A UK Emissions Trading Scheme (UK ETS) replaced the UK’s participation in the EU ETS on 1 January 2021. The 4 governments of the UK have established the scheme to increase the climate ambition of the UK’s carbon pricing policy, while protecting the competitiveness of UK businesses.
This guidance explains who the UK ETS applies to and what is required of businesses that are covered.
The UK was instrumental in developing the EU ETS and the introduction of a UK scheme provides continuity of emissions trading for UK businesses. Many of the features and processes in the new UK scheme will be familiar to operators.
Further details of the design of the UK ETS and proposals for its future development are available in the UK government and devolved administrations’ response to the consultation on the future of UK carbon pricing. The UK ETS is established through The Greenhouse Gas Emissions Trading Scheme Order 2020.
The UK government and the devolved administrations collectively constitute the UK ETS Authority to oversee the UK ETS.
The UK ETS Authority and its regulators will release guidance necessary to advise operators and facilitate their compliance obligations with the UK ETS.
The ‘How to Comply’ guidance will be released in early 2021.
Read the initial guidance for aircraft operators. Future guidance will be released as the scheme develops.
If you have any queries, in the first instance please contact your regulator.
The ‘cap and trade’ approach to reducing emissions
Emissions trading schemes work on the ‘cap and trade’ principle, where a cap is set on the total amount of certain greenhouse gases that can be emitted by sectors covered by the scheme. This limits the total amount of carbon that can be emitted and, as it decreases over time, will make a significant contribution to how we meet our Net Zero 2050 target and other legally binding carbon reduction commitments.
Within this cap, participants receive free allowances and/or buy emission allowances at auction or on the secondary market which they can trade with other participants as needed.
Each year, installations and aircraft operators covered by the scheme must surrender allowances to cover their reportable emissions. The cap is reduced over time, so that total emissions must fall.
Who the UK ETS applies to
The UK ETS will apply to energy intensive industries, the power generation sector and aviation.
It covers activities involving combustion of fuels in installations with a total rated thermal input exceeding 20MW (except in installations for the incineration of hazardous or municipal waste).
The aviation routes covered by the UK ETS will include UK domestic flights, flights between the UK and Gibraltar, and flights departing the UK to European Economic Area states conducted by all included aircraft operators, regardless of nationality.
If you carry out an activity covered by the UK ETS, you will need a greenhouse gas emissions permit.
You may also need:
- a small emitter or hospital permit (if you are classed as a small emitter or a hospital)
- an emissions monitoring plan (if you are an aircraft operator)
Activities covered by the UK ETS are any of the activities listed in Schedule 1 (for Aviation) and Schedule 2 (for stationary installations) of the Greenhouse Gas Emissions Trading Scheme Order 2020.
Northern Ireland electricity generators shall remain in the EU ETS by virtue of the Ireland / Northern Ireland Protocol.
Permitting, monitoring, reporting and verification
Operators of stationary installations
Permits for operators whose activity falls within the scope of the UK ETS will receive their permits in 2 stages.
The first stage, which will be completed by the end of 2020, will see operators receive the main part of their permit via the Emissions Trading System Workflow Automation Program (ETSWAP) system.
The second stage, which will be completed in early 2021, will see the regulators attach the monitoring methodology plan to relevant permits and make consequential amendments associated with free allocation.
This approach is being taken to ensure that from 1 January 2021 all operators whose activity falls within the scope of the UK ETS will have the necessary permitting documentation.
The regulators for each of the UK nations, controlled waters, territorial sea and the UK sector of the continental shelf are listed in article 10 of The Greenhouse Gas Emissions Trading Scheme Order 2020. Failure to comply with your permit and obligations under this Order may lead to significant civil penalties being applied.
Operators should read and understand their permit, and conditions within relating to monitoring and reporting obligations, as well as those requiring third-party verification of reported emissions. Government will be working in 2021 to 2022 to develop a new system to replace ETSWAP. Until this new system is operational, operators will continue to use the existing ETSWAP system to complete applications and submit reports as normal.
