The Greenhouse Gas Emissions Trading Scheme (Amendment) (No. 2) Order 2022

Following the United Kingdom’s (UK) exit from the European Union (EU), this Order establishes a UK Emissions Trading Scheme (UK ETS) covering greenhouse gas emissions (GHG) from power and heat generation, energy intensive industries and aviation. It replaces the European Union Emissions Trading System (EU ETS) for UK participants.

The UK ETS begins on 1st January 2021. Before the UK left the EU, the EU ETS was applied in the UK through The Greenhouse Gas Emissions Trading Scheme Regulations 2012. All UK operators that carried out an activity covered by the EU ETS were required to hold a permit, which was a licence to operate and emit greenhouse gases covered by the EU ETS. Activities covered by the EU ETS are any of the activities listed in Annex I to Directive 2009/29/EC to improve and extend the greenhouse gas emission allowance trading scheme of the Community (‘EU ETS Directive’).

The UK ETS does not significantly change the requirements for participating UK operators from those brought in by the EU ETS. Elements of the scheme will be familiar to operators. It is designed to maintain continuity with the EU ETS and to facilitate possible linkage in the future, however this is subject to ongoing trade negotiations between the UK and EU and would require further secondary legislation.

Key provisions included in this Order cover the scope of the scheme, monitoring and reporting requirements, the cap (the total level of emissions permitted) and the trajectory (the rate at which the cap declines) and the roles of the regulators in monitoring and enforcing the rules of the UK ETS. Secondary legislation will be introduced under the Finance Act 2020  to establish other parts of the UK ETS including rules for the auctioning of emissions allowances. Secondary legislation for the UK ETS currently includes:

• The Greenhouse Gas Emissions Trading Scheme (Amendment) Order 2020 – further below in the updates section; and
• The Greenhouse Gas Emissions Trading Scheme Auctioning Regulations 2021 – implement the legal framework to allow auctioning of emissions allowances.

The regulated activities covered by the UK ETS are listed in Schedule 2. Aviation activities are covered by the scheme and the definition of this is given in Schedule 1. The scheme covers electricity generation and heavy energy-using industries such as power stations, refineries, iron and steel, cement and lime, paper, food and drink, glass, ceramics, engineering, and the manufacture of vehicles. Other organisations, including universities and hospitals, may also be covered by the UK ETS depending upon the combustion capacity of equipment at their sites.

The UK ETS continues the principals of emissions trading by allocating and trading GHG emissions allowances. One allowance equals one tonne of carbon dioxide (CO2) equivalent. At the end of each year, installations must have enough allowances to account for their GHG emissions. They have the flexibility to buy additional allowances on top of their allocation, or to sell surplus allowances generated from reducing their emissions below their allocation.

Allocation periods
Phase I of the UK ETS will run from 2021-2030 and is split into two allocation periods:

• 2021-2025 allocation period; and
• 2026-2030 allocation period.

The regulators in each jurisdiction that the Regulations apply to are the following:

• the Environment Agency (EA) for installations* in England;
• Natural Resources Wales (NRW) for installations in Wales;
• the Scottish Environment Protection Agency (SEPA) for installations in Scotland;
• the chief inspector for installations in Northern Ireland; and
• the Secretary of State for offshore installations.

*’Installation’ means a stationary technical unit where one or more regulated activities listed in Schedule 2 are carried out. ‘Installation’ does not include any of the following (which are outside the scope of the UK ETS):

• an installation that uses only biomass as a fuel;
• an installation, or part of an installation, of which the primary purpose is research and development (including the testing of new products and processes);
• an installation, of which the primary purpose is the incineration of hazardous or municipal waste; or
• a relevant Northern Ireland electricity generator.

For qualifying aircraft operators the regulators depend on which jurisdiction the aircraft operator is registered in:

• the EA, if the registered office is in England;
• NRW, if the registered office is in Wales;
• SEPA, if the registered office is in Scotland; or
• the chief inspector if the registered office is in Northern Ireland.

The EA is the default regulator for new aircraft operators that do not have a registered office or place of residence in the UK. From 2026, the regulator for aircraft operators will be one of the four above and depend on the jurisdiction where the highest proportion of emissions occur.