The UK Emissions Trading Scheme (UK ETS) is a key component of the UK’s strategy to combat climate change and meet its 2050 net-zero emissions target. It’s the country's principal mechanism for reducing greenhouse gas emissions from heavy industry. Created in the wake of Brexit, the UK ETS replaced the EU Emissions Trading System (EU ETS). It sets a limit on greenhouse gases that certain sectors can emit, requiring companies to obtain allowances for their emissions. These allowances can be traded between organisations, establishing a market-driven approach to emissions reduction.
How the UK ETS Works
The UK ETS works on a cap-and-trade principle that creates a market-based system to reduce emissions. The scheme started in January 2021 and puts a declining cap on greenhouse gas emissions.
The system's core components include:
- Allowance auctions held every two weeks on a Wednesday
- Free allocation mechanism for eligible sectors
- Market stability measures
- Annual emissions reporting requirements
Under the scheme, participants can acquire allowances through auctions hosted by ICE Futures Europe. An auction reserve price of £22 has been established to prevent market instability, while the Cost Containment Mechanism (CCM) helps control escalating prices. The UK ETS Authority keeps a close eye on market conditions. It can step in with additional measures when there's too much instability. These steps might include new rules about how participants manage their allowance holdings and limits on auction bid sizes. To protect against carbon leakage, the scheme gives free allowances to protect sectors that might move to countries with weaker climate policies. Regular reviews of this allocation help balance emission reduction goals with industry's competitive needs.
The UK ETS initially reduced its cap by about 4.2 million allowances annually, aligning with the UK's net zero goals and economic stability. However, this approach has been revised, and from 2024, the cap has been adjusted to achieve a more substantial reduction over the decade, reflecting the UK's enhanced climate ambitions.
Sectors Covered by the UK ETS
The UK ETS applies to high-emission industries, ensuring coverage of significant polluters. The scope is set to expand significantly in the coming years. From 2026, domestic maritime transport involving vessels of 5,000 gross tonnage and above will be included. Further expansion will occur in 2028 to incorporate waste incineration and energy from waste facilities. Sectors currently covered by the system include:
- Power generation: Includes large electricity generators using fossil fuels.
- Heavy industry: Covers steel, cement, chemicals, refining sectors and several other energy-intensive industries.
- Aviation: Encompasses flights within the UK and between the UK and the European Economic Area (EEA).
- Maritime sector (2026): Recent expansions plan to include maritime emissions starting in 2026.
- Waste management sector (2028): The scheme is set to expand to include waste incineration and energy-from-waste sectors from 2028.
Differences Between the UK ETS and the EU ETS
While sharing similar foundational principles, the UK ETS and EU ETS have developed distinct characteristics since their separation in January 2021. The UK system operates with a more ambitious emissions cap, set 5% below what would have been the UK's notional share under the EU ETS.
Read More: The EU Emissions Trading System (ETS) Explained
| Aspect | UK ETS | EU ETS |
| Coverage | UK Territories | EU and EEA countries |
| Initial Cap (2021) | 0.156 Gt CO2e (156 million allowances) | 1.57 Gt Co2e (~1,750 million allowances) |
| Free Allocations | ~40 million allowances (2021) | 43% until 2026 |
| Regulators | Four national environmental agencies | Member state authorities |
Impact of the UK ETS
Recent analysis demonstrates the significant impact of the UK Emissions Trading Scheme on the nation's decarbonisation efforts. Research indicates that expanding the scheme to include heating and road transport fuels could reduce economy-wide emissions by up to 26% under high-price scenarios and 16% under low-price scenarios. The continuing impact of the scheme include:
Reduced emissions: Provides a robust mechanism for cutting industrial emissions in line with national targets.
Support for sustainable innovation: Encourages investment in renewable energy and low-carbon technologies.
Economic pressures: Adds compliance costs for high-emitting sectors, motivating them to transition to cleaner operations.
Global competitiveness: Ensures the UK remains a leader in climate action, despite challenges such as "carbon leakage," where industries relocate to less regulated regions.
The Bottom Line
The UK ETS is a vital tool for achieving the UK’s climate goals, reflecting a commitment to emissions reduction. Its expansion to include maritime emissions is a significant step in addressing climate change comprehensively. Through its market-driven approach and planned expansions, the scheme continues to shape Britain's path toward net zero emissions while maintaining industrial competitiveness and economic growth. Learn more about how the UK ETS impacts your business by booking a free consultation with our expert sustainability scientists here.