UK Emissions Trading Scheme (UK ETS)

Page type: primary-anchored (mirrors The Greenhouse Gas Emissions Trading Scheme Order 2020, SI 2020/1265)

Last updated: 2026-04-06

Source file: ~/knowledge/sources/legislation/uk/si-2020-1265-uk-ets.md

What this instrument does

The Greenhouse Gas Emissions Trading Scheme Order 2020 (SI 2020/1265) establishes the UK Emissions Trading Scheme, the cap-and-trade system that replaced the UK's participation in the EU ETS after Brexit. It creates the legal framework for requiring regulated industrial installations and aviation operators to hold and surrender allowances equal to their greenhouse gas emissions.

The Order was made jointly by the Secretary of State, the Scottish Ministers, the Welsh Ministers, and DAERA in Northern Ireland. It operates under powers in the Climate Change Act 2008 (ss.44, 46(3), 54, 90(3), Schedules 2 and 3).

The UK ETS runs from 2021 to 2030. The total cap declines sharply over that period: from a base of 155.7m allowances in 2021 to 49.3m in 2030, a 68% reduction, with major step-downs in 2024 (-37.5%) and 2028 (-23.7%).

The Order has been amended eight times since 2020. The largest change was SI 2024/1366 (December 2024), which tightened the cap trajectory, inserted a flexible reserve, and added an entirely new Part 4A covering the free allocation regime.

Part 1: Preliminary (Articles 1-15)

This Part sets up the governance structure and defines who sits where in the system.

The UK ETS authority (Article 14) is the four governments acting jointly: the Secretary of State, DAERA, Scottish Ministers, and Welsh Ministers. It creates allowances, sets annual caps, compiles allocation tables, publishes the carbon price, and conducts scheme reviews. Because all four must act jointly, any government has an effective veto on scheme changes.

Five regulators are appointed by territory (Articles 9-11):

The registry administrator (Article 8A) is all five regulators acting jointly. It operates the electronic registry that tracks accounts, allowances, transfers, and surrenders.

Scheme review dates are 31 December 2023 and 31 December 2028 (Article 17).

Part 2: Basic Elements of the UK ETS (Articles 16-25A)

Allowances and the cap

One allowance equals one tonne of CO2 equivalent (Article 18(2)). Allowances are created by the UK ETS authority and can only be held in registry accounts (Article 18(3)).

The overall cap for the 2021-2030 trading period is set at: (633,116,297 x 2021-2025 hospital/small emitter reduction factor) + (302,924,924 x 2026-2030 hospital/small emitter reduction factor) (Article 19).

Annual bases (Article 22, Table B, as substituted December 2024):

The 2024 step-down (-37.5%) was the sharpest in the scheme's history. The 2028 step-down (-23.7%) is the next major structural point.

Allowances may be traded freely unless prohibited by other legislation (Article 23).

A flexible reserve (Article 23A, inserted December 2024) pools three categories of unallocated allowances: 2021-2025 unallocated (capped at 240,342,255), 2026-2030 unallocated (capped at 121,169,970), and unallocated aviation allowances. These may be used for additional free allocation or auctioned.

Monitoring, reporting and verification

The Monitoring and Reporting Regulation 2018 (Commission Implementing Regulation (EU) 2018/2066) applies to the UK ETS with 40 modifications set out in Schedule 4 (Article 24). The Verification Regulation 2018 (Commission Implementing Regulation (EU) 2018/2067) applies with 56 modifications in Schedule 5 (Article 25). The Order is therefore not self-contained on monitoring, reporting and verification; reading it requires the modified EU regulations alongside it.

The registry (Article 25A, Schedule 5A)

The registry is an electronic system maintained by the registry administrator. It tracks every operator account, allowance balance, transfer, and surrender. Key rules:

• Any person may open a trading account with a minimum of two operational authorised representatives and a fitness check (Schedule 5A, paragraph 14)
• Accounts may have up to eight authorised representatives across five permission levels (Schedule 5A, paragraph 16)
• The authority must publish annual account information by 1 May each year (Schedule 5A, paragraph 31)
• Transfer data must be published three years after completion (Schedule 5A, paragraph 34)
• Accounts may be suspended for death, insolvency, unfitness, or misuse (Schedule 5A, paragraph 25)

Part 3: Installations (Articles 26-27A)

This is the core obligation for industrial participants.

