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Use this function to compare the design elements and characteristics of up to three ETSs from around the world.
New Zealand Emissions Trading Scheme
General Information
The New Zealand Emissions Trading Scheme (NZ ETS) was launched in 2008 and is a central climate change mitigation policy for the country. It covers roughly half of New Zealand’s GHG emissions. The “Climate Change Response Act 2002” sets the legislative framework for the NZ ETS and incorporates all of New Zealand’s key climate legislation under one Act.
The cap is set in a top-down process to align with New Zealand’s 2050 net zero targets and associated emissions budgets. Covered entities must surrender allowances for all their reported emissions.
The NZ ETS has broad sectoral coverage, including forestry, stationary energy, industrial processing, liquid fossil fuels, waste, and synthetic GHGs. Allocation is based primarily on auctioning, which began in March 2021. Free allocation is granted only for emissions-intensive, trade-exposed (EITE) activities and is based on output- and intensity-based benchmarks. Uniquely to the NZ ETS, the forestry sector has both surrender obligations and the opportunity to earn units for emissions removals. The agricultural sector used to face processor level reporting obligations with the future possibility of facing compliance obligations under the NZ ETS, but this is no longer the case.
From 2011 until November 2024, companies carrying out certain agricultural activities had an obligation to report their emissions to the NZ ETS at the processor level. The He Waka Eke Noa partnership between the government and the agricultural sector had been established to deliver a pricing mechanism outside of the NZ ETS for the sector, with a ‘backstop’ measure to price agricultural emissions through the NZ ETS at the processor level in 2025, followed by pricing at the farm-level in 2027.
This legislation was repealed in 2024, removing agriculture activities from the NZ ETS. A new Pastoral Sector Group will replace the He Waka Eke Noa partnership. The government plans to price agricultural emissions (through a mechanism other than the NZ ETS) by no later than 2030.
In June 2024, the government commissioned an independent ministerial advisory panel of experts to review the latest science about biogenic methane and provide an up-to-date evidence base about methane’s warming impact. This report was delivered in December 2024 and ministers will consider the findings alongside the Climate Change Commission’s advice on New Zealand’s 2050 targets in 2025.
Unit supply settings, as well as auction reserve price settings for 2025 to 2029, were updated in September. The cap (which limits the number of units from auctioning, industrial allocation, and the cost containment reserve - CCR) was reduced from 27.9 million in 2024 to 19.1 million in 2025. The 2025 auction reserve price floor is NZD 68 (USD 41.17), and the first CCR trigger price is NZD 193 (USD 116.86).
Four auctions were undertaken in 2024, with 14.1 million units for sale, as well as another 7.7 million units available from the CCR. Two of the auctions cleared, with 3 million units sold in March 2024 and 4 million in December 2024, all at the floor price of NZD 64 (USD 38.75). In line with the NZ ETS auctioning regulations, any units that were unsold after the last auction of 2024 are not available for sale at any subsequent auction.
In December 2024, the government updated baselines for activities eligible for industrial allocation, to better reflect the actual emissions intensity of those activities. The regulations containing the new baselines came into force as of January 2025 and will impact the final allocations firms receive for 2024. The updates bring the industrial allocation system more in line with its purpose.
Emissions & Targets
78.4 MtCO2e (2022)
By 2030: 50% reduction of net emissions below gross 2005 levels (NDC); 10% reduction of biogenic methane emissions below 2017 levels (Climate Change Response Act 2002, through an amendment in 2019)
By 2050: Reduce net emissions of all GHGs (except biogenic methane) to zero; reduce biogenic methane emissions to 24-47% below 2017 levels (Climate Change Response Act 2002, through an amendment in 2019)
Average auction price: NZD 64 (USD 38.75)
Average secondary market price: NZD 59.31 (USD 35.91)
Updated prices available here
Size & Phases
The NZ ETS cap limits the number of New Zealand Units (NZUs) that may be released to the market from auctioning, industrial allocation, and from the CCR, as well as from any international units (not currently allowed). There is no limit on NZUs generated from removal activities. The NZ ETS cap thus limits the volume of net emissions that are emitted by ETS regulated entities, without imposing a limit on gross emissions within the ETS.
In 2025, the cap is 19.1 MtCO2e.
