With effect from 1 January 2021, the UK Emissions Trading Scheme ("UK ETS") replaced the UK's participation in the equivalent EU Emissions Trading Scheme ("EU ETS"). This greenhouse gas trading scheme forms part of the UK government's ambition to achieve net zero emissions by 2050.

How does UK Emissions Trading Scheme work?

The UK ETS sets an initial cap on emissions at 5 per cent below what the UK's share would have been under the EU ETS.

The scheme works on a 'cap and trade' principle, setting a cap on the total amount of certain greenhouse gases that can be emitted by energy intensive industries, which will be reduced over time. Over time, the cap will be reduced so the total emissions from each industry will fall. cap, industry participants may buy and sell emissions allowances through auctions or secondary markets.

Who does the UK ETS apply to?

The UK ETS currently applies to energy intensive industries, the power generation sector, and the aviation industry. The government intends to expand the scheme into other industries to capture emissions not currently covered.

The scheme covers activities involving the combustion of fuels in installations with a total rated thermal output of more than 20 MW.

The relevant activities covered by the scheme can be found in Schedule 1 (for Aviation) to the Greenhouse Gas Emissions Trading Scheme Order 2020 and Schedule 2 (for stationary installations and regulated activities) to the Greenhouse Gas Emissions Trading Scheme Order 2020.

Exemptions to the UK ETS

Installations for the incineration of hazardous or municipal waste are excluded from the scheme.

Hospitals and small emitters with installations with emissions below 25,000 tonnes of Co2 equivalent and a net-rated thermal capacity below 25MW will be subject to emissions targets instead of trading allowance. Hospitals and small emitters will also require a small emitter or hospital permit.

Ultra-small emitters will also be permitted exemptions for installations with emissions lower than 2,500 tonnes of carbon dioxide.

Auctioning Allowances

As with the EU ETS, auctioning will remain the primary means of introducing allowances to the market. The auction calendar will be published in the first quarter of 2021 and auctions are expected to commence during the second quarter of 2021.

A transitional Auction Reserve Price setting a minimum price for the sale of allowances has been set and a cost containment mechanism will be introduced allowing the government to intervene should prices rise significantly.

Free Allocation of Allowances

The Free Allocation Regulation applicable to the EU ETS will continue to apply to qualifying operators of installations and aircraft in order to prevent carbon leakage.

Existing operators of installations who increase their activity and new entrants will be able to take advantage of free allowances. Aircraft operators may also apply for free allocation and must do so by 31 March 2021.

Permits and Monitoring

Industries which carry out activities covered by the UK ETS will require a greenhouse gas emissions permit. Aircraft operators will also require an emissions monitoring plan.

Operators of stationary installations should be aware that failure to comply with permits and associated obligations in accordance with The Greenhouse Gas Emissions Trading Scheme Order 2020 may result in significant civil penalties.

Aircraft operators will also have obligations under the UK ETS, as with installation operators, failure to comply with their obligations way result in civil penalties.

Penalties for non-compliance and breach of obligations can be found in Schedule 2 of The Greenhouse Gas Emissions Trading Scheme Order 2020.

Reviewing the UK ETS

The first phase of the UK ETS will run from 2021 with an initial review of the scheme commencing in 2023. A full review of the first phase will take place from 2028 to assess performance of the scheme with updates to the UK ETS made from 2031.

The government intends to explore expanding the scheme to capture the emissions not covered.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.