reporting period
• 12 May 2021
  • Free Allocation of Table published
• 19 May 2021
  • UK ETS Auctions begin (auctions will be held every 2 weeks through 2021)
• 30 June 2021
  • Submit verified activity level data report
• 15 July 2021
  • UK ETS auction calendar for 2022 published
• 1 September – 31 December 2021
  • Verifications required (annually)
• 31 December 2021
  • End of first year of reporting (annually)
• 28 February 2022
  • Free allocations issued (annually)
• 31 March 2022
  • Submission deadline (annually)
• 30 April 2022
  • Surrender of allowances (annually)31 December 2023
• 31 December 2023
  • Review of the operation of UK ETS Phase 1
• 31 December 2028
  • Review of the operation of UK ETS Phase 2

Not every UK-based business will need to adhere to the UK ETS. The legislature applies to three industries within the UK economy:

• Energy-intensive industries (such as steelmaking and meat processing)
• Power generation
• Aviation

Because the UK was so heavily involved in the formation of the EU ETS, most elements of the UK ETS remain the same. The biggest exception is that the UK ETS applies only to companies within the UK. Using the aviation industry as an example, the EU ETS covers all flights within the EEA, while the UK ETS covers UK domestic flights, flights between the UK and the EEA, and flights between the UK and Gibraltar.

Apart from the obvious geographical differentiation, the main difference between the UK ETS and the EU ETS is that the UK ETS is somewhat more ambitious than the EU ETS, with a price cap that is 5% lower.

One unit, or “allowance” under the UK ETS, is called a UK allowance (UKA). This unit of measurement gives a UK 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.

Applicable organisations will need a greenhouse gas emissions permit. If you are an aircraft operator, you will need an emissions monitoring plan. You can learn more here: full guidance for aircraft operators.

You may apply for a greenhouse gas emissions permit through the ETSWAP portal on the Environment Agency’s website.

No. The UK ETS system prevents carbon-intensive businesses from transferring operations to countries with fewer regulations and lower costs. This potential risk is called “carbon leakage,” and both the UK and EU EST safeguards against this. This is why the UK ETS allocates a certain number of free allowances for energy-intensive businesses.

Also, The New Entrants Reserve (NER) allows free allowances that are set aside for new operators, as well as for existing operators that have dramatically increased their capacity.

You can only opt out of the UK ETS if your organisation is classified as a ‘small emitter’, or a ‘hospital/service provider’ for hospitals. However, to successfully opt out you will need to apply for a “hospital or small emitter” (HSE) permit.

Energy suppliers can also get a HSE permit if at least 85% of the heat produced by 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
• have a total rated thermal input of less than 35 megawatts (MW)

Even if your organisation meets these criteria, it may not automatically qualify for exemption.

You will need submit your application for exemption within a specific timeframe and make sure you check the eligibility requirements carefully. Applications for exemption in the period 2021 to 2025 are already closed, and applications for the next period open in April 2024. View the full UK Government guidelines for hospitals and small emitters permits.

Military and search & rescue flights are also exempt from ETS requirements.

There are two measures in place to prevent extreme highs and lows in pricing of UK ETS: the Auction Reserve Price, or ARP, and the Cost Containment Mechanism, or CCM.

The Auction Reserve Price, sets the minimum price for a UK allowance which is currently £22. Bids below this price will not be accepted.

The Cost Containment Mechanism enables the UK ETS authorities to intervene if prices remain high over a prolonged period. The factor in whether prices are too high fluctuates each month and is based on comparable prices during a reference period of the previous two years. If the UK ETS price increases by double the reference period average and then remain at this price for three consecutive months, this indicates a need for intervention.

If the CCM is required, the UK ETS authority will take steps to reduce prices. This can be done by increasing the number of permits, by bringing forward some of following year’s allowance, or releasing some of the permits that were planned for the New Entrants’ Reserve.

If you want to see the current price of UK EST then it is best to look back at the trading that occurred during the auction periods. The ICE Exchange website holds reports that lists all the UK emissions auction since trading opened on May 2021 and includes the price of UK allowance at each auction.