The Climate Change Response Act 2002 requires the government to set a cap on emissions covered by the NZ ETS, based on the five-yearly emissions budgets and announced over a rolling five-year period with annual updates.
The government updated regulations for unit supply settings in September 2024, setting the annual cap for the years 2025 to 2029. In setting supply limits, the government also considers the stockpile of banked allowances already in circulation and projected unit supply from removal activities.
NZUs generated from removal activities are forecast to be 13.8 million units in 2025, mainly generated in the forestry sector.
The NZ ETS was originally designed to operate without a specific domestic cap, as this accommodated carbon sequestration from forestry activities and a full link to the international Kyoto Protocol carbon markets. Allowance supply was restricted to NZUs in 2015. No decisions have been made on potential future access to and use of international units.
SECTORS: Sectors were gradually phased in between 2008 and 2013.
- Forestry (mandatory: deforesting pre-1990 forest land; voluntary: post-1989 forest land)
- Stationary energy
- Industrial processing
- Liquid fossil fuels
- Waste (except for small and remote landfills)
- Synthetic GHGs; synthetic GHGs not covered by the NZ ETS are subject to an equivalent levy
From 2011 until November 2024, companies carrying out certain agricultural activities had an obligation to report their emissions to the NZ ETS at the processor level. The He Waka Eke Noa partnership between the government and the agricultural sector had been established to deliver a pricing mechanism outside of the NZ ETS for the sector, with a ‘backstop’ measure to price agricultural emissions through the NZ ETS at the processor level in 2025, followed by pricing at the farm-level in 2027.
This legislation was repealed in 2024, removing agriculture activities from the NZ ETS. A new Pastoral Sector Group will replace the He Waka Eke Noa partnership. The government plans to price agricultural emissions (through a mechanism other than the NZ ETS) by no later than 2030.
Types of fuel covered: petrol, diesel, aviation gasoline, jet kerosene, light fuel oil, heavy fuel oil. Emissions from fuel used for international aviation and marine transport are exempt.
INCLUSION THRESHOLDS: Thresholds for participation are typically low.*
- Forestry (mandatory: deforesting pre-1990 forest land; voluntary: post-1989 forest land)
- Stationary energy (various thresholds)
- Industrial processing (various thresholds)
- Liquid fossil fuels (various thresholds)
- Waste (except for small and remote landfills)
- Synthetic GHGs (various thresholds); synthetic GHGs not covered by the NZ ETS are subject to an equivalent levy
* Detailed threshold information can be found in Schedule 3 of the Climate Change Response Act 2002 and in the Climate Change (General Exemptions) Order 2009
Upstream (power, aviation, buildings, forestry, forestry fuel use, transport); point source (industry, waste).
For all fossil fuels, the point of obligation is generally upstream. Some large businesses that purchase fossil fuels directly from mandatory NZ ETS participants can choose to opt into the NZ ETS rather than have the costs passed down from their suppliers.
4,617 entities were registered as participants in the NZ ETS as of the end of December 2024, of which:
- 165 entities have mandatory reporting and surrender obligations for 176 activities*
- 4,452 entities have voluntary (opt-in) reporting and surrender obligations for 4,650 activities*, 4,427 entities are registered as forestry.
*Some entities have obligations under multiple activities.
Note that some organizations have both mandatory and voluntary reporting and surrender obligations.
Allowance Allocation & Revenue
Proportion of allowances offered at auction in 2024: 51%
14.1 million units were made available at auction in 2024, and seven million were sold.
FREE ALLOCATION:
Leakage protection/Industrial free allocation: Free allocation is provided, based on output and intensity-based benchmarks, for 26 eligible industrial activities. Activities are deemed eligible if both EITE criteria are met. Highly emissions-intensive activities (over 1,600 tCO2e per NZD 1 million [USD 605,494] of revenue) receive 90% free allocation. Moderately emissions-intensive activities (over 800 tCO2e per NZD 1 million [USD 605,494] of revenue) receive 60% free allocation. An activity is deemed to be trade-exposed if there is transoceanic trade in the good produced.
In 2023, 5.7 million NZUs were allocated for industrial EITE activities.
In December 2024, the government updated the baselines for activities eligible for industrial allocation, to better reflect the actual emissions intensity of those activities. The regulations containing the new baselines came into force from January 2025 and will impact the final allocations firms receive for 2024. The updates bring the industrial allocation system more in line with its purpose.