Using UK greenhouse gas inventory data in UK ETS monitoring and reporting: the country-specific factor list
The Monitoring and Reporting Regulation, as modified by the UK ETS Order, allows nationally reported data to be used by operators as default factors in specific circumstances. See the country-specific factor list:
- Using UK greenhouse gas inventory data in UK ETS monitoring and reporting: the country-specific factor list
Finding an accredited UK ETS verifier
The Verification Regulation 2018 (Commission Implementing Regulation (EU) 2018/2067 of 18 December 2018 as applied and modified for the purposes of the UK ETS by Schedule 5 to the Greenhouse Gas Emissions Trading Scheme Order 2020 (SI 2020/1265)) requires verifiers to be a legal person or another legal entity that is carrying out verification activities for the purpose of UK ETS and is accredited by the UK Accreditation Service (UKAS). There is no requirement for UK ETS accredited verifiers to have a physical office in the UK or to be a legal entity registered in the UK.
UKAS is responsible for the accreditation and supervision of verifiers in the UK and for maintaining a list of those verifiers.
Operators are responsible for ensuring that their verifier is accredited for the relevant scope of work. Details of a verifier’s scope of accreditation can be found on the verifier’s certificate of accreditation.
If you are an UK ETS verification body working in the UK for the first time, you will need an ETSWAP account to view your client’s reports and to submit your verification opinion statement. To do this, email the Environment Agency at firstname.lastname@example.org quoting ETSWAP Support in your subject line.
From 1 January 2021, aircraft operators will have obligations under the UK ETS upon becoming an aircraft operator. Failure to comply with obligations under the UK ETS may result in significant civil penalties.
For information on whether you have obligations, and how to comply, read the guidance for aircraft operators.
A UK Emissions Trading Registry has been developed for the UK ETS. There are different types of account available in the Registry:
- Operator Holding Account (OHA)
- Aircraft Operator Holding Account (AOHA)
- Trading Accounts
- Person Holding Accounts
Operator Holding Account (OHA) and Aircraft Operator Holding Account (AOHA)
Operators must have a holding account in the Registry to acquire and surrender allowances in line with UK ETS obligations.
Aircraft operators will need to have an Aircraft Operator Holding Account (AOHA). All other operators will need to have an Operator Holding Account (OHA). These accounts can also be used to trade allowances.
Once your permit or emissions monitoring plan has been issued, your regulator will instruct the Registry Administrator to open an OHA, or AOHA for you. You will be contacted by the Registry Administrator and asked to provide details of a primary contact (who is authorised to give instructions to the Registry Administrator on your behalf), and also to nominate authorised representatives to operate your OHA, or AOHA for you.
UK ETS Trading Accounts are available for holding and trading of UK allowances that is not related to UK ETS compliance.
To open a trading account, you must first register to use the service, and then request to open a trading account. The Registry Administrator will then get in touch with you to guide you through the remainder of the process.
Trading accounts require at least 2 registered authorised representatives to operate the account.
Person Holding Accounts
The Registry is also used to host the UK Kyoto Protocol Registry, and Person Holding Accounts are available to be requested if you need to hold or trade international units.
Opening a UK Registry account
The opening of a UK Registry account and validation of individuals must undergo similar scrutiny as when opening a bank account. This will include requesting any further information to satisfy the Registry Administrator that both you (the account holder) and the nominated authorised representatives are fit and proper.
This process can take longer for account representatives based outside of the UK.
Timetable for onboarding Registry accounts
Users intending to request a UK ETS trading account can now register and sign in to use the service. Once registered, users can apply to open a UK ETS Trading Account.
A timetable for when all other users can access the service is outlined below.
From 4 May 2021
Operators and Aircraft Operators participating in the UK ETS will be contacted by the Registry Administrator and asked to provide details of a primary contact (who is authorised to give instructions to the Registry Administrator on your behalf), and also to nominate authorised representatives to manage their Operator Holding Account (OHA) or Aircraft Operator Holding Account (AOHA).
