Policy paper

UK Emissions Trading Scheme (UK ETS): a policy overview

Published 29 August 2025

This page provides an overview of the UK Emissions Trading Scheme policy, the role of the UK Emissions Trading Scheme in UK decarbonisation, and how the UK ETS Authority is developing the scheme.

See also:

• Who the scheme applies to and first steps for new participants looking to engage with the scheme
• Technical guidance and other tools for current scheme participants
• Operation of the UK ETS markets - how to take part in auctions and trade on the secondary market

What is the UK ETS?

The UK Emissions Trading Scheme (UK ETS) is one of the UK’s flagship decarbonisation policy instruments. We have set out here the key features of the scheme and outlined the work the UK ETS Authority is undertaking to develop it. Our work to develop the scheme will ensure that the UK ETS continues to play an important role in meeting UK climate targets, while supporting businesses through the net zero transition.

The UK, Scottish, and Welsh Governments, and the Northern Ireland Department of Agriculture, Environment and Rural Affairs (DAERA) – collectively the UK ETS Authority – established the UK ETS, following the UK’s exit from the European Union and resulting withdrawal from the EU Emissions Trading System (EU ETS) on 1 January 2021. The initial design of the scheme was set out in the Authority’s response to its consultation on the Future of UK Carbon Pricing in 2020.

The UK ETS currently covers the heavy industry, power and aviation sectors – approximately 25% of UK territorial emissions. By setting a limit – the cap – on emissions from these sectors, and creating a carbon price, the scheme incentivises investment in decarbonisation in line with climate targets across the UK. The Authority is expanding the scheme to incentivise additional sectors of the economy.  

The UK ETS works directly to tip the balance between continuing to emit, and using or investing in lower carbon technology. It does this by creating a market for carbon allowances, allowing those who decarbonise to trade allowances with those who continue to emit. This process will guide the UK to the most cost-effective path to net zero across the sectors the ETS applies to.

How do emissions trading schemes work?

Emissions trading schemes, like the UK ETS, are “cap and trade” carbon pricing policies. Carbon pricing seeks to apply a cost to activities like fossil fuel power generation, manufacturing and air travel that better reflects the cost to society of the emissions they produce.

The “cap and trade” principle means that an overall cap on total emissions is set for the UK ETS. The cap represents the total amount of particular greenhouse gases that can be emitted by the sectors covered by the scheme (aviation, power and industry). This overall cap is divided into allowances, each equivalent to 1 tonne of CO2 equivalent greenhouse gas.

Each year, operators who are covered by the scheme (that is, operators in the aviation, power or industry sectors) must surrender UK ETS Allowances (UKAs) to cover their emissions for that year. To do so, they must acquire allowances through auctions run by the Authority, from other participants through secondary markets, or they can obtain UKAs from their free allocation (if eligible).

A proportion of UK ETS allowances are allocated for free as “free allowances”. The UK ETS is designed to mitigate carbon leakage risks through increased free allocations to operators in sectors identified as being at risk. Carbon leakage refers to the movement of production and associated emissions from one country to another due to different levels of decarbonisation effort through carbon pricing and climate regulation undermining overall efforts to reduce global emissions. Free allowances also provide a financial incentive for companies to innovate and improve efficiency, as they can sell their excess free allocation on the secondary market to help cover their decarbonisation costs.

By setting an overall cap for this scheme, the total amount of carbon that can be emitted by these sectors is limited. The cap decreases over time, sending a clear signal to businesses concerning the level of long-term emissions reductions they will need to deliver. This framework provides businesses and investors with the clarity and certainty needed to make choices over when to invest in decarbonisation.

Consultations and how to contact us

The UK ETS Authority does not currently have any consultations open for submissions, but you can provide feedback on the scheme at any time by emailing the Authority at emissions.trading@energysecurity.gov.uk.

To find out about future consultations and other publications, sign up to receive alerts from the Authority.

We will update the consultation information here each time we publish a government response.