No person may carry out a regulated activity at an installation without holding either a greenhouse gas emissions permit or a hospital/small emitter permit (Article 26). A regulated activity means one of 30+ activities listed in Schedule 2, Table C (including combustion above 20 MW, metals, cement, glass, chemicals, and CCS) (Schedule 2, paragraph 3).

A full-scope permit holder must surrender allowances equal to their annual reportable emissions by 30 April each year (Article 27). Verified reports must be submitted by 31 March. Permits specify a surrender condition and, where the operator qualifies for free allocation, additional free allocation conditions (Schedule 6, paragraph 4).

Operators not applying for free allocation must submit an information notice to their regulator in the window 1 April to 30 June 2025, with the regulator forwarding to the UK ETS authority by 30 September 2025 (Article 27A). This is a currently live obligation.

Part 4: Aviation (Articles 28-34)

Aviation operators are regulated on a separate track. The aviation scope covers flights departing or arriving in the UK, EEA, Gibraltar, and Switzerland, excluding 13+ categories of exempt flights (military, state, SAR, training, aircraft below 5,700 kg MTOM, etc.) (Schedule 1).

Key obligations: - Apply for an emissions monitoring plan within 42 days of becoming an aircraft operator (Article 28) - Monitor emissions per the plan (Article 32) - Submit a verified report by 31 March (Article 33) - Surrender allowances equal to aviation emissions by 30 April (Article 34)

Exemptions (Articles 7-8): - Commercial operators: exempt if fewer than 243 full-scope flights per 4-month period or annual emissions below 10,000 tCO2 - Non-commercial operators: exempt if annual emissions below 1,000 tCO2 - Small emitter verification exemption: below 25,000 tCO2 from full-scope flights, or below 3,000 tCO2 from aviation activity (Article 33)

Part 4A: Free Allocation (Articles 34A-34W, inserted December 2024)

Free allocation is the most complex section. It was inserted wholesale by SI 2024/1366 and implements benchmarked allocation for industrial installations and aviation.

Installations (Chapter 1): - The UK ETS authority compiles allocation tables for 2021-2025 and 2027-2030 (Article 34A), and separately for 2026 (Article 34AA) - Publication deadlines: 2021-2025 tables by 30 June 2021; 2026 table by 1 January 2026; 2027-2030 tables by 1 January 2027 (Article 34D) - Allowances allocated by transfer to operator accounts: 2021 as soon as practicable; subsequent years by 28 February (Article 34E) - Allocation withheld if monitoring methodology plan not approved (Article 34F) - New entrants' reserve: 20,725,431 allowances, allocated chronologically until exhausted (Article 34G) - Errors in allocation applications trigger a correction mechanism (Article 34H)

Aviation (Chapter 2): - Historical aviation activity is measured in tonne-kilometres from 2010 or 2014 (Article 34J), with a threshold multiplier of 1.93877776 - Free allocation benchmark: 0.000642186914222035 (Article 34M(2)) - Aviation reduction factors 2021-2025: 0.978, 0.956, 0.934, 0.912, 0.89 (Article 34M(5)) - Application deadline: 31 March 2021; late applications by 31 March 2023 (Article 34L)

Return of allowances (Articles 34S-34W): Both installations and aviation operators may be required to return allowances where errors are corrected or allocations are revised. The UK ETS authority may withhold future allocation to recover overallocated amounts (Article 34W).

Part 5: Charging (Articles 35-37)

Regulators and the registry administrator may charge to recover their costs from operators, aircraft operators, and applicants. Regulators must publish a charging scheme with consultation and national authority approval (Article 36). The registry administrator's charging scheme requires UK ETS authority approval (Article 36A).

Part 6: Monitoring Compliance (Articles 38-43)

Regulators and authorised persons have inspection powers at reasonable times (Article 39) and powers of entry with a warrant issued by a justice of the peace, sheriff, or lay magistrate (Article 40). Legal professional privilege is protected (Article 43). Evidence gathered during inspections is admissible in legal proceedings (Article 42).

Part 7: Enforcement (Articles 44-68)

Enforcement and deficit notices

Regulators may issue enforcement notices specifying a contravention, required remedial steps, and the timeframe (Article 44). Deficit notices are issued for surrender shortfalls and require surrender of the deficit by a specified date (Article 44A).