UK Kyoto Protocol (KP) Person Holding Account holders in the EU Registry will have their accounts and units migrated to the UK Registry. These users will be contacted by the Registry Administrator and asked to provide details of a primary contact (who is authorised to give instructions to the Registry Administrator on your behalf), and also to nominate at least 2 authorised representatives to operate these migrated accounts for you.
From late May 2021
You will be able to apply to open a new UK KP Person Holding Account. The exact date will be confirmed at a later date.
A link to the UK Emissions Trading Registry will be made available here once it is open for registrations in April.
Free allocation of allowances to qualifying operators of installations and aircraft operators will continue, to reduce the risk of carbon leakage for UK businesses.
The initial approach to free allocation in the UK ETS will be similar to the EU’s proposed approach for Phase IV of the EU ETS. This will ensure a continuation of emissions trading smooth transition for businesses in 2021. The benchmarks used to calculate free allocation entitlement will be the same as Phase IV of the EU ETS .
Legislation covering free allocation is in The Greenhouse Gas Emissions Trading Scheme (Amendment) Order 2020, which came into force on 31 December 2020.
Free allocation for operators of installations
Free allowances will be made available for operators of eligible installations who applied for a free allocation of allowances for the 2021 to 2025 allocation period and for new entrants to the UK ETS. The free allocation application validity will be determined by the UK ETS authority.
Each installation’s free allocation will be published in an Allocation Table once it has been calculated and approved by the UK ETS authority.
The industry benchmarks used to calculate free allocation were published by the European Commission on the 12 March 2021.
The Allocation Table, which contains a list of each installation’s free allocation for the 2021 to 2025 allocation period, was published on 11 May 2021. Free allowances for the 2021 scheme year were allocated to operator holding accounts in the UK ETS Registry on 26 May 2021.
Submitting Activity Level Reports
If you are included in the Allocation Table, you must submit a verified Activity Level Report. For 2021 the deadline for submission was 30 June, so your report should already have been submitted to your regulator. From 2022 onwards the deadline each year to submit these reports will be 31 March.
If the data in your Activity Level Report shows an increase or decrease in activity of 15% or more from historic activity levels (calculated from the previous 2 years activity levels), your free allocation of allowances will be recalculated.
Your regulator re-calculates the free allocation of allowances in line with the Activity Level Change Regulation. The UK ETS Authority approves the final allocation.
When approved, you will be notified by your regulator of changes to the final free allocation of allowances in due course.
Any changes to free allocation of allowances in 2021 will be published in an updated Allocation Table at a later date. (Please note that we will prioritise instances of initial overallocation, with installations having an under allocation and further amendments processed up until January 2022).
Any increase in allocation will be allocated to Operator Holding Accounts in the Registry in line with the updated allocation table, and any reductions in entitlement will mean that you must return any over-allocations from your Operator Holding Account.
You will be able to access your updated Activity Level Report from ETSWAP following your regulator’s review. This ALR will contain updated benchmarks and any other changes agreed with your regulator and should be used in future years.
You must use the verification report template for the verification of your activity levels data. You must submit the completed verification report template to your regulator with your activity levels data report.
Free Allocation from 2022
In 2022 and every scheme year thereafter, free allocation will be allocated on or before 28 February of each calendar year. The deadline for submitting verified Activity Level Data Reports will be the 31 March of each calendar year.
Cross-Sectoral Correction Factor
The UK ETS authority has determined that no cross-sectoral correction factor (CSCF) will be applied for the 2021-2025 allocation period.
Free allocation for aircraft operators
Free allocation will be made available to all eligible aircraft operators who applied for a free allocation of allowances under the UK ETS.
Each aircraft operator’s free allocation entitlement will be published on the Aviation Allocation Table (AAT) once it has been calculated and approved by the UK ETS authority.
The Aviation Allocation Table contains a list of each aircraft operator’s free allocation entitlement for the 2021 to 2025 allocation period. This table is subject to change and the years 2023-2025 should be treated as indicative, pending the outcome of the ongoing free allocation review. Free Allowances for the 2021 scheme year will be allocated to operator holding accounts in the UK ETS Registry after the publication of the Aviation Allocation Table.