Recent milestones

21 July 2025: interim responses published to the 2024 consultations on expanding the UK ETS to maritime and waste, and integrating greenhouse gas removals.

19 May 2025: the UK Government and EU agreed to work towards linking their respective Emissions Trading Schemes.

February 2025: consultation on extending the UK ETS cap beyond 2030 published.

December 2024: consultation on carbon leakage and adjustment of free allocation for sectors covered by the UK Carbon Border Adjustment Mechanism (CBAM) published as part of the wider review of free allocation policy. The Authority also confirmed that the start of the scheme’s second allocation period would be moved to 2027 and set out changes to free allocation rules for sites that cease operation.

How UK ETS policy is being developed

The core aspects of ETS policy are :

• the cap
• free allocation
• markets policy

In 2022, the Authority consulted on a wide range of reforms to the scheme in Developing the UK ETS. Proposals covered:

• aligning the scheme’s cap with net zero to ensure the sectors covered decarbonise at the pace and scale required for us to achieve our climate targets
• how the overall level of free allocation available – the ‘industry cap’ – should be adjusted in light of a net zero cap
• expanding the scheme to include the maritime sector as a new ETS sector
• expanding it to include waste incineration and energy from waste
• integrating greenhouse gas removals (GGRs)
• other technical and operational amendments to the scheme

The full Authority response in July 2023 confirmed:

• the net zero consistent cap would be implemented for the start of the 2024 scheme year
• expanding the scheme to cover the maritime sector from 2026
• expanding the scheme to cover energy from waste and waste incineration from 2028, preceded by a 2-year monitoring and reporting period
• greenhouse gas removals (GGRs) to be included in the UK ETS

Free allocation policy

The Authority is reviewing free allocation policy to ensure it is working effectively in the UK context to both incentivise emissions reduction, and protect energy intensive, trade-exposed industries from the risk of carbon leakage. 

Phase 1 of the review

The first phase of this review, as part of the Developing the UK ETS consultation, aimed to align the industry cap (the share of free allocations under the cap available to be given out for free) with the overall UK ETS net zero consistent cap, and proposed short-term technical changes to address concerns flagged as part of the call for evidence.

Phase 2 of the review

The second phase, a consultation on the free allocation review (December 2023), aimed to:  

• better target free allocations to sectors most at risk of carbon leakage to ensure that our available free allowances are being used effectively to provide support where it is most needed
• make free allocations more tailored to a UK context. We will ensure, where appropriate, that more representative carbon leakage and emissions data is used to determine where support is required for industries in the UK
• provide clarity for business on the future of their free allocation, and on future methodologies and key principles, so they can make long-term investment decisions

In November 2024 the Authority published an initial response confirming changes to free allocation rules for UK ETS installations that cease operation.

A further consultation - UK Emissions Trading Scheme: free allocation review - carbon leakage in December 2024, continued the second phase of the Free Allocation Review with proposals on:  

• the future of the Carbon Leakage List
• options for Free Allocation Adjustments for sectors covered by the UK Carbon Border Adjustment Mechanism (CBAM)  

The consultation contained an Authority response confirming that:

• the start of the second UK ETS free allocation period will move from 2026 to 2027
• implementation of the Free Allocation Review will be delayed from 2026 to 2027

This also aligns changes with the implementation of the UK CBAM in 2027.

We will publish a full response to the consultations on the second phase of the Free Allocation Review by the end of 2025.

UK Carbon Border Adjustment Mechanism (CBAM)

The UK carbon border adjustment mechanism will place a carbon price on specified goods imported to the UK from sectors that are at risk of carbon leakage. It takes effect from January 2027.

The CBAM will ensure highly traded, carbon intense goods imported to the UK from overseas face a carbon price which is comparable to the carbon price paid by domestic producers of such goods. This will prevent the displacement of emissions overseas to ensure that the UK’s decarbonisation efforts lead to a true reduction in global emissions.