Industrial free allocation is being phased down. A minimum annual phase-down rate of 0.01% across all industrial activities applies from 2021 to 2030. That rate will increase to 0.02% for the years 2031 to 2040, and to 0.03% for 2041 to 2050. The minimum phase-down rate could be adjusted for activities that are considered at lower risk of carbon leakage alongside other criteria as set in legislation.
AUCTIONING:
Auctioning was introduced in 2021. The volume of NZUs made available for auctioning is set on an annual basis, five years in advance (see ‘Cap’ section). The annual quantity is split between the quarterly auctions. In 2024, 14.1 million allowances were made available for auctioning, plus an additional 7.7 million allowances in the CCR. Seven million NZUs were sold in 2024.
Auctions follow a sealed-bid, single-round format. The clearing price is set at the lowest successful bid and NZUs are sold to all successful bidders at this price, providing it is not below the confidential reserve price (see ‘Market Stability Provisions’ section). Otherwise, the auction fails and all allowances on offer are rolled forward to the next auction within the same calendar year. Any units that remain unsold after the last auction of the year are not available for sale at any subsequent auction.
ALLOWANCES GRANTED FOR REMOVALS:
Post-1989 forestry sector and other removal activities: NZUs are granted to participants that voluntarily register in the scheme for removal activities.
Forestry removal activities: Participants are entitled to receive one NZU per tCO2 removed for registered post-1989 forest land. If the forest is harvested* or deforested, units must be surrendered to account for the emissions. If the participant chooses to deregister from the scheme, NZUs equivalent to the number received must be returned. 20 million NZUs were issued for forest removal activities in 2023.
Other removal activities: 2.1 million allowances were granted in 2023 for other removal activities, such as producing a product with embedded GHGs.
* Under the new “averaging” method for post-1989 forests, allowances are granted only up to the long-term average carbon stock, but therefore do not need to be surrendered at harvest.
NZD 5.6 billion (USD 3.7 billion) since the beginning of the program
NZD 480.9 million (USD 291.2 million) in 2024
Flexibility & Linking
Banking is allowed. NZUs do not expire.
Borrowing is not allowed.
The use of offset credits is not allowed.
Units from Kyoto Protocol flexibility mechanisms were eligible for use in the system with no restrictions until June 2015 but have since been ineligible. Access to high-integrity international carbon markets may be part of New Zealand’s strategy to meet its 2030 target. The government can decide to allow international units as part of the annual unit supply-setting process. However, only units from government-approved sources and those meeting environmental integrity standards would be eligible and subject to quantitative limits.
The NZ ETS is not linked with any other system.
Until June 2015, the NZ ETS was indirectly linked to other systems (e.g., the EU ETS) via the international Kyoto Protocol flexible mechanisms. Since then, the NZ ETS has been an exclusively domestic system.
Carbon tax: Synthetic GHG levy
Compliance
For most sectors, the NZ ETS has annual surrender obligations. For post-1989 forestry participants, annual reporting of emissions and removals is optional, with five-year mandatory reporting periods. As a result, unit allocations and surrenders for these participants occur in the year they choose to report their emissions.
REPORTING: Most sectors are required to report annually; the deadline is the end of March to submit an Annual Emissions Return (emissions report).
VERIFICATION: MRV follows a system of self-reporting supplemented by a program of official government audits. Each year, a sample of NZ ETS participants are selected for compliance review. Third-party verification is not typically required for emissions reports. However, participants must seek third-party verification if they apply for the use of a unique emissions factor, as opposed to using the default factors supplied by the government.
An entity that fails to submit an emissions report by the due date must pay a fine equal to the number of units involved, multiplied by the current unit price and a “culpability factor”.
An entity that fails to surrender or repay emissions units when required must surrender the units and pay a cash penalty of three times the current market price for each unit that was not surrendered by the due date. Entities can be fined up to NZD 24,000 (USD 14,531.86) on conviction for failure to collect emissions data or other required information, calculate emissions and/or removals, keep records, register as a participant, submit an Annual Emissions Return when required, or notify the administering agency or provide information when required to do so.
