UK emissions trading scheme

The UK Emission Trading Scheme (ETS) is a cap-and-trade system which caps the total level of greenhouse gas emissions, creating a carbon market with a carbon price signal to incentivise decarbonisation. The UK ETS came in to force on 1 January 2021 to replace the UK’s participation in the EU ETS, which was established in 2005.

Participants in the scheme are required to obtain and surrender allowances to cover their annual greenhouse gas emissions. Participants can purchase allowances at auction or trade them amongst themselves, which allows the market to find the most cost-effective way to reduce emissions. Industrial sectors considered at risk of carbon leakage (whereby carbon costs would make them uncompetitive prompting industry to relocate outside the country in which the ETS applies) receive a proportion of allowances for free.

On 1 June 2020, the Scottish Government, UK Government, Welsh Government and Northern Ireland Executive jointly announced plans to establish a UK Emissions Trading Scheme (UK ETS) from January 2021. This was in response to the 2019 consultation for a replacement for the UK’s participation in the EU Emissions Trading System after EU Exit.

The UK ETS aims to:

incentivise cost-effective greenhouse gas emissions reductions for sectors currently in scope of the EU ETS, while balancing this ambition with the competitiveness of UK industry
be at least as ambitious as the current EU ETS and to provide a smooth transition for all relevant sectors

UK ETS design features

The UK ETS is a single UK-wide emissions trading scheme modelled on phase IV (2021-30) of the EU ETS. The UK ETS legislation will allow the UK ETS to operate as a standalone scheme, or to link to the EU ETS if an agreement is reached with the EU. It will play an important role in delivering Scotland’s net zero targets and ensure a continued carbon price to drive decarbonisation for our largest greenhouse gas emitters now that we have left the EU Emissions Trading System (EU ETS).

The UK ETS maintains the scope of the EU ETS, with participation mandatory for the power sector, energy intensive industries and aviation. It will cover around 100 participants in Scotland who account for 28% of Scotland’s greenhouse gas emissions.

The UK ETS sets a cap on emissions at 5% less than the UK’s notional share of the EU ETS cap. Along with the other governments, we have committed to review this cap in 2021, and implement any changes by 2024, to ensure the cap is in line with our net zero ambitions.

The UK ETS obligations on participants, in particular for monitoring, reporting and verification, are based on the EU ETS phase IV requirements. The Scottish Environment Protection Agency (SEPA) will continue to regulate Scottish participants with enforcement powers to ensure compliance with the UK ETS rules.

The first phase of the scheme will run from January 2021 to December 2030, with two whole-system reviews in 2023 and 2028 to assess the performance of the scheme. Other reviews of specific aspects of the UK ETS will take place as needed – e.g. changes to the cap will be reviewed.

Consultation 2022

The UK ETS Authority – made up of the UK Government, Scottish Government, Welsh Government and the Department of Agriculture, Environment and Rural Affairs for Northern Ireland – published a consultation to further develop the UK Emissions Trading Scheme (UK ETS) in March 2022. This consultation closed in June 2022.

The UK ETS Authority has published the final government response to the consultation, which includes decisions on the net zero aligned cap, free allocation policy and, further to subject consultation, scope expansion of the ETS. An initial government response to the consultation was published in August 2022, as a small number of proposals required implementation via legislation ahead of 2023.

Consultation 2019

In May 2019, we launched a joint consultation with the UK Government and other Devolved Administrations on the Future of UK Carbon Pricing once we have left the European Union. This focused on seeking stakeholders’ views on the design of a UK ETS.

The consultation received 149 response from a variety of industry sectors. We published a joint Government response to the consultation on 1 June 2020.

Operational guidance

Operational guidance can be found on the gov.uk landing page for the UK ETS.

Additional resources

Additional resources regarding emissions trading and related information are available below:

For further information, please email: emissions.trading@gov.scot

Climate change