See the:

• December 2024 Carbon leakage and CBAM consultation - UK Emissions Trading Scheme: free allocation review - carbon leakage
• HM Revenue & Custom policy update to their consultation on the Draft legislation: Carbon border adjustment mechanism

The Authority is working closely with HM Treasury, which is responsible for CBAM policy, to ensure that the two policies work cohesively.

Markets policy

When the UK ETS was first established, market policies were implemented to support the stable launch of a new ETS market and the effective functioning of the scheme in its early years. These are set out in more detail in our guidance on UK ETS markets.

There are two key market stability mechanisms in the UK ETS:

• an Auction Reserve Price (ARP), set in 2021, sets a minimum bid price at auction of £22. Bids below this price are not accepted.  We proposed setting the ARP at £22 to ensure a minimum level of ambition and to minimise the potential for a significant fall in the UK carbon price in our transition from the EU ETS
• a Cost Containment Mechanism (CCM) provides the UK ETS Authority with the option to intervene if prices are elevated for a sustained period of time

The Developing the UK ETS consultation included a call for evidence on market policies. In December 2023, the Authority published a consultation on future markets policy, seeking views on:

• whether we have identified the most significant risks to effective market functioning
• the suitability of different policy options to address the risks identified
• how individual market stability policies, including a potential Supply Adjustment Mechanism, and the current ARP and CCM, could be designed to most effectively address market risks while minimising intervention and disruption in the market

The Authority will respond to this consultation in due course.

Aviation policy

The UK ETS is a significant part of the UK and devolved governments’ strategy to decarbonise aviation. Aviation is a growing and significant emitter, and there are technical and structural challenges to decarbonising the sector.

Following economic research that identified minimal carbon leakage and associated competitiveness risks for aviation under the current scope of the UK ETS, the Developing the UK ETS consultation covered options for aviation free allocation phase-out and the Authority agreed to end aviation free allocation from 1 January 2026.

Sustainable Aviation Fuel (SAF)

In June 2023, the Authority committed to review its approach to SAF, acknowledging the significance of the UK SAF Mandate to the decarbonisation of the aviation sector.

The Authority will continue to develop proposals on how the UK ETS should treat the use of SAF by aircraft operators and will consult on these in due course, considering alignment with the SAF Mandate sustainability criteria as one option.

Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA)

The UK has been voluntarily participating in the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) since the beginning of its Pilot Phase in 2021. The UK Government has begun to regulate for full UK participation in CORSIA, with legislation covering CO2 monitoring, reporting and verification requirements in place in the UK since 2021. 

In December 2024, the UK Department for Transport (DfT) launched a consultation on implementing CORSIA in the UK in partnership with the UK ETS Authority. It sought views on draft legislation for CORSIA’s offsetting requirements, including:

• penalties for non-compliance
• options for how CORSIA could interact with the UK ETS on flights in scope of both schemes

The DfT and UK ETS Authority will respond to this consultation in due course.

Expanding the coverage of the UK ETS

The Authority set out its intention to expand the scheme to new sectors in the Developing the UK ETS consultation and 2023 Long-term Pathway. This will cap emissions so that covered sectors decarbonise in line with climate commitments across the UK, and drive market-led-emissions reductions by applying the carbon price to more emitting activities.

The initial sectors the scheme will expand to cover are:

• waste incineration and energy from waste
• maritime transport

We have also set out adjustments to the scope of coverage from existing ETS sectors to:

• include venting of CO2
• explore the rules around non-pipeline transport of CO2 to storage
• integrate Greenhouse Gas Removals

Maritime

The Authority plans to expand the UK ETS to include emissions from the maritime sector, providing an incentive for the industry to invest in technologies to reduce their emissions.

The July 2025 interim response to the maritime technical consultation was published to enable maritime operators to prepare for the scheme. The response confirms:

• expansion of the scheme to maritime from July 2026
• scope to include UK domestic journeys and emissions while in UK ports for vessels of 5000 gross tonnage (GT) and above
• monitoring, reporting and verification (MRV) requirements
• who is responsible for complying with the scheme

Initial information was provided regarding onboarding for prospective maritime operators.