Entities can also be fined up to NZD 50,000 (USD 30,274.70) on conviction for knowingly altering, falsifying, or providing incomplete or misleading information about any obligations under the scheme, including in the Annual Emissions Return report. This penalty and/or imprisonment of up to five years also applies to entities that deliberately lie about obligations under the NZ ETS to gain financial benefit or avoid financial loss.
Market Regulation
MARKET PARTICIPATION: Any individual or organization can own and trade NZUs, if they hold an account with the NZ ETS Registry.
MARKET TYPES:
Primary: Auctions are operated jointly by NZX (New Zealand Exchange) and the European Energy Exchange (EEX) and are held four times a year. Any NZ ETS Register Account Holder can participate in the auctions.
Secondary: Most NZUs are traded on the secondary market. Trades can take place directly between companies (OTC) or via a trading platform. Trades can be on a spot basis or through forward contract.
LEGAL STATUS OF ALLOWANCES: Allowances are not financial products in New Zealand law and, as a result, there is currently no single integrated market governance framework that would manage risks of misconduct in the NZ ETS. The government has work underway on options to improve market governance.
COST CONTAINMENT RESERVE (CCR)
Instrument type: Price-based instrument
Functioning: If a predetermined trigger price is reached at auction, a specified number of allowances from the CCR are additionally released for sale. The CCR follows a two-tier system, with a specific number of allowances available for auction at each trigger. The government updates the CCR trigger prices each year, together with other auction supply settings (see ‘Cap’ section).
At the start of 2025, the first CCR trigger price is NZD 193 (USD 116.86), with a total of 2.6 million units available. The second trigger price is NZD 242 (USD 146.53), with 4.5 million units available. These triggers will rise annually to reach NZD 235 (USD 142.29) and NZD 294 (USD 178.01) respectively in 2029.
In 2024, the volume of the CCR was set at a total of 7.7 million allowances for both triggers. The trigger price was not reached during 2024, so none of these were released to market. Currently, the volume of the reserve is set at 7.1 million in 2025, dropping annually to 4.7 million in 2029.
PRICE FLOOR
Instrument type: Price-based instrument
Functioning: With the start of auctioning, the government introduced a price floor operating through a reserve price or minimum accepted bid at auction.
In addition to the hard auction reserve price floor, the government introduced a confidential reserve price. This is set by referencing prices from the secondary market and uses a confidential methodology to determine a reserve price below which units cannot be sold. If it is set higher than the hard auction reserve price, then it becomes the new reserve price floor for that auction.
The hard auction reserve price floor is NZD 68 (USD 41.17) in 2025, rising annually to NZD 82 (USD 49.65) in 2029.
Other Information
Ministry for the Environment: Responsible for establishing the regulatory framework of the NZ ETS.
Environmental Protection Authority: Responsible for the NZ ETS registry and compliance.
Ministry for Primary Industries: Responsible for the forestry sector under the NZ ETS.
Climate Change Commission: Independent body providing official annual advice on NZ ETS settings.
The Climate Change Response Act 2002 includes provisions for reviews of the operation and effectiveness of the NZ ETS. These reviews were originally required every five years, but the timing is now discretionary. The first review took place from 2011 to 2012, and the second review took place from 2015 to 2017. A third review of the NZ ETS was opened in early 2023. Following the 2023 General Election, this was closed by the new government.
Climate Change Response Act 2002—Part 4 New Zealand greenhouse gas emissions trading scheme*
* To keep New Zealand’s key climate change legislation under one act, the Climate Change Response Act incorporates both the “Climate Change Response (Emissions Trading Reform) Amendment Act 2020”, and the “Climate Change Response (Zero Carbon) Amendment Act 2019”. The “Zero Carbon Act” details domestic targets to 2050, establishes the Climate Change Commission, and mandates a process of setting and meeting five-year national emission budgets.
UK Emissions Trading Scheme
General Information
The UK Emissions Trading Scheme (UK ETS) began operating in January 2021, following the departure of the UK (excluding power operators located in Northern Ireland) from the EU ETS. Verified emissions from stationary UK ETS operators currently account for around a quarter of the UK’s territorial GHG emissions. The first phase of the UK ETS runs until 2030.
The UK ETS covers around 1,000 installations in the power and industrial sectors, as well as around 400 aircraft operators. Aviation activity covered includes flights within the UK as well as flights departing the UK to the European Economic Area (EEA) and Switzerland.
