Understanding the UK Emissions Trading Scheme. A Native-Hue energy management briefing
What are the UK Emissions Trading Scheme UKETS and the EU Emissions Trading Scheme EUETS
The UKETS was created by the Greenhouse Gas Emissions Trading Scheme Order 2020 alongside the EUETS achieving globally significant carbon reduction. The two schemes account for around 40% of all UK and EU carbon emissions and naturally establish a carbon price for allowances – measured as £ (or €) per tonne of CO2 equivalent (tCO2e).
The schemes are aimed primarily at large oil and gas fuelled electricity generators and industrial plant. So fossil power stations are major participants but sites with large standby generators – like data centres and some city buildings – can be pulled in even though their generators are rarely used.
The UKETS is a “cap and trade” scheme requiring participating sites to measure and report to the government their annual emissions from all combustion plant. Each year, knowing the previous year’s national emissions, the government sets a national total tCO2e cap for the coming year and issues that number of tCO2e allowances. Some of the allowances are provided free, to certain industrials for example, and the rest are auctioned by government to participants or traders. After that it’s up to the participants using the auctions directly and the carbon allowances market that arises to ensure that each site has bought enough allowances at the end of the year to cover its emissions. There are significant fines for non-compliance.
How the Scheme works
Operators of installations (sites that are pulled into the Scheme) must measure annual CO2 emissions – then report and buy carbon allowances for them each year. Measurements and audit trails are independently verified.
Participation in the UKETS can be triggered by a site having large combustion plant (including standby generators) measured as MW of thermal input from fuel such as gas or oil. The site is pulled in if, adding up only plant items over 3 MW of thermal input (so around one MW of electrical output for generators), the site exceeds a total of 20 MW thermal input.
The idea is that
- as the government issues only enough allowances to meet the national emissions cap it has set – and then enforces compliance firmly – national emissions are indeed restricted each year to the decreasing total cap.
- high carbon prices justify more emissions reduction measures.
- sites which can cheaply reduce emissions can benefit by not having to buy so many allowances – freeing them up for others within the total cap.
The Ultra-small Emitter class in 2021-2025 and 2026-2030
A category of so-called Ultra-small Emitters with annual emissions below a threshold 2,500 tCO2e has a reduced compliance burden as detailed in Schedule 8 of the 2020 law.
Ultra-small Emitters do not have to buy allowances and have reduced obligations: emissions must be measured but do not need to be independently verified or reported annually unless they rise above the Ultra-small Emitter threshold (2,500 tCO2e per site).
From January 2026 these sites need to be re-qualified as Ultra-small Emitters via a retrospective verification and reporting exercise showing annual emissions below 2,500 tCO2e in the years 2021 to 2023.
What next
The schemes have worked when markets are reasonably stable, but questions remain.
- Does their carbon reduction justify the bureaucratic burden?
- Can the UKETS and EUETS schemes survive usefully in turbulent markets?
- Could they form an essential stepping stone to international emissions limitation?
The information in this Native-Hue energy management briefing should be verified before use for compliance purposes.