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United Kingdom

Compare ETS
ETS Status
in force
Jurisdictions
United Kingdom
Start of operation (year)
2021
Sectoral coverage
Domestic Aviation
Industry
Power
Allocation
Free allocation (Benchmarking) and Auctioning
Cap
147.2 MtCO2e (2023)
GHGs covered
CO2, N2O, PFCs
Average auction price (2022)
GBP 75.42 (USD 92.96)
Total revenue since beginning
GBP 10.4 billion (USD 12.9 billion)
Total revenue (2022)
GBP 6.1 billion (USD 7.6 billion)
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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 cover 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 entities in the power and industrial sectors, as well as aviation within the UK and flights departing the UK to Switzerland and the European Economic Area (EEA). Allowances are primarily allocated through auctioning, with a portion freely allocated to safeguard the competitiveness of emissions-intensive trade-exposed (EITE) sectors and minimize the risk of carbon leakage. The system has both a cost containment mechanism (CCM) and auction reserve price, to support market stability.

The scheme is due to be reviewed in 2023 and 2028, with ongoing reforms and developments of specific elements in the meantime. The UK government remains open to the possibility of linking the UK ETS to other systems, if such a link would be advantageous for both systems.

The year began with the CCM being triggered, with an announcement in mid-January that no market intervention would be made. There was no further triggering of the CCM, although allowance prices were generally higher than in 2021.

In March, the UK launched a major consultation on reforming the ETS. The UK ETS Authority proposed to align the ETS trajectory with its net-zero target by rebasing the cap in 2024, alongside a suggestion to reset the share of free allocations available in light of this change. The consultation also sought views on expanding the ETS scope to cover emissions from domestic maritime, waste incineration, and energy from waste. The consultation addressed the integration of GHG removals into the scheme, amending rules for the aviation sector, and further development of market design.

In August, an initial response to the consultation was published, outlining changes to be implemented from 2023. These included covering emissions from flights departing the UK for Switzerland, amending free allocation for 2022 to reflect activity level changes in 2020 caused by the COVID-19 pandemic, and minor amendments to MRV provisions. A full response to the consultation is expected in 2023.

The UK government will launch a consultation in spring 2023 to explore policies that could potentially mitigate future risk of carbon leakage, including measures such as product standards and a carbon border adjustment mechanism (CBAM).

Domestic Aviation
Industry
Power

Emissions & Targets

405.8

BY 2030: At least a 68% reduction in UK net GHG emissions from 1990 levels, including emissions from LULUCF (UK NDC, December 2020)

BY 2035: Limit UK net GHG emissions to 965 MtCO2e over 2033-2037, representing ~77% reduction on 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 (The Climate Change Act 2008 (2050 Target Amendment) Order 2019)

Average auction price in 2022: GBP 75.42 (USD 92.96)

Size & Phases

102.60MtCO2e
CO2, N2O, PFCs

PHASE ONE: 10 years (2021-2030)

FIRST ALLOCATION PERIOD (2021-2025): 736 MtCO2e, to be adjusted to reflect the hospital and small emitter opt-outs.

SECOND ALLOCATION PERIOD (2026-2030): 630 MtCO2e, to be adjusted to reflect the hospital and small emitter opt-outs.

The cap was set at 5% below the UK’s notional share of the EU ETS cap for its fourth phase.  The annual cap for 2023 is 147.2 MtCO2e and will decline by 4.2 MtCO2e each year, which is a ~2.8% reduction in 2023. Allowances for the New Entrants’ Reserve (NER) are part of the overall cap.

In March 2022, the UK launched a consultation on reforming the ETS, including on aligning the cap trajectory with the UK’s net-zero emissions target. A decision on changes to the cap is expected in 2023.

 

POWER SECTOR & INDUSTRY: The ETS applies to a specified list of activities of installations in the power and industry sector. 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 a minimum carbon price of GBP 18 per tCO2 (USD 22.22) for power generators using fossil fuels. The CPS will continue to support the decarbonization of the power sector and will stay in place at least until unabated coal-fired power generation is phased out. The government has committed to end the use of unabated coal by 2024.

Small Emitter and Hospital Opt-Out 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 less 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: Emissions are included from flights within the UK and flights from the UK to and from Gibraltar or to a country within the EEA. Exemptions are made for aircraft operators with fewer than 243 flights per calendar year for three consecutive four-month periods or total annual emissions of less than 10,000 tCO2. From January 2023, flights from Great Britain to Switzerland (and vice versa) have also been included in the scope of the UK ETS.

ADDITIONAL SECTORS: The 2022 consultation on reforming the UK ETS sought views on expanding the scheme to emissions from domestic maritime (by the mid-2020s), waste incineration and energy from waste (by the mid- to late-2020s).