Covered installations and aircraft operators must surrender allowances for all their covered emissions. Allowances are allocated primarily through auctioning, with a portion freely allocated to mitigate the risk of carbon leakage. The system has both a cost containment mechanism (CCM) and an auction reserve price, to support market stability.
The UK ETS cap is consistent with the UK’s target of achieving net zero by 2050.
In December 2023, the UK Government published the long-term pathway for the UK ETS, outlining its continuation until at least 2050, in alignment with net-zero targets. The document includes a workplan for consultations on expanding the scheme to waste incineration and energy from waste, domestic maritime, and GHG removals, as well as a framework for potentially including more high-emitting sectors.
A package of reforms to develop the UK ETS further were implemented in 2024 as well as a number of consultations to expand its scope.
Since January 2024, the UK ETS cap was reset to be consistent with the UK’s net-zero target by 2050. The changes included a 30% reduction in the total number of allowances available between 2021 and 2030. To ensure a smooth transition to the net zero cap, 53.5 million previously unallocated allowances were released from reserve pots to auction between 2024 and 2027. The cap will reduce from 156 MtCO2e in 2021 to around 50 MtCO2e by 2030.
In May 2024, the UK ETS Authority launched two consultations related to scope expansion. The UK ETS intends to cover emissions from waste incineration and energy from waste from 2028 (preceded by a two-year MRV-only period from 2026 to 2028). The UK ETS Authority followed up on its commitment to integrate engineered greenhouse gas removals (GGRs) in the scheme by proposing policy options for how this could be done.
In October 2024, the UK Government confirmed that the UK Carbon Border Adjustment Mechanism (UK CBAM) will be introduced on 1 January 2027, in order to address the risk of carbon leakage. The CBAM will place a carbon price on some of the most emissions-intensive industrial goods imported to the UK from the aluminum, cement, fertilizer, hydrogen, and iron and steel sectors that are at risk of carbon leakage.
In November 2024, the UK ETS Authority launched two further consultations on scope expansion: to cover emissions from domestic maritime activities from 2026 and to recognize and implement non-pipeline transport for carbon capture and storage. In addition, the Authority also published an initial response to the 2023 “Free Allocation Review” consultation, confirming that operators who cease operation will have their final year’s allocation adjusted to reflect activity levels, while also allowing operators who are ceasing to decarbonize to apply to be exempted from this new rule to ensure the incentive to decarbonize is maintained.
In December 2024, the UK ETS Authority confirmed that the start of the second free allocation period will move from 2026 to 2027, to align changes to free allocation with the introduction of the UK CBAM in 2027. The UK ETS Authority also launched a consultation seeking views on how carbon leakage risk should be calculated, and the approach to adjusting free allocation levels for CBAM sectors.
Emissions & Targets
409.6 MtCO2e (2022)
By 2030: At least a 68% reduction in UK net GHG emissions from 1990 levels, including emissions from LULUCF (NDC)
By 2035: At least a 81% reduction in UK net GHG emissions from 1990 levels, including emissions from LULUCF (NDC)
Limit UK net GHG emissions to 965 MtCO2e over 2033 to 2037, representing ~77% reduction from 1990 levels, including emissions from LULUCF and international aviation and shipping (“Carbon Budget Order 2021”)
By 2050: Net-zero UK GHG emissions, including emissions from LULUCF and international aviation and shipping (“Climate Change Act 2008 [2050 Target Amendment] Order 2019”)
Current prices can be checked here
Size & Phases
PHASE 1: Ten years (2021 to 2030)
A cap limits the total emissions allowed in the system.
FIRST ALLOCATION PERIOD (2021 to 2025): 633 MtCO2e, to be adjusted to reflect the hospital and small emitter opt-outs.
SECOND ALLOCATION PERIOD (2026 to 2030)*: 303 MtCO2e, to be adjusted to reflect the hospital and small emitter opt-outs.
The cap was initially set at 5% below the UK’s notional share of the EU ETS cap for its fourth phase. The cumulative caps for the first and second allocation periods were originally 736 MtCO2e and 630 MtCO2e, respectively. However, they were reduced following a 2022 consultation on reforming the UK ETS, which included aligning the cap trajectory with the UK’s net-zero emissions target. The cap for 2025 is 86.7 MtCO2e. Allowances for the New Entrants’ Reserve (NER) are part of the overall cap.