Where verified emissions reports are missing or inadequate, the regulator must determine emissions on an assumption designed to ensure no under-estimation (Article 45).

Civil penalty regime

The carbon price (used in several penalty calculations) is published annually by 30 November: auction-based for 2021; December ICE futures settlement prices for 2022 onwards (Article 46).

The inflation factor for Article 52 is CPI at penalty date / CPI in March 2021 (minimum 1). Names of excess-emissions penalty recipients must be published after the appeal period expires (Article 49). Penalty notices are mandatory for Articles 52, 54, 59, and 65A (Article 47).

Part 8: Appeals (Articles 69-74)

Regulated persons have a broad right of appeal against regulator and registry administrator decisions. The one exclusion is challenges to directions under the Climate Change Act 2008 (Article 70).

Appeal bodies by jurisdiction (Article 71): - SEPA decisions: Scottish Land Court - Northern Ireland decisions: Planning Appeals Commission - All others: First-tier Tribunal

Appeals generally suspend the effect of the decision (Article 72), except for refusals of applications, enforcement notices, and account suspensions. Those take effect immediately pending appeal.

The appeal body may affirm, quash, vary, substitute, or direct the original decision (Article 73).

Part 9: Miscellaneous (Articles 75-77)

Authorities and regulators may issue information notices requiring any person to produce data, including data not currently held if it is reasonable for them to obtain it (Article 75).

A strict prohibition applies to disclosing UK ETS information obtained in the course of regulatory functions (Article 75B). An exception for national security applies under the National Security Act 2023 (Article 75C).

The Order applies to the Crown (Article 76).

Transitional provisions managing the move from the EU ETS (SI 2012/3038) are in Schedule 11 (Article 77).

Three-tier operator classification

The Order creates three tiers of regulated operator, each with different compliance obligations.

Tier 1: Full-scope installations (Schedule 6, Parts 2-3) - Must hold a greenhouse gas emissions permit (Article 26) - Monitor per MRR 2018, verify, report by 31 March, surrender by 30 April - Eligible for free allocation from allocation tables - Subject to the full penalty regime

Tier 2: Hospitals and small emitters (Schedule 7) - Threshold: up to 24,999 tCO2e annually (excluding biomass), or at least 85% of heat supplied to hospital services - Hold a hospital or small emitter permit rather than a GHG permit - Do not surrender allowances; instead must meet annual emissions targets - Targets are baseline (average 2016-2018 for 2021-2025; average 2021-2023 for 2026-2030) multiplied by a reduction factor - 2021-2025 reduction factors: 0.8697 down to 0.7751 (Schedule 7, paragraph 16) - 2026-2030 reduction factors: 0.8882 down to 0.7763 (Schedule 7, paragraph 17) - May bank surplus below the target into the following year (not available in 2025 or 2030) - Verification may use operator declaration rather than third-party verifier - 2026-2030 applications open 1 April to 30 June 2025

Tier 3: Ultra-small emitters (Schedule 8) - Threshold: up to 2,499 tCO2e annually (excluding biomass) - No permit required; MRR 2018 largely disapplied - Must monitor using existing baseline plan and must not exceed the 2,499 tCO2e maximum - Must notify regulator by 31 March if the maximum is exceeded - 2026-2030 applications open 1 April to 30 June 2025; list published by 17 October 2025

Defined terms

See the full defined-terms register in the source file. Key terms:

• Allowance: Created under this Order; equals 1 tonne of CO2 equivalent (Article 18(2))
• Carbon price: Published by 30 November annually; 2021 auction-based, 2022+ ICE December UK Allowance futures settlement (Article 46)
• FA installation: An installation qualifying for free allocation under Article 4A
• Flexible reserve: Pool of unallocated or returned allowances from three specified sources (Article 23A)
• Installation: A stationary technical unit for one or more regulated activities (Schedule 2)
• Operator: The person with control over an installation's operation (Article 5)
• Regulated activity: An activity in Schedule 2, Table C that produces greenhouse gas emissions, including combustion above 20 MW (Schedule 2, paragraph 3)
• Registry: The electronic system under Schedule 5A tracking accounts, allowances, and surrenders
• Scheme year: Each calendar year 2021-2030 (Article 4(1))
• Trading period: 2021-2030 (Article 4(1))
• UK ETS authority: The four governments acting jointly (Article 14)

Cross-references

Amendment history

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