Point source

1,006 entities (2021)

Allowance Allocation & Revenue

AUCTIONING:  Auctioning is the primary means of allowance allocation in the UK ETS. Auctions have a GBP 22 (USD 27.16) transitional Auction Reserve Price (ARP), below which allowances will not be sold. The 2022 consultation on UK ETS reforms sought views on the timeline to withdraw the ARP and whether it should be replaced by another mechanism. 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 have reached the 125% limit, the remaining unsold allowances are transferred into a reserve in the Market Stability Mechanism Account. 

In 2022, around 81 million allowances were allocated through auctioning, raising GBP 6.1 billion (USD 7.6 billion). As set out in the auction calendar, around 79 million UK Allowances (UKAs) will be sold in 2023.

FREE ALLOCATION: A number of allowances 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. 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”). This was set at around 58 million allowances in 2021 (~37% of the 2021 cap) and declines by 1.6 million allowances per year. If the total amount of free allocation exceeds the industry cap for a particular year, unallocated allowances 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.

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, which addressed resetting the industry cap in the context of a net-zero consistent cap and proposals on technical changes to free allocations. The review will continue in 2023 with a second phase focusing on the free allocation methodology and better targeting support for those sectors most at risk of carbon leakage.

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 6.1 billion (USD 7.6 billion) in 2022

Revenues from UK ETS auctions accrue to the general budget and are not earmarked.

Flexibility & Linking

Banking of allowances is permitted, and allowances remain valid in future years of the scheme.

Limited and implicit borrowing is allowed, i.e., using allowances allocated for free in the current year for compliance in the previous year. Covered entities are not allowed to use surplus allowances from the EU ETS for compliance with the UK ETS.

The use of offsets for compliance is not permitted at this time. The UK is considering introducing GHG removals in the UK ETS to be used for compliance within the scheme, and a call for evidence on this issue closed in June 2022. The UK is also considering how the UK ETS should interact with the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA).

No link with another system is currently in place. 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 post-Brexit Trade and Cooperation Agreement between the EU and UK 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”.

Compliance

One calendar 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 without surrendering a permit. This penalty is equal to GBP 100 per tCO2e (USD 123.46) initially but is adjusted for inflation over time. 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 in the secondary market must meet the requirements of the ICE Futures Exchange and have an account in the UK registry. Participants may also trade allowances over the counter.

LEGAL STATUS OF ALLOWANCES: The “Recognised Auction Platforms (Amendment and Miscellaneous Provisions Regulations 2021) Affirmative Statutory Instrument” establishes UKAs as financial instruments.

SUPPLY ADJUSTMENT MECHANISM (SAM): The UK ETS Authority has set out the possibility of establishing a SAM. This could be broadly based on the EU ETS Market Stability Reserve (MSR), although adaptations would be required to suit the UK context. The UK ETS Authority will consult separately on the design of a SAM if required in due course. There is a transitional ARP in place to ensure minimum price continuity (see ‘Allowance Allocation’ section).   

COST CONTAINMENT MECHANISM (CCM): The UK ETS has a CCM to avoid spikes in allowance prices 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 allowances 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 CCM was triggered in December 2021 and January 2022, following which the UK ETS Authority met and agreed that the appropriate decision was not to intervene in the market.

Triggers: In the first year, the CCM was triggered if, for three consecutive months, the UK ETS carbon price was double the average allowance price in effect in the UK in the two preceding years. From February 2022, the CCM was triggered if the allowance price was more than two and a half times the average price for preceding two-year reference period, for three consecutive months. From February 2023 onwards, the CCM is triggered if the allowance price is three times the average price for the reference period for six consecutive months.

TRANSITIONAL AUCTION RESERVE PRICE (ARP):To ensure a minimum level of ambition in the transition from the EU ETS to the UK ETS, a transitional ARP of GBP 22 (USD 30.26) is in place. No further changes to the level of the ARP are planned. The 2022 consultation on UK ETS reforms sought views on the timeline to withdraw the ARP and whether it should be replaced by another mechanism.

Other Information

UK ETS Authority: Overall responsibility for designing and implementing the UK ETS. It is composed of the representatives of the UK Government, Scottish Government, Welsh Government, and the Department of Agriculture, Environment and Rural Affairs of Northern Ireland.

National Regulators (Environment Agency; Scottish Environment Protection Agency; Natural Resources Body for Wales; Northern Ireland Environment Agency): 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 must be carried out by the end of 2023 and the second by the end of 2028. A report will be published on the conclusions of each review round. Changes to the ETS design following the reviews should be implemented by 2026 and 2031, respectively.

In addition to the whole-system reviews, the government is in the process of reviewing free allocation for stationary installations and aviation and changes required to align with CORSIA.

The Greenhouse Gas Emissions Trading Scheme Order 2020 
The Climate Change Act 2008 (2050 Target Amendment) Order 2019

 

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