* An Authority publication of December 2024 announced that the second allocation period would start in 2027. To effect this, a new allocation period will be created for a standalone year in 2026, however free allocations for this time will be calculated on the same basis as 2021 to 2025 free allocations.
POWER SECTOR AND INDUSTRY: The UK ETS applies to a specified list of activities of installations in the power and industrial sectors. This includes activities involving the combustion of fuels in installations with a total rated thermal input exceeding 20 MW, as well as activities in refining, heavy industry, and manufacturing. Power generators in Northern Ireland still fall under the EU ETS, as they are part of the integrated Single Electricity Market with the Republic of Ireland.
In addition to the power sector’s participation in the UK ETS, the UK’s Carbon Price Support (CPS) policy imposes an additional carbon tax of GBP 18 per tCO2 (USD 23.01) for power generators in Great Britian (excluding Northern Ireland) using fossil fuels.
Hospitals and Small Emitter (HSE) Scheme: Hospitals and small emitters with emissions below 25,000 tCO2e per year and a net-rated thermal input lower than 35 MW can opt out of the ETS and instead monitor and report their emissions and meet annual emission reduction targets. This approach is similar to the UK’s opt-out scheme in Phase 3 of the EU ETS.
Ultra-Small Emitter Exemption: For stationary installations emitting fewer than 2,500 tCO2e per year, an ultra-small emitter exemption is in place. These installations are required to monitor emissions and notify the regulator if emissions exceed the threshold.
AVIATION: UK ETS obligations arise from flights within the UK, flights from the UK to a country within the EEA (excluding outermost regions) and to Switzerland, and flights between the UK and Gibraltar. * Commercial aircraft operators with fewer than 243 full scope flights in a four-month period for three consecutive four-month periods or total full scope annual emissions of less than 10,000 tCO2 are exempt.
Non-commercial aircraft operators are not subject to UK ETS obligations if their annual full scope emissions fall below 1,000 tCO2. Full scope flights are those departing from or arriving in an aerodrome in the UK, Gibraltar, an EEA state, Switzerland, or outermost regions other than an excluded flight.
The UK is also considering how the UK ETS should interact with the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). In December 2024, the UK Department for Transport launched a consultation on implementing CORSIA in the UK, in partnership with the UK ETS Authority, which includes options for how CORSIA could interact with the UK ETS on flights in scope of both schemes.
ADDITIONAL SECTORS: In 2023, the UK ETS Authority announced its intention to expand the scheme to cover emissions from domestic maritime from 2026, and emissions from waste incineration and energy from waste from 2028.
* Aviation activities included in the UK ETS are outlined in the “Greenhouse Gas Emissions Trading Scheme Order 2020”.
Point source
A total of 1,396 entities in 2023, made up of 1,009 installations and 387 aircraft operators
Allowance Allocation & Revenue
AUCTIONING: Auctioning is the primary means of allowance allocation in the UK ETS. Auctions have a GBP 22 (USD 28.12) Auction Reserve Price (ARP), below which allowances will not be sold. Auctions clear even when not all allowances are sold. Unsold allowances are carried over to the next four auctions, up to a limit of 125% of allowances originally intended for sale at those auctions. If all four subsequent auctions reach the 125% limit, the remaining unsold allowances are transferred into the Market Stability Mechanism Account.
In 2024, ~69 million allowances were sold at auction, raising ~GBP 2.6 billion (~USD 3.3billion). As set out in the auction calendar, ~56 million UK Allowances (UKAs) will be auctioned in 2025 across 25 auctions.
FREE ALLOCATION: A number of UKAs are allocated for free to industrial participants at risk of carbon leakage. The number of free allowances that an installation is entitled to is determined using the historical activity level, an industry benchmark, and a carbon leakage exposure factor (CLEF). The benchmarks and CLEFs that have been used initially are those used in Phase 4 of the EU ETS in the most part with an exception for the lime benchmark and malt extraction’s carbon leakage status. Historical activity levels are based on data collected under the EU ETS.