Auctioning and market operation
Auctioning will continue to be the primary means of introducing allowances into the market. Participants will also be able to trade allowances on a secondary market.
The auction calendar confirms the volume of allowances available in each auction. A revised 2021 auction calendar was published by ICE Futures Europe on 19 October 2021. The 2022 auction calendar was published on 3 November 2021. There is the potential for minor revisions to the 2022 auction calendar once volumes for aviation free allocation are finalised.
Auctions can clear, with allowances being sold to bidders, without all allowances being successfully bid for. Any remaining allowances not sold in an auction are redistributed across the following four auctions up to 125% of those auctions’ original number of allowances. Above this limit, allowances will transfer into the market stability mechanism account.
The 2023 Auction Calendar will be published in the second half of 2022.
Auction Reserve Price
The UK ETS will have a transitional Auction Reserve Price (ARP) of £22, which establishes a minimum price for which allowances can be sold at auctions. Bids below this price will not be successful at auction. The ARP value was set in the Auctioning Regulations published on 11 February 2021, and the government does not intend to make any further changes to the level of the Auction Reserve Price before it is likely withdrawn as the UK ETS matures. The government will consult on its intent to withdraw the ARP as part of the planned consultation to appropriately align the UK ETS cap with a net zero trajectory which will be launched later this year.
Cost Containment Mechanism
There is also a Cost Containment Mechanism (CCM), which provides a powerful tool for the UK ETS Authority to intervene if prices are elevated for a sustained period. The UK CCM has lower price and time triggers in the first 2 years of the UK ETS when compared to the equivalent EU ETS mechanism: this is to ensure the intervention can be more agile in early years while the UK ETS matures.
If the CCM is triggered, the UK ETS Authority will consider what intervention, if any, to make. Their decision will be based on addressing sustained price movements that do not correspond to market fundamentals. If there is no agreement on what action to take, the final decision will be taken by HM Treasury (HMT). This intervention can include:
- redistributing allowances between the current year’s auctions
- increasing the volume of allowances to be auctioned by:
- bringing forward auctioned allowances from future years
- drawing allowances from the market stability mechanism account
- auctioning up to 25% of the remaining allowances in the New Entrants Reserve
- auctioning allowances which form part of the industry cap on free allocation to stationary installations for the current or past scheme years where the amount of free allocation is lower than the industry cap
- bringing allowances into auctions from the flexible share
Furthermore, the decision about what intervention, if any, to make will be clearly communicated to participants in a timely manner.
Until January 2022, the CCM will be triggered if the average end of day settlement price of a UK allowance (UKA) December futures contract is more than 2 times the average price for the preceding 2-year ‘reference period’, for 3 consecutive months (the ‘monitoring period’).
From February 2022 until January 2023, the CCM will be triggered if the average end of day settlement price of the relevant UKA December futures contract is more than 2.5 times the average price for the reference period for the duration of the monitoring period.
From February 2023 onwards, the CCM will be triggered if the relevant UKA futures contract is 3 times the average price for the reference period for 6 consecutive months.
An explanation of the operation of the CCM is set out in the explanatory memorandum to the UK ETS auctioning regulations.
The 2-year reference period ends when the 3 consecutive months monitoring period starts. This means that the whole period under consideration is 27 months, split into 2 components – the 2-year ‘reference period’, followed by the 3-month ‘monitoring period’. To calculate the carbon price in the 2-year reference period, a combination of EU allowance (EUA) December future contracts and UKA December future contracts may be used dependent upon when the 2-year reference is counted from. EUA prices are used as a reference due to the limited UK ETS market data available since UK ETS auctions only started in May 2021.
