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The UK Emissions Trading Scheme – What you need to know

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Was your organisation previously part of the EU Emissions Trading Scheme (EU ETS)? If so, read on to find out about the UK scheme that has replaced EU ETS due to Brexit.

As the UK has left the EU, organisations that were part of EU ETS are automatically transferred to the UK scheme that has replaced the EU version for UK participants. This scheme is known as the UK Emissions Trading Scheme (UK ETS).

The UK ETS went live on 1st January 2021 and it broadly follows the same criteria with a few important differences.

Background

The EU ETS has been around for a number of years. It was set up in 2005 to help combat climate change and become a key tool for reducing greenhouse gas emissions cost-effectively. It was the world’s first international emissions trading system.

The schemes uses the ‘cap and trade’ principle. There is a limit on the total amount of certain greenhouse gases that can be emitted by the organisations covered by the system – this is the ‘cap’. The cap is reduced over time so that total emissions fall.

Organisations buy or receive emissions allowances, which they can trade with one another as needed. Each year each organisation must surrender enough allowances to cover all of its emissions, otherwise fines are imposed. If emissions are reduced, spare allowances can be sold to other organisations that are short of allowances.

Buying and selling of allowances takes place within official auctions.

UK ETS

The UK ETS has been implemented by the following legislation:

Note that the scheme is still in the process of being introduced so it is likely that further secondary legislation around the scheme may still be published.

The principles of the UK ETS largely follow the requirements brought in by the EU ETS. It has been designed to maintain continuity with the EU ETS and to facilitate possible linkage in the future, which is subject to ongoing trade negotiations between the UK and EU.

A UK ETS Authority has been created to oversee the scheme and this is made up relevant departments within the UK government.

There are no changes to who the UK ETS applies to meaning if organisations were part of EU ETS they fall under the scope of UK ETS. But how do you know if your organisation falls within the scope of UK ETS? The regulated activities covered by the UK ETS are listed in the table in Schedule 2 to the legislation. Aviation activities are also covered by the scheme.

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.

If organisations carry out an activity covered by the UK ETS, they must hold a greenhouse gas emissions permit. These permits are issued by the regulators in the UK jurisdictions (for example the Environment Agency in England). Organisations should already have had their new greenhouse gas emissions permit for UK ETS issued by their regulator.

The requirements around annual monitoring, reporting and verification of greenhouse gas emissions remain very similar. The deadline for submitting reports remains the same as in the EU ETS which is by 31st March in the following year.

A UK Registry has been created for the UK ETS which is the system used for keeping track of allowances held by participants. It replaces the use of the EU registry operated by the European Commission within the UK. Again, the deadline mirrors that for surrender of allowances each year which is by 30th April in the following year.

UK ETS auctions have recently just begun, with the first one taking place on 19th May 2021. This is where organisations can buy and sell emissions allowances. Auctions take place every 2 weeks as set out in the auction calendar.

The UK ETS is a complex scheme and the main points have been touched on in this article. If you would like to know more about the scheme Government has produced dedicated guidance including ‘participating in the UK ETS’.

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