There is a maximum number of allowances allocated for free (the “industry cap”). Originally, an absolute value for the industry cap was established for each year of the first phase. This approach was changed following the 2022 consultation on reforming the UK ETS. From 2024, the industry cap is now set at 40% of the total cap and reduces annually in line with the cap trajectory. If the total amount of free allocation exceeds the industry cap for a particular year, unallocated UKAs from the industry cap from the previous year, as well as allowances from a flexible reserve, can be used. As a last resort, a cross-sectoral correction factor would be applied to ensure a uniform reduction across eligible participants.
An initial allocation table, which lists the volume of free allowances for each installation for the first allocation period, was published in May 2021. Eligible installations must submit a verified Activity Level Report (see ‘Compliance’ section). If the data in the Activity Level Report shows an increase or decrease in activity of 15% or more from historical activity levels (calculated based on the previous two years’ activity levels), their free allocation will be recalculated.
The first phase of a review of free allocation started with a call for evidence in spring 2021 and continued in 2022 as part of the consultation on developing the UK ETS. The second phase of the review, starting with a consultation in December 2023, is focused on the free allocation methodology and better targeting support for those sectors most at risk of carbon leakage. In December 2024, the UK ETS Authority published a further consultation on the carbon leakage list to be used for free allocation in the next period and confirmed that changes following the free allocation review will be made from 2027, with 2026 allocations calculated on the same basis as the first allocation period. The Authority also confirmed changes to rules around free allocation for installations that cease activity.
In 2023, the UK ETS Authority announced that free allocation for aviation operators would be phased out by 2026.
Carbon Border Adjustment Mechanism: As part of the December 2024 consultation, the UK ETS Authority put forward proposals to gradually adjust free allocation in CBAM covered sectors following the introduction of the new mechanism. The UK CBAM will apply to imports of specific goods in the aluminum, cement, fertilizers, hydrogen, and iron and steel sectors. It will cover both direct emissions related to the production processes of the CBAM goods, as well as indirect emissions related to the production of electricity consumed during their production. To better align the UK CBAM launch with the domestic ETS, the UK ETS Authority has confirmed that the free allocation in 2026 will be calculated on the same basis as the first allocation period delaying the second allocation period to 2027.
NER: A reserve of free allowances is set aside for installations that become eligible for participation within Phase 1 and for covered installations that significantly increase their activity level. The number of free allowances for new entrants is determined based on their activity in the first year of operation, the industry benchmark, and CLEF.
GBP 17.2 billion (USD 21.9 billion) since the beginning of the program
GBP 2.6 billion (USD 3.3 billion) in 2024
Revenues from UK ETS auctions accrue to the general budget and are not earmarked.
Flexibility & Linking
Banking is allowed, and allowances remain valid in future years of the scheme.
Limited and implicit borrowing is allowed, i.e., the use of UKAs allocated for free in the current year for compliance in the previous year.
The use of offset credits is not allowed. The UK ETS Authority intend to include engineered GGRs in the system.
The UK ETS is not linked with any other system.
The UK government has indicated it is open to the possibility of internationally linking the scheme in the future but has not made any decision on preferred linking partners. The UK-EU Trade and Cooperation Agreement (TCA) stipulates that the jurisdictions “shall give serious consideration to linking their respective carbon pricing systems in a way that preserves the integrity of these systems and provides for the possibility to increase their effectiveness”.
Carbon tax: UK Carbon Price Support (CPS)
The CPS, introduced in 2013, is an additional GBR 18/tCO2 (USD 23/tCO2) tax on emissions from fossil fuel power generation in Great Britain (excluding Northern Ireland), on top of the UK ETS carbon price.
Domestic crediting mechanisms: UK Woodland Carbon Code and Peatland Code
Compliance
One year. Covered entities have until the end of April of the following year to surrender allowances. These provisions are the same as under the EU ETS.
REPORTING FREQUENCY: Annual self-reporting.
VERIFICATION: Verification by independent accredited verifiers is required before the end of March each year.
FRAMEWORK: The UK ETS has adopted the MRV framework of Phase 4 of the EU ETS, including discretionary changes regarding reduced frequency of improvement reporting and the simplification of monitoring plans.
Regulated entities must pay an excess emissions penalty for each tCO2e emitted not matched by a surrendered allowance. This penalty is equal to GBP 100 per tCO2e (USD 127.81) initially but is adjusted for inflation over time. Paying this penalty does not remove the obligation to surrender an allowance. A new deadline for any outstanding deficit will be set, and non-compliance with this will result in a penalty of 1.5x the relevant carbon price, and may lead to escalating daily GBP 1,000 penalties if it continues to remain unmet. The names of non-compliant operators are published.