A full response to the consultation will be published in due course.

Waste

In 2023 the Authority announced its intention to expand the scope of the UK ETS to waste incineration and energy from waste (EfW) from 2028, preceded by a 2-year MRV transitional period. Expanding the scheme will support the waste sector to decarbonise in the most efficient way, reflecting the waste hierarchy.

The 2024 consultation on the technical details of key aspects expansion to include waste covered:

• full details of implementation
• the implications of not exempting hazardous and clinical waste
• options for mitigating risk of diversion of waste to landfill or export
• cost pass-through to customers

The interim response (July 2025) confirmed:

• that the MRV-only period for combustion and process emissions from energy from waste and waste incineration processes will commence from 1 January 2026
• that at this stage, participation in the MRV-only period will be voluntary
• details of how this will work

The full response will provide details for full inclusion of waste in the scheme in due course, including on how costs for local authorities will be managed.

Greenhouse Gas Removals

The integration of UK-based engineered Greenhouse Gas Removals (GGRs) into the UK ETS, and the potential integration of high-quality nature-based UK GGRs, will help incentivise investment by providing a significant source of demand for GGRs from polluting sectors. The 2024 consultation on integrating GGRs into the UK ETS was supported by evidence from the Climate Change Committee and the Intergovernmental Panel on Climate Change highlighting the essential role of removals in achieving net zero. The Authority’s response provides detail on how GGRs will be integrated into the UK ETS, including:

• the design of the market
• permanence requirements
• eligibility criteria
• safeguards to ensure environmental integrity and market stability

It is accompanied by new evidence assessing the permanence and suitability of woodland as a potential GGR, which will inform a future decision on its inclusion.

The Authority aims to legislate for GGR integration by the end of 2028, with the system expected to be operational by the end of 2029, subject to legislation, regulatory assessments and further consultation.

Coverage in existing ETS sectors

The Authority is refining the scope of the scheme for sectors already covered, to ensure that it is effectively driving decarbonisation and incentivising investment in key technologies, like carbon capture and storage.

Non-pipeline transport of CO2

A 2024 consultation on a regulatory framework recognised non-pipeline transport of CO2 (NPT) under the UK ETS.

The framework will require the Authority to set out who is responsible for CO2, when CO2 moves from an entity regulated under the UK ETS to a non-regulated entity, including detail on transport emissions (road, rail and shipping) and intermediate storage sites.

Recognising NPT will ensure that operators transporting CO2 for storage can deduct the amount they send to storage from their reportable emissions, providing economic support for industrial sites without access to pipelines.

We will respond to this consultation in due course.

CO2 venting

CO2 released through venting in the upstream oil and gas sector has been included in the scope of the UK ETS for installations already covered by the scheme, so that:

• treatment of CO2 from venting is in line with that from flaring
• a perverse incentive for operators to vent CO2 is removed

See the legislation implementing the change to treatment of CO2 venting.

Long term planning

In December 2023 the Authority published its Long-term pathway for the UK ETS. This policy paper:

• affirmed commitment to the long-term continuation of the UK ETS and continued alignment with the UK and Devolved Governments’ net zero goals
• set out the work the Authority is undertaking to develop and expand the scheme

Extending the UK ETS cap beyond 2030

As set out in the Long-term Pathway, we intend to continue the scheme until at least 2050 and maintain the ETS’s key role in driving decarbonisation in the covered sectors. The first phase of the UK ETS runs until the end of 2030. We have therefore consulted on the principle of extending the scheme and provided initial proposals concerning future phase length and the inter-phase banking of allowances:

• Extending the UK Emissions Trading Scheme cap beyond 2030

The Authority plans to respond to this consultation in 2025, and consult again on the level of the cap for the next phase in 2026, so that the cap can be informed by the UK Government’s decisions on Carbon Budget 7. This is to give participants certainty on the continuation of the scheme and a clear trajectory for emissions reductions under the cap.

