UK ETS Free Allocation Largely Maintained Following Consultation

On 26 November 2025, the UK ETS Authority (the "Authority") published a combined final response spanning two consultations on reforms to the free allocation rules:

• the Free Allocation Review Consultation (December 2023 – March 2024); and
• the Carbon Leakage Consultation (December 2024 - March 2025), (together, the "Consultations").

The Consultations covered a broad range of possible reforms to the free allocation rules under the UK ETS. However, the Authority ultimately decided on only a couple of key changes, which will apply for the 2027 to 2030 allocation period:

• free allocation for sectors covered by the UK CBAM will be phased out gradually over a 9-year period from 2027; and
• the current benchmarks will remain the same, although the intention is for these to be updated from 2028 to align with the revised EU benchmarks once these are available.

There were a number of key themes throughout the response, including a focus on maintaining policy stability and certainty, as well as limiting the administrative burden on business and regulators where possible. The Authority also indicated its desire to provide meaningful support to UK industry, to enable industry to plan and invest with confidence. We have provided some further context to the relevant decisions below, but these overarching themes largely resulted in the current system being maintained.

The Authority also emphasised the need to minimise competitive distortions between the UK and the EU, and seemingly sought to limit differences between the two systems. This comes following the agreement between the UK and the EU to work towards linking their relevant ETS. As political negotiations on this topic continue, this is likely to remain a priority for UK ETS development going forwards.

Free allocation to be phased out for sectors covered by the UK CBAM

Sectors covered by the UK CBAM will be gradually phased out from free allocation over a 9-year period from 2027 in order to prevent double-protection against carbon leakage. The EU will also be phasing out allowances for CBAM sectors, albeit over an 8-year period rather than a 9-year period, starting in 2026.

The reduction in free allocation will only apply at a sub-installation level, so only the parts of a company producing the CBAM goods will see a reduction. Any unallocated allowances will be put in a "flexible reserve" to ensure stability in the carbon market.

Updated benchmarks to apply from 2028

The Authority has indicated that it intends to update benchmarks in line with EU values. However, as the EU benchmarks are not currently available, the current benchmarks will be retained in 2027 and then aligned with the EU ones from 2028, once these are available. Although the EU benchmarks will not include data from UK installations, the Authority outlined its view that: (1) the quantity and quality of the data used to calculate the EU benchmarks is more robust; and (2) maintaining alignment with the EU ETS approach would avoid creating competitive distortions between both schemes.

Other free allocation rules largely maintained

In other areas, the Authority took the decision to make few or no changes to its current approach.

1. Carbon Leakage List to remain unchanged

The carbon leakage list ("CLL"), which identifies industrial sectors at risk of carbon leakage, will be maintained. The current list is based on the EU ETS Phase IV CLL, and the Authority considers this to be the most robust framework available. Retaining the EU list would also ensure continuity between the UK and EU ETS.

The phase out date of free allocations for sectors not at risk of carbon leakage will be kept, and will not be accelerated. This means that the current phase out timeline will remain in place, and installations operating in sectors not at risk of carbon leakage will continue receiving reduced levels of free allocation until 2030.

2. Approach to activity levels and carbon leakage to stay the same

The Authority also decided to maintain its current approach to historical activity levels (the baseline measure of how much a facility has historically produced) and activity level changes (a mechanism that adjusts free allocation when a facility's production changes significantly). It concluded that the current approach (a 15% activity level threshold), provides certainty and continuity for operators and avoids increasing their administrative burden.

In response to stakeholder concerns about the impact of including activity data from 2020 and 2021 during the baseline period, the Authority confirmed that operators can choose to exclude this data from historical activity level calculations for the 2027-2030 allocation period given the impact of COVID-19.

3. No changes to benchmarks for access to decarbonisation technologies

The Authority has decided that it will not adjust free allocation benchmarks to reflect operators' differing levels of access to decarbonisation technologies. Although some respondents flagged concerns that early adopters of technologies such as carbon capture may distort benchmarks and create competitive imbalances, the Authority found no evidence that widespread deployment of decarbonisation technologies would impact on benchmark values. However, the Authority has indicated that it will continue to monitor the impact of decarbonisation technologies.

4. No conditionality for free allowances

Following stakeholder concerns in relation to the potential introduction of conditions for the receipt of free allowances, the Authority therefore concluded that no conditionality would be introduced from 2027. It concluded that conditionality may duplicate other UK policies and add complexity without providing meaningful improvement to decarbonisation outcomes.

5. No technical changes

The Authority decided not to introduce any of the technical changes proposed in the Free Allocation Review Consultation, which included updating electricity reporting requirements, requiring yearly reviews of measurement equipment and introducing new heat metering accuracy standards. Following its review of stakeholder responses, the Authority concluded that certain changes were already reflected in current legislation, and others would impose excessive costs and operational disruption.

Next steps

The UK ETS Authority's response demonstrates its focus on maintaining stability, despite the breadth of reforms consulted on. However, the following key areas remain under review and may be subject to change in the future:

• the treatment of unallocated allowances which will result from the phased reduction of free allocation for CBAM sectors;
• the introduction of conditions for free allocation; and
• the disaggregation of benchmarks to account for differing levels of access to decarbonisation technologies.

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