Market Regulation
MARKET PARTICIPATION: Compliance entities, non-compliance entities (domestic and international), and individuals.
MARKET TYPES:
Primary: The majority of allowances are allocated through auctioning. Auctions are held every two weeks, with dates and allowance amounts set out in the auction calendar. Compliance entities, financial institutions, and business groupings and public bodies acting on behalf of compliance entities can participate. Auctions are managed by ICE Futures Europe.
Secondary: UKAs are traded on the ICE Futures Europe exchange. Contracts for daily futures, futures, and options on futures contracts are available. Participants may also trade allowances over the counter. Participants in the secondary market must have an account in the UK Registry. Participants trading on the exchange must meet the requirements of the ICE Futures Exchange.
LEGAL STATUS OF ALLOWANCES: The “Recognized Auction Platforms (Amendment and Miscellaneous Provisions Regulations 2021) Affirmative Statutory Instrument” establishes UKAs as financial instruments.
COST CONTAINMENT MECHANISM (CCM)
Instrument type: Price-based instrument
Functioning: The UK ETS has a CCM to avoid price spikes by auctioning additional allowances. If the CCM is triggered, regulators can decide on whether and how to intervene. The intervention can include: redistributing allowances between the current year’s auctions; bringing forward UKA supply from future years; drawing from the Market Stability Mechanism Account; auctioning up to 25% of remaining allowances in the NER; or auctioning allowances left unallocated from the industry cap in a given year. The UK ETS Authority has publicly consulted on the current design of the CCM and is currently analyzing responses to the consultation.
The CCM is triggered if, for six consecutive months, the allowance price is three times the average allowance price in effect in the UK in the two preceding years.
AUCTION RESERVE PRICE (ARP)
Instrument type: Set price
Functioning: To ensure a minimum level of ambition in the transition from the EU ETS to the UK ETS, an ARP of GBP 22 (USD 28.12) is in place. The UK ETS Authority has publicly consulted on maintaining the ARP and sought views on the level and design of the ARP.
SUPPLY ADJUSTMENT MECHANISM (SAM)
The UK ETS Authority launched a consultation in December 2023 on the potential introduction and design of a SAM. The UK Government is currently analyzing responses to the consultation.
Other Information
UK Climate Change Committee (CCC): An independent, statutory body established under the Climate Change Act 2008. Its primary role is to advise the UK government and devolved administrations on emissions targets and on the progress in their achievement. The CCC provides expert advice on the design and implementation of the UK ETS, on its effectivenessin reducing emissions and reports on its progress.
UK ETS Authority: Overall responsibility for designing and implementing the UK ETS. It is composed of the representatives of the UK Government (Department for Energy Security and Net Zero (DESNZ), HM Treasury (HMT) and Department for Transport (DfT)), Scottish Government, Welsh Government, and the Department of Agriculture, Environment and Rural Affairs of Northern Ireland.
Regulators (Environment Agency; Scottish Environment Protection Agency; Natural Resources Wales; Northern Ireland Environment Agency; Offshore Petroleum Regulator for Environment and Decommissioning): Responsible for enforcing compliance with the UK ETS Regulations. The Environment Agency serves as the registry administrator and is responsible for the management of accounts in the UK Emissions Trading Registry.
Phase 1 includes two mandatory whole-system reviews. The first review was published at the end of 2023, and the second must be published by the end of 2028.
The UK ETS evaluation programme supports the mandatory review process. The report for Phase 1 of the UK ETS evaluation was published in December 2023.*
Phase 2 of the evaluation, assessing quantitative impacts of the UK ETS, is scheduled to be published in 2026.
In addition to the whole-system reviews, the UK ETS Authority is in the process of reviewing the future of UK ETS markets policy and free allocation for stationary installations. The UK ETS Authority is also consulting on expansion of scope to the waste and maritime sectors and to recognize non-pipeline transport for CCS as well as integration of engineered GGRs. The UK ETS Authority is also considering the approach to implementing CORSIA, including options for how CORSIA and the UK ETS should interact on flights in scope of both schemes.
* The report is available online.