UK Emissions Trading Scheme (UK ETS)

What is UK Emissions Trading Scheme (UK ETS)?

The UK Emissions Trading Scheme (UK ETS) launched on 1 January 2021, replacing the UK's participation in the EU Emissions Trading System following Brexit. It is a cap-and-trade system administered jointly by the UK Government, the Scottish Government, the Welsh Government, and the Northern Ireland Executive, with day-to-day operation by the Environment Agency, the Scottish Environment Protection Agency (SEPA), the Natural Resources Body for Wales (NRW), and the Northern Ireland Environment Agency (NIEA).

The UK ETS covers approximately 1,000 installations across the UK, including power stations, oil refineries, steel works, cement plants, glass manufacturers, paper mills, and other energy-intensive industries, plus domestic aviation (flights within the UK and to the EEA). Together, these account for roughly one-third of the UK's total greenhouse gas emissions. Installations exceeding specified capacity thresholds must participate in the scheme.

The system works by setting an annual cap on the total tonnes of CO₂e that can be emitted by all participants combined. This cap decreases each year in line with the UK's legally binding carbon budgets and net zero target. Allowances — UK Allowances (UKAs) — are distributed through a combination of free allocation (based on benchmarks of efficient production) and auctioning. Each allowance permits the emission of one tonne of CO₂e.

At the end of each compliance year, participants must surrender enough allowances to cover their verified emissions. If an installation emits less than its allocation, it can sell surplus allowances on the secondary market. If it emits more, it must purchase additional allowances at auction or from other participants. This creates a financial incentive to reduce emissions — every tonne avoided saves the cost of purchasing an allowance.

The UK ETS cap was initially set at 5% below the UK's expected share of the EU ETS cap and has been progressively tightened. The UK Government has committed to aligning the cap with the UK's net zero trajectory, which means it will decrease more steeply over time. The carbon price — the market price of a UKA — has fluctuated between approximately £30 and £80 per tonne, influenced by supply and demand dynamics, policy announcements, and energy prices.

Free allocation is given to sectors at risk of carbon leakage — where production might relocate overseas to jurisdictions without equivalent carbon pricing, resulting in no net reduction in global emissions. This includes sectors like cement, steel, glass, and chemicals. The government is developing a UK Carbon Border Adjustment Mechanism (CBAM) to address carbon leakage by placing a carbon price on certain imported goods, which may reduce the need for free allocation over time.

How Climatise Helps

For organisations with installations covered by the UK ETS, Climatise provides verified-ready emissions calculations and supports the monitoring and reporting requirements of the scheme. The platform also helps organisations outside the ETS understand how carbon pricing may affect their supply chain costs through Scope 3 analysis.

Frequently Asked Questions