When the 2-year reference period starts in 2019 or 2020, the carbon price calculation includes:
- the end of day settlement prices of the EU allowance (EUA) December futures contracts up until 31 December 2020. After this date EUA prices are no longer counted. This price was converted from EUR to GBP using the respective historical daily spot exchange rate, provided by the Bank of England
- from 1 January 2021 onwards, the end of day settlement prices of the UKA December futures contracts is counted. However, from 1 January 2021 to 18 May 2021 there were no UKA future contracts. Therefore, these days are treated as non-trading days and do not contribute to the 2-year average
|Month||2-year reference period||Trigger price||3-month monitoring period||Monthly average prices in 3-month monitoring period: Month 1||Monthly average prices in 3-month monitoring period: month 2||Monthly average prices in 3-month monitoring period: month 3||CCM triggered? Yes or No|
|Aug-21||1 May 2019 – 30 Apr 2021||£44.74||May, June, July||£49.09||£46.08||£44.15||No|
|Sep-21||1 June 2019 – 31 May 2021||£45.90||June, July, Aug||£46.08||£44.15||£48.55||No|
|Oct-21||1 July 2019 – 30 June 2021||£48.37||July, Aug, Sep||£44.15||£48.55||£58.36||No|
|Nov-21||1 Aug 2019 – 31 July 2021||£50.37||Aug, Sep, Oct||£48.55||£58.36||£60.98||No|
|Dec-21||1 Sep 2019 – 31 Aug 2021||£52.88||Sep, Oct, Nov||£58.36||£60.98||£60.50||Yes|
|Jan-22||1 Oct 2019 – 30 Sep 2021||£56.58||Oct, Nov, Dec||£60.98||£60.50||£74.87||Yes|
|Feb-22||1 Nov 2019 – 31 Oct 2021||£75.76||Nov, Dec, Jan||£60.50||£74.87||TBD||No|
|Mar-22||1 Dec 2019 – 30 Nov 2021||£80.90||Dec, Jan, Feb||£74.87||TBD||TBD||No|
|Apr-22||1 Jan 2020 – 31 Dec 2021||£87.99||Jan, Feb, Mar||TBD||TBD||TBD||TBD|
The monthly average carbon price is calculated by dividing the sum of the end of day settlement prices for the relevant December futures contract during each month by the number of days in the month for which a price is published. For trading days from 19 May 2021 until 30 November 2021, the 2021 UKA December futures contract is used. From 1 December 2021 until 30 November 2022, the 2022 UKA December futures contract is used.
In order for the CCM to be triggered, there must be 3 consecutive months where monthly average prices are above the trigger price.
December 2021 trigger
The monthly average carbon prices in September, October and November 2021 were all above the December trigger price of £52.88. This means that the CCM was triggered for December 2021.
The UK ETS Authority agreed in December that the appropriate decision at that time was not to intervene in the market. This decision was based on the specific circumstances at the time and does not prejudice future decisions. See the UK ETS Authority Statement on the Cost Containment Mechanism decision for December. The Authority will continue to monitor the market closely.
To calculate whether the CCM was triggered for December, it was first necessary to calculate the average carbon price for the 2-year reference period. This was done by dividing the sum of the end of day settlement prices from 1 September 2019 to 31 August 2021 by the number of days for which an end of day settlement price for relevant December futures contract was published during the reference period. This number was then multiplied by 2. This calculation resulted in a trigger price of £52.88.
January 2022 trigger
The monthly average carbon prices in October, November and December 2021 were all above the January trigger price of £56.58. This means that the CCM has been triggered for January 2022.
The UK ETS Authority will now consider what intervention, if any, to make. The UK ETS Authority decision options are listed above. The decision will be communicated to the market no later than after trading hours on 18 January. This is to give sufficient time for all members of the Authority to consider the most up to date evidence and for Authority ministers to reach a decision.
To calculate whether the CCM is triggered for January 2022, the relevant reference period is 1 October 2019 to 30 September 2021. The trigger price for January is £56.58. The average prices in October (£60.98), November (£60.50) and December 2021 (£74.87) were all above the trigger.
February 2022 trigger
The average monthly price in November was lower than the February trigger price, therefore the CCM cannot be triggered for February 2022. February is the first month where the CCM trigger price is 2.5 times the average price in the reference period, as is the case for all subsequent months in 2022.
March 2022 trigger
The CCM cannot be triggered in March 2022, since the average monthly price in December was below the March trigger price.