Review, monitoring and evaluation

The Authority is undertaking an evaluation to understand the effectiveness of the scheme’s implementation, the early outcomes of the scheme and its longer-term impacts. This 2-phase process will take place from 2023 to 2026.

The Authority commissioned CAG Consultants to undertake the evaluation, in partnership with GC Insight (previously named Winning Moves), University College London and Cambridge Econometrics.

The first phase of the evaluation covering process, outcomes and early impacts, was completed in December 2023.

This first phase informed the Authority’s first review - UK Emissions Trading Scheme review 2023. A second review will be published by the end of 2028.

International cooperation

Carbon pricing is most effective when it is deployed widely and across borders. Climate change is a global issue, and wider uptake and higher ambition in carbon pricing means a broader incentive to reduce emissions. Global uptake of carbon pricing also reduces the risk of carbon leakage between jurisdictions.  

Multilateral Cooperation

The UK Government actively cooperates with other countries on carbon pricing measures to support increased climate ambition globally through a range of bilateral and multilateral arrangements.

The UK is a long-standing member and supporter of the International Carbon Action Partnership (ICAP). ICAP is a global organisation which connects emissions trading systems across the world and provides expert technical advice on ETS construction and design.

The UK Government supports the Global Carbon Pricing Challenge (GCPC) for all countries to adopt carbon pricing as a central part of their climate strategies, with a collective goal for carbon pricing to cover 60% of global emissions by 2030.​ The GCPC is an informal partnership of jurisdictions (and international organisations) which aims to strengthen existing carbon pricing systems and support emerging ones.

The UK Government also provides support through UK Partnering for Accelerated Climate Transitions (UK PACT). UK PACT is a programme funded by the UK Government. UK PACT supports countries that strive to overcome barriers to clean growth and have high emissions reduction potential to accelerate their climate change mitigation efforts.

The UK government is providing £130m to developing countries to support more ambitious carbon pricing globally. This includes £20m to the Partnership for Market Implementation fund, to help developing countries put a price on their emissions using carbon taxes and emissions trading schemes.

Bilateral cooperation

Bilateral arrangements and discussions can help with the growth of carbon pricing and reduction of distortions between systems. In December 2022, the UK and Switzerland signed a Memorandum of Understanding (MoU) concerning the inclusion of flights between the two countries in their respective Emissions Trading Schemes. This includes the mutual intention to discuss potential areas of future co-operation as appropriate.

The UK also engages with other jurisdictions on a bilateral basis to share experience and expertise in the establishment and development of emissions trading schemes.

Linking to other Emissions Trading Schemes

It is possible to link Emissions Trading Schemes, creating larger markets and removing competitive distortions that arise from having separate markets. Linking means that allowances are fungible between different schemes, though each scheme can retain its own cap and other policy features.

In May 2025, the UK Government and European Union agreed, as part of the Summit on our future partnership, to work towards linking the UK ETS and EU ETS. This follows the commitment made in the 2021 UK-EU Trade and Cooperation Agreement to co-operate on carbon pricing and give serious consideration to linking carbon pricing systems. The May 2025 Summit Common Understanding sets out the parameters for a potential linking agreement. The UK and EU are working closely to agree a timetable for linking negotiations to try and deliver a successful agreement. Further updates on this process will be published in due course.

As the UK enters negotiations on linking with the EU ETS, the Authority will continue its work to develop and expand the UK ETS. The Authority understands that participants need certainty over key areas like free allocation and the future of the scheme beyond 2030. The Authority will still conclude the free allocation review by the end of 2025, to give participants certainty over the free allocation they will receive from 2027. The Authority will also respond to the consultation on extending the scheme beyond 2030 by the end of 2025. The Authority will provide further updates on markets policy and scope expansion to waste, maritime and GGRs as soon as possible.