UK announces major policy decisions and launches new consultations on ETS expansion
The UK Emissions Trading Scheme (UK ETS) Authority has published a series of major consultation responses and launched new consultations over recent weeks, marking significant progress in the development and expansion of the UK's carbon market. Between late October and early December 2025, the Authority responded to key consultations on free allocation, markets policy, and the scheme's extension beyond 2030, while opening a new consultation on international maritime emissions.
Domestic maritime to enter UK ETS from July 2026
On 26 November 2025, the UK ETS Authority published its main response to the Maritime Scope Expansion consultation, confirming the final policy details for including domestic maritime emissions in the scheme from 1 July 2026. The expansion will cover vessels of 5,000 gross tonnage (GT) or above undertaking domestic voyages between UK ports, including round trips and all in-port emissions. Covered greenhouse gases include carbon dioxide (CO₂), methane (CH₄), and nitrous oxide (N₂O), for this sector, with emissions from government non-commercial vessels such as military and emergency services remaining fully exempt.
The response addresses several key implementation details. Maritime operators will be required to develop Emissions Monitoring Plans, appoint accredited verifiers, and submit annual emissions reports under an operator-based monitoring, reporting, and verification framework. The Authority will adjust the UK ETS cap to account for domestic maritime emissions and has outlined the mechanism to ensure carbon pricing parity across the Irish Sea. The response also confirms the requirement for a Document of Compliance and sets out the surrender period for the scheme's first year. The Authority committed to reviewing the 5,000 GT threshold in the future and indicated that the scope will be reviewed as international frameworks at the International Maritime Organization evolve.
New consultation launched on international maritime voyages
On the same day, the UK ETS Authority launched a consultation on the potential future inclusion of emissions from international maritime voyages. The consultation builds on questions first raised in the 2024 "Scope Expansion: Maritime" exercise and now explores proposals in greater detail to extend the UK ETS to a share of emissions from international voyages, consistent with the UK-EU Common Understanding of May 2025.
The consultation seeks views on the proposed scope of the scheme, adjustments to the UK ETS cap to account for the proposed inclusion of international maritime emissions, a future review of the scheme in light of global measures developed at the IMO, and the impacts of the proposed scheme. The Department for Transport will conduct stakeholder engagement in the coming weeks on the broader policy landscape for international maritime policy, providing an avenue to understand stakeholder views in light of delays to the adoption of the IMO Net Zero Framework. The consultation is open until 20 January 2026.
Free allocation targeted at sectors most at risk of carbon leakage
Also on 26 November 2025, the UK ETS Authority published its response to the 2023 Free Allocation Review consultation and 2024 Free Allocation Review Carbon Leakage consultation. The publication concludes the free allocation review and sets out responses to remaining consultation proposals from both consultations, confirming changes to free allocation rules that will take effect for allocations distributed over the 2027-2030 allocation period.
Free allocations will be targeted at sectors most at risk of carbon leakage in the context of the reset industry cap, in line with the UK ETS's objective of incentivizing a move to more carbon-efficient production across the UK's industrial sectors. The response outlines the approach for sectors to be covered by the UK Carbon Border Adjustment Mechanism from 2027.
Key decisions include allowing operators to choose to have activity data for either 2020 only, or 2020 and 2021 excluded for the purpose of determining historical activity level for the 2027-2030 allocation period. The Authority will retain current benchmarks for 2027, with the in-principle intent to adopt updated EU benchmark values from 2028-2030. The current carbon leakage list will be retained, with no introduction of tiering of free allocation for sectors at risk of carbon leakage and no early phase-out of free allocations for sectors not on the carbon leakage list. The Authority decided against introducing additional methodologies in 2027 that would introduce conditions on the provision of free allocation but has set out a pathway to reconsider their introduction for future allocation periods. A gradual phase-out of free allocations for sectors covered by the UK CBAM will begin in 2027, with an indicative phase-out trajectory of nine years.
UK ETS extended to 2040 with allowance banking permitted
On 4 December 2025, the UK ETS Authority published its response to the Extending the UK ETS Cap Beyond 2030 consultation. The Authority confirmed its decision to extend the UK ETS into a Phase II from 2031 onwards, with the phase running from 1 January 2031 to 31 December 2040. Banking of allowances between Phases I and II of the UK ETS will be permitted.
Before legislating to extend the scheme, the Authority will consult on the specifics of a detailed Phase II cap profile. The decisions provide long-term certainty for participants and support continued decarbonization efforts beyond 2030 while enabling industries to plan their transition to net zero by 2050.
Markets policy updated to retain existing price control mechanisms
On the same day, the UK ETS Authority published its response to the Future Markets Policy consultation. The response sets out changes to markets policy for the UK ETS in the context of a standalone scheme.
The Authority decided to retain and inflation-proof the Auction Reserve Price, implementing an inflation-based increase from GBP 22 to GBP 28 in 2026 and increasing the value yearly by inflation from 2027 to maintain its real value. The existing design and operation of the Cost Containment Mechanism will be maintained, continuing to trigger if the average price for one allowance on the secondary futures market is more than three times the average price in the preceding two-year period for six consecutive months. The Authority has decided to rule out the implementation of a quantity-triggered Supply Adjustment Mechanism for a standalone UK ETS, concluding that retaining the existing price-based mechanisms is sufficient to mitigate against key risks in a standalone UK scheme.
These decisions were made in the context of the UK and EU's announcement on 19 May 2025 to work toward linking the UK ETS and EU ETS. The Authority noted that linking has implications for the approach to managing risks and that decisions set out in the response do not represent UK positions for the negotiations.
UK CBAM to be introduced from 2027
Beyond the UK ETS, the UK government confirmed it will legislate in the Finance Bill 2025-2026 to introduce a Carbon Border Adjustment Mechanism from 1 January 2027. A CBAM policy update was published on 26 November 2025 providing further information on the implementation of the mechanism.
Key decisions announced in the policy update include delaying the inclusion of indirect emissions (related to electricity generation consumed during production) from the initial scope until 2029 at the earliest to reflect continued support for the Energy Intensive Industries Compensation Scheme. The CBAM charge will initially apply only to direct emissions from production processes and emissions embodied in precursor goods used in complex CBAM goods. The government also confirmed that glass and ceramic sectors will not be in scope from 2027 as originally proposed and announced it will publish a Call for Evidence on the fuel sector, recognizing the role of refineries in energy security and the UK's industrial base.
Technical changes to the legislation include provisions that the free allowance adjustment in the CBAM rate calculation will be based on a sectoral average of emissions covered by free allowances over a baseline period, adjusted annually to reflect the phase-out of free allocations under the UK ETS. Carbon price relief has been extended to enable recognition of carbon prices incurred under carbon border adjustment mechanisms in other jurisdictions, and an exemption has been included for emissions embodied in UK-produced precursor goods to prevent double carbon pricing. As outlined in the November 2025 UK ETS free allocation review response, free allocations for sectors covered by the UK CBAM will be gradually phased out beginning in 2027 over an indicative nine-year trajectory.