April 2022 trigger
To calculate whether the CCM is triggered for April 2022, the relevant reference period is 1 January 2020 to 31 December 2021. The trigger price for April is £87.99. If the average prices in January, February and March are above £87.99 the CCM will be triggered for April 2022.
Triggering the CCM any month runs separately from triggering for previous months, and depends on the calculation of future average monthly prices.
The UK ETS Authority will update this page monthly with the latest CCM trigger prices and monthly average carbon prices. The next update will be on 10 February 2022.
The Auctioning Regulations
The Auctioning Regulations govern the auctioning of UKAs and the provision of a secondary market. The Auctioning Regulations and Explanatory Memorandum contain additional policy background relating to UK ETS Auctions. BEIS has been appointed by HMT as UK Auctioneer for these auctions. This role is required by legislation and is responsible for the conduct of the auctions.
The Auctioning Regulations were made the Recognised Auction Platforms (Amendment and Miscellaneous Provisions Regulations 2021) Affirmative Statutory Instrument. This SI establishes a market and auction oversight role for the FCA in the UK ETS and establishes UK emissions allowances as ‘financial instruments’, ensuring they are subject to the correct regulatory treatment.
These Statutory Instruments have been amended by the Recognised Auction Platforms and Greenhouse Gas Emissions Trading Scheme Auctioning (Amendment) Regulations 2021. This Statutory Instrument updates the existing Instruments to provide greater clarity on the auction clearing price, the Cost Containment Mechanism and the eligibility criteria for bidding in UK ETS auctions.
ICE Futures Europe will continue to provide the auction platform and secondary market services under the UK ETS until December 2022.
Eligibility for auctions
To be eligible to bid in UKA auctions, entities will need to be one of the following:
- a UK ETS operator or a UK ETS aircraft operator;
- a member of a UK ETS operator or UK ETS aircraft operator’s group (i.e. parent companies, subsidiaries or fellow subsidiaries) which is not required to be located in the UK
- a business grouping of UK ETS operators, UK ETS aircraft operators or their group, which is not required to be located in the UK
- public/state bodies of the UK that control UK ETS operators, UK ETS aircraft operators or members of their group
- a UK investment firm with a Part 4A FSMA permission that would require authorisation under the Markets in Financial Instruments directive (MiFID)
- a UK credit institution with a Part 4A FSMA permission that would require authorisation under the Capital Requirements directive (CRD)
- a third country (i.e. non-UK) investment firm with a Part 4A FSMA permission that would require authorisation under MiFID
- a third country (i.e. non-UK) credit institution with a Part 4A FSMA permission that would require authorisation under CRD
- a person covered by the exemption in paragraph 1(k) of Schedule 3 of the FSMA Regulated Activities Order 2001 (whose investment business is ancillary to their main commodities business, in accordance with regulation 16(2) of the Auctioning Regulations), provided they have a registered office (or head office if no registered office) in the UK.
Register for auctions
Auction participants will need to register with ICE as the appointed auction platform. Market participants who are interested in bidding in the auction should visit the ICE website and contact email@example.com.
Auction participants will also require a registry account in the UK Emissions Trading Registry. Entities can either open a UK ETS Trading account or, if holding a UK ETS Permit or Monitoring Plan already, can use their Operator Holding Account (OHA) or Aircraft Operator Holding account (AOHA) to take part in auctions. For Operators and Aircraft operators the OHAs and AOHAs will be opened for them by the Registry Administrator, however it is important that they register with ICE as soon as possible to start the process.
For more information about the UK ETS auctions, please contact firstname.lastname@example.org.
Simplified provisions for small emitters and hospitals, and ultra-small emitting installations
In the UK ETS, there will be simplified provisions for small emitting installations and hospitals with emissions lower than 25,000t CO2e per annum and a net-rated thermal capacity below 35MW. These installations will be subject to emissions targets instead of trading allowances. Separate simplified provisions are available to Installations with emissions lower than 2,500t CO2e per annum.
Read guidance on opting out of the UK ETS if your installation is either: