Introduction to the EU Emissions Trading System including how the cap-and-trade System works, how free allowances are allocated, details on complying, the inclusion of aviation in the System and the UK’s opt-out scheme for small emitters and hospitals.
The EU ETS is the largest multi-country, multi-sector greenhouse gas emissions trading system in the world.
It includes more than 11,000 power stations and industrial plants across the EU with around 1,000 of these in the UK. These include power stations, oil refineries, offshore platforms and industries that produce iron and steel, cement and lime, paper, glass, ceramics and chemicals.
Other organisations, including universities and hospitals, may also be covered by the EU ETS depending upon the combustion capacity of equipment at their sites. Aviation operators flying into or from a European airport are also covered by the EU ETS.
This guidance explains the EU’s cap and trade system, including details of the phases of delivery of the System. It provides information on the UK’s application for Phase III free allowances via its National Implementation Measures (NIMs), as well as details of compliance and verification. There are also sections on emissions regulation for the aviation industry and the UK’s Small Emitters and Hospitals Opt-out Scheme.
Cap and trade
The EU ETS works on a ‘cap and trade’ basis, so there is a ‘cap’ or limit set on the total greenhouse gas emissions allowed by all participants covered by the System and this cap is converted into tradable emission allowances.
Tradable emission allowances are allocated to participants in the market; in the EU ETS this is done via a mixture of free allocation and auctions. One allowance gives the holder the right to emit one tonne of CO2 (or its equivalent). Participants covered by the EU ETS must monitor and report their emissions each year and surrender enough emission allowances to cover their annual emissions.
Participants who are likely to emit more than their allocation have a choice between taking measures to reduce their emissions or buying additional allowances; either from the secondary market – e.g. companies who hold allowances they do not need – or from Member State held auctions. More information is available on the EU ETS: carbon markets webpage.
It does not matter where (in terms of physical location) emission reductions are made because emissions savings have the same environmental effect wherever they are made.
The rationale behind emissions trading is that it enables emission reductions to take place where the cost of the reduction is lowest, lessening the overall cost of tackling climate change.
How trading works: a simplified hypothetical example
Historically installation A and installation B both emit 210 tonnes of CO2 per year. Under the EU’s allocation process they are given 200 allowances each. At the end of the first year, emissions of 180Mt were recorded for installation A as it installed an energy efficient boiler at the beginning of the year which reduced its CO2 emissions. It is now free to sell its surplus allowances on the carbon market.
Installation B however emitted 220Mt CO2 because it needed to increase its production capacity and it was too expensive for it to invest in energy efficiency technology.
Therefore, installation B bought allowances from the market, which had been made available because installation A has been able to sell its additional allowances.
The net effect is that the investment in carbon reduction occurs in the cheapest place, and CO2 emissions are limited to the 400 allowances issued to both installations.
Delivery phases of the Emissions Trading System
To date, three operational phases of the EU ETS have been delivered or agreed although it is envisaged the scheme will continue beyond 2020:
Phase I (1 January 2005 to 31 December 2007)
This phase is complete. Further details around this phase can be viewed on the National Archives version of the DECC: EU ETS Phase I web page.
Phase II (1 January 2008 to 31 December 2012)
Phase II of the EU ETS coincided with the first Kyoto Commitment Period. Phase II built on the lessons from the first phase, and was broadened to cover CO2 emissions from glass, mineral wool, gypsum, flaring from offshore oil and gas production, petrochemicals, carbon black and integrated steelworks.
In Phase II, each Member State developed a National Allocation Plan (NAP), which set out the total quantity of allowances that the Member State intended to issue during that phase and how it proposed to distribute those allowances to each of its operators covered by the System. Each NAP had to be approved by the European Commission. The approved UK Phase II NAP was published on 16 March 2007.
Further details around this phase can be viewed on the National Archives version of the National Archives version of the DECC: EU ETS Phase 2 web page.
Phase III (1 January 2013 to 31 December 2020)
The current phase of the EU ETS builds upon the previous two phases and is significantly revised to make a greater contribution to tackling climate change including: an EU-wide cap on the number of available allowances and an increase in auctioning of those allowances, as well as the UK’s scheme to lower compliance costs for small emitters and hospitals.
The EU cap will reduce the number of available allowances by 1.74% each year, delivering an overall reduction of 21% below 2005 verified emissions by 2020. The trajectory will be calculated from a departure point of the mid-point of Phase II and will describe a declining cap from 2013 onwards.
Free allocation of allowances
All sectors covered by the EU ETS, with the exception of most of the EU power sector, are provided with a free allocation of allowances in order to assist with their transition towards a low carbon economy.
In addition, industrial sectors at significant risk of competition from countries without similar carbon costs (see section on carbon leakage in the EU ETS for more information) are eligible to receive a higher proportion of allowances for free.
In 2011, Member States were required to submit to the European Commission a list of the preliminary number of free allowances to be issued to each industrial installation in Phase III, referred to as ‘National Implementation Measures’ or ‘NIMs’. The UK submitted its NIMs to the European Commission on 12 December 2011, and subsequently submitted modified NIMs in April 2012.
On 5 September 2013 the European Commission announced completion of the process to check and confirm the free allocation of EU ETS allowances in each Member States’ NIMs. It also announced that a cross sectoral correction factor was required to ensure that free allocation across the EU remains within the cap set in the ETS Directive. The factor reduced the preliminary allocation for each EU ETS installation by 5.73% in 2013, rising to 17.56% in 2020. The average reduction of allocation is therefore 11.58% over the period 2013-2020.
The first list below shows free allocation figures in Phase III for each industrial installation in the UK, as approved by the European Commission on 18 December 2013. The second list shows updated free allocation figures for Phase III, taking into account any changes to the allocation agreed in the UK’s NIMs for individual installations as of 30 April 2014, for instance due to partial cessations, significant capacity reductions or where installations have entered the EU ETS (new entrants). This list will be updated on an annual basis to take into account further changes to allocation over the course of the phase.
Carbon leakage and the EU ETS
Carbon leakage is a term used to describe the prospect of an increase in global greenhouse gas emissions when a company shifts production or investment outside the EU because - in the absence of an legally binding international climate agreement - they are unable to pass on the cost increases induced by the EU ETS to their customers without significant loss of market share.
The best way to address carbon leakage would be a legally binding international climate agreement. This would create a level playing field for industry inside and outside the EU with respect to accounting for the costs of carbon.
In the meantime, the EU ETS provides two mechanisms to mitigate the risk of carbon leakage. First, sectors deemed to be at significant risk of carbon leakage are eligible to receive 100% free allocation of allowances up to the sector’s benchmark. This is a significant source of relief, as sectors not deemed at risk will receive 80% of their allocation for free in 2013, declining annually to 30% in 2020 with a view to reaching 0% (i.e. full auctioning) in 2027.
The second mechanism allows Member States to compensate sectors at significant risk of carbon leakage as a result of indirect EU ETS costs (i.e. through EU ETS-related increases in electricity prices), provided that schemes are designed within the framework set by the European Commission (see section on indirect carbon leakage compensation scheme for more information).
The UK government strongly supports the principle of free allocation in the absence of an international climate agreement. We believe that the proportionate free allocation of allowances gives relief to sectors at significant risk of carbon leakage, without raising barriers to international trade. We are concerned however that those most at risk may not be compensated sufficiently in the future if current EU ETS rules are not reformed for Phase IV of the EU ETS.
The UK government recognises industry concerns around competitiveness and carbon leakage and is committed to ensuring that sectors genuinely at significant risk of carbon leakage are protected from this risk. In June 2014, we published a research project commissioned by the Department of Energy and Climate Change and undertaken by Vivid Economics and Ecofys, which investigates the occurrence of carbon leakage so far and the fundamental drivers of carbon leakage for a selection of industrial sectors and assesses the measures in place for its mitigation.
The report models the risk of carbon leakage for 24 industrial sectors, and was produced in consultation with industry stakeholders. Modelling analysis shows that in the absence of any mitigating policy measures (such as free allocation of allowances), no allowance for carbon abatement potential, and no increase in carbon regulation outside of the European Union, a number of sectors are at risk of leakage. Given these assumptions, the modelling analysis shows higher rates of carbon leakage than would be expected to occur in reality. The views expressed in the report are those of its writers, and do not represent an official position of the UK government.
The final report, case studies and associated peer review are available:
Assessment of carbon leakage status for the free allocation of allowances
Sectors at risk of carbon leakage are assessed against a set of criteria and thresholds set out in the EU ETS Directive. The list of sectors deemed at risk of leakage for the period 2013-2014 were agreed through the EU comitology procedure in December 2009, with additions to the list made in subsequent European Commission Decisions.
The EU ETS Directive allows for a review of sectors at risk every five years, with the possibility of adding sectors to the list on annual, ad hoc basis. On 5 May 2014, the European Commission published its draft list of sectors for the period 2015-19, based on the quantitative and qualitative criteria set out in the ETS Directive. The draft carbon leakage list will be presented to the EU Climate Change Committee for vote shortly, after which it must be sent to the European Parliament and the Council for three months scrutiny before adoption.
On 31 August 2013, the UK responded to the European Commission’s consultation on the methodology for determination of the carbon leakage list for 2015-19.
Indirect carbon leakage compensation scheme
In the 2011 Autumn Statement, the Chancellor announced that the government intended to implement measures to reduce the impact of policy on the costs of electricity for the most electricity-intensive industries, beginning in 2013 and worth around £250 million over the Spending Review period.
As part of this, the government has committed to compensate the most electricity-intensive businesses to help offset the indirect cost of the Carbon Price Floor and the EU ETS, subject to state aid guidelines. In the 2014 Budget, the Chancellor announced that compensation for the indirect costs of the Carbon Price Floor and the EU ETS would be extended to 2019-20.
The European Commission adopted revised State Aid guidelines on compensation for the indirect costs of the EU ETS in June 2012. These guidelines list the sectors deemed to be exposed to a significant risk of carbon leakage due to indirect emissions costs, and provide details of the maximum levels of compensation that can be made available to them. Any Member State compensation scheme must be designed within the framework set by the European Commission.
In October 2012, DECC and BIS launched the energy intensive industries compensation scheme consultation, which set out our proposals for the eligibility and design of the compensation package.
The consultation, which closed in December 2012, provided an opportunity for all those interested in the package to comment on the proposals, helping us ensure that compensation is targeted at those companies who are most at risk of carbon leakage as a result of energy and climate change policies.
Following detailed consideration of the responses and state aid clearance for the EU ETS compensation package, in May 2013 we published the government’s response to the consultation and the final compensation scheme design for the EU ETS. The UK started making payments in respect of indirect costs of the EU ETS in 2013.
For Carbon Price Floor compensation, which remains subject to state aid approval from the European Commission, we expect to publish guidance later in the summer and begin payments shortly thereafter.
Full details can be viewed at on the Energy-intensive industries: compensation for indirect costs of energy and climate change policies page.
New Entrants Reserve
The New Entrants Reserve (NER) is a set aside of EU allowances, reserved for new operators or existing operators who have significantly increased capacity. The UK’s EU ETS Regulators are responsible for administering and assessing all NER applications.
Operators starting a new entrant activity must submit an NER application to their regulator within 12 months of starting normal operation of the new or extended activity. More information on applying to the Phase III NER is available on the Environment Agency: EU ETS New Entrant Reserve (NER) webpage.
Further information on allowances can be found on the EU ETS: allowances page.
Complying with the EU ETS
The Greenhouse Gas Emissions Trading System Regulations 2012 require all operators that carry out an activity covered by the EU ETS to hold a greenhouse gas emissions permit - in effect, a licence to operate and emit greenhouse gases covered by the EU ETS. Activities covered by the EU ETS are any of the activities listed in Annex I to the EU ETS Directive.
The EU ETS Regulators are responsible for enforcing compliance with the EU ETS Regulations, including operational functions such as granting and maintaining permits and emissions plans (for aviation), monitoring and reporting (including monitoring plans), assessing verified emission reports (and tonne-kilometre reports), assessing applications to the NER, determining reductions in allocations as a result of changes in capacity or cessation of activities, exchanging of information with UKAS on verifier activities.
Regulators include: the Environment Agency, Scottish Environment Protection Agency (SEPA), Northern Ireland Environment Agency (NIEA), Natural Resources Wales, the Department of Energy & Climate Change (DECC) for offshore installations.
For the purpose of calculating civil penalties, DECC determines the value of the EU ETS carbon price used by the regulator. The determination is published in November each year:
- Determination by the Secretary of State for Energy and Climate Change of the 2014 carbon price under regulation 49 of the Greenhouse Gas Emissions Trading Scheme Regulations 2012
On 7 August 2013, we launched a consultation on a number of technical amendments to the Greenhouse Gas Emissions Trading Scheme Regulations 2012 so as to simplify and harmonize EU ETS penalties in the transition to Phase III, improve clarity and reduce the burden for businesses. The consultation closed on 19 September 2013.
For more information on how to comply with EU ETS please visit:
- EU ETS: monitoring and reporting
- EU ETS: notify your regulator about changes to your operations
- EU ETS: open an ETSWAP and Registry Account and make application
- EU ETS operators and activities affected
Monitoring, reporting, verification and accreditation
An EU ETS operator must propose a monitoring plan when applying for a greenhouse gas emissions permit (or emissions plan for aviation operators). The monitoring plan provides information on how the EU ETS operator’s emissions will be measured and reported. A monitoring plan must be developed in accordance with the European Commission’s Monitoring and Reporting Regulation and be approved by an EU ETS Regulator. The reporting year runs from 1 January to 31 December each year.
The EU ETS requires all annual emissions reports and monitoring to be verified by an independent verifier in accordance with the Accreditation and Verification Regulation. A verifier will check for inconsistencies in monitoring with the approved plan and whether the data in the emissions report is complete and reliable.
The European Commission’s Guidance on the Accreditation and Verification Regulation aims to help operators of all stationary installations, aviation operators, verification bodies and regulators perform verifications consistently throughout the EU. It provides practical information and advice on the process and requirements for annual verification required by the EU ETS Directive, the European Commission’s Monitoring and Reporting Regulation and Greenhouse Gas permits/monitoring plans/tonne-kilometre plans.
Further useful information can be found on the EU ETS: monitoring and reporting page.
Finding an accredited EU ETS verifier in the UK
The Accreditation and Verification Regulation (Commission Regulation 600/2012/EU) requires EU ETS verifiers to meet specific requirements. In the UK, these requirements are demonstrated by being accredited. The UK Accreditation Service (UKAS) is responsible for the accreditation and supervision of verifiers in the UK and for maintaining a list of those verifiers. The list of UKAS accredited verifiers for Phase III, including aviation, of the EU Emissions Trading System indicates the scope of a particular verifier’s accreditation, for example in relation to particular sectors.
The UKAS list does not include verifiers accredited by other national accreditation bodies and under Phase III rules there is no ‘registration’ or acceptance procedure for non-UK verifiers. All verifiers are required to demonstrate that they are either accredited (or certified) in accordance with the Accreditation and Verification Regulation. Operators are responsible for ensuring that their verifier is accredited for the relevant scope of work. Details of a verifier’s scope of accreditation can be found on the verifier’s accreditation certificate.
If you are an EU ETS verification body working in the UK for the first time, you will need an ETSWAP account to view your client’s reports and to submit your verification opinion statement, as well as a Registry Account. To open a verifier ETSWAP account, send an email to EThelp@environment-agency.gov.uk. It is advisable to do this when you have a client in the UK.
Include the following information in your email:
- Name of verifier organisation
- Accreditation identification number
- A copy of your accreditation certificate
- Full name and email address of the main point of contact (this user will have the responsibility for managing other users for this verifier)
Once the ETSWAP administrator has approved your request for access, ETSWAP will send you an email with the login details for your individual user account.
To apply for a verifier Registry account, email email@example.com for an application pack.
Using UK greenhouse gas inventory data in EU ETS monitoring and reporting: the country-specific factor list
The European Commission’s Regulation on Monitoring and Reporting allows nationally reported data to be used as default factors in specific circumstances.
Carbon emission factors and calorific values from the UK Greenhouse Gas Inventory (AEA-Ricardo, 2015) are available for annual emissions reporting for the EU ETS:
The national factors are Tier 2 and Tier 2a emission factors and net calorific values for specific fuels used by particular industries.
The data have largely been extracted from the UK Greenhouse Gas Inventory that is presented on an annual basis to the United Nations Framework Convention on Climate Change (UNFCCC). The Greenhouse Gas Inventory is developed independently to the EU Emissions Trading System. This data means the data referred to in Article 31(1) of the Monitoring and Reporting Regulation.
The factors in these tables should only be used in accordance with the requirements in an installation’s approved monitoring plan, which is part of the Greenhouse Gas permit.
Tables for previous years are available as follows:
EU ETS non-compliance
The EU ETS Directive requires Member States to put in place a system of penalties which is effective, proportionate and dissuasive but the nature of the penalties is largely left to Member State discretion (with the exception of the penalty for failure to surrender sufficient allowances in certain circumstances).
The Greenhouse Gas Emissions Trading System Regulations 2012 set out the civil penalties to which a person is liable if they do not comply with the EU ETS. DECC has produced the guidance below for the offshore oil and gas industry detailing the Department’s approach to enforcement and sanctions.
The Regulations provide for the right of appeal against decisions of an EU ETS Regulator. In England and Wales appeals for both operators of stationary installations and aircraft operators, as well as offshore installations, are heard by the First-tier Tribunal.
Appeals in Northern Ireland are heard and determined by the Planning Appeals Commission (PAC). In Scotland, the Directorate for Planning and Environmental Appeals (DPEA) in the Scottish Government hears and determines appeals on behalf of the Scottish Ministers.
Different arrangements apply to appeals brought by aviation operators against a penalty notice served under the Aviation Greenhouse Gas Emissions Trading Scheme Regulations 2010 for the 2012 scheme year. The relevant rules under the 2010 Regulations continue to apply in relation to any appeal brought against any decision made or notice served under the 2010 Regulations. These provide that the appeal body is the Secretary of State or an independent person appointed by the Secretary of State.
Further information can be found on the DECC Environmental Legislation page.
2012 scheme year: Six appeals determinations have been made under these Regulations:
Aviation in the EU ETS
The EU Emissions Trading System requires aircraft operators to monitor and report emissions of CO2 and surrender the equivalent number of allowances. The scheme is designed to be a cost-effective means of tackling the CO2 emissions from aviation, enabling the aviation industry to grow sustainably whilst delivering emission reductions. The scheme applies to all flights between airports in the European Economic Area.
Details of the underpinning EU legislation and related detailed FAQs can be found on the European Commission: Reducing emissions from aviation web page.
We are consulting on implementation of the revised Aviation ETS in the UK. The consultation seeks comments on the proposed amendments to UK Regulations and the consultation-stage Impact Assessment. You can view the consultation and accompanying documents on the EU Emissions Trading System aviation consultation webpage.
The key changes are:
- An Intra-European Economic Area (EEA) scope for the Aviation ETS from 1 January 2013 until 31 December 2016;
- A deferral of compliance deadlines for 2013 emissions until March and April 2015;
- An exemption for non-commercial operators emitting less than 1,000 tonnes of CO2 per year until 2020;
- Simplified procedures for operators emitting less than 25,000 tonnes of CO2 per year;
- The number of free allowances issued and allowances auctioned are reduced in proportion to the reduction in scope.
We welcome views from any organisation or individual, and the consultation will be of particular interest to aircraft operators, aerodrome operators, verifiers, other participants in the EU ETS and environmental groups.
Regulation of aircraft operators’ emissions
Each aircraft operator is administered by a single member state. The European Commission produces an annual list showing which operators are administered by which member state.
There are three Regulators in the UK that regulate Aviation ETS activities, depending on the location of an operator’s registered office or where their highest proportion of emissions occur: the Environment Agency (for operators in England); the Scottish Environmental Protection Agency; and Natural Resources Wales.
You can find out more about what operators need to do to comply with the scheme on the EU ETS: operators and activities affected web page.
Find out how to bid for carbon allowances and aviation allowances in forthcoming Phase III emissions auctions. The first UK auction for aviation allowances will be on Wednesday 17 September 2014.
Free allocation to aircraft operators
The European Commission enacted legislation in April 2014 changing the scope of EUETS with regards to international aviation emissions (Regulation (EU) No 421/2014 amending Directive 2003/87/EC). As a result of the change in scope of Aviation EU ETS, the UK is obligated to recalculate the allocation of free allowances due to eligible aircraft operators. This recalculation has been done in accordance with the Commission guidance.
The table includes all operators who were previously due free allowances and indicates their new free allowance allocation under the reduced scope. Operators who ceased operations have been removed from this list.
Operators who are now exempt under the new non-commercial de minimis (under 1,000tCO2 per annum calculated on the basis of full scope) still appear in this table. However owing to their exempt status these operators are not due free allowances and as such their Aircraft Operator Holding Account (AOHA) will be marked as “excluded” in the registry – meaning that no transactions can be carried out and no free allowances will be deposited.
If you believe you are no longer due any allowances as a result of the changes or you wish to seek further clarification as to your new free allowance allocation please contact the Environment Agency aviation helpdesk ETAviationHelp@environment-agency.gov.uk.
The European Commission: Allocation of aviation allowances in an EEA-wide Emissions Trading System web pages on allocation to aircraft operators provide further detail on the allocation process.
Please visit the National Archives version of the Aviation in the EU Emissions Trading System web pages to see information relating to aviation/aviation appeals previously available on the DECC website.
Small Emitter and Hospital Opt-out Scheme
The UK’s Small Emitter and Hospital Opt-out Scheme allows eligible installations to be excluded from Phase 3 (2013 to 2020) of the EU ETS. The scheme has been approved by the European Commission.
Article 27 of the EU ETS Directive enables small emitters and hospitals to be excluded from the EU ETS, with the primary aim of reducing the administrative burdens on these installations. This acknowledges that the administrative costs faced by smaller emitters under the EU ETS are disproportionately high per tonne of CO2, in comparison to the costs for large emitting installations. The Directive requires that excluded installations are subject to a domestic scheme that will deliver an equivalent contribution to emission reductions as the EU ETS.
The UK’s opt-out scheme was designed in consultation with industry and aims to offer a simple, deregulatory alternative to the EU ETS whilst maintaining the incentives for emission reductions. We estimate that the scheme will offer savings of up to £39 million to industry over Phase III.
The opt-out scheme offers deregulatory savings through:
- the replacement of a requirement to surrender allowances with an emissions reduction target
- simplified monitoring, reporting and verification requirements (MRV), including the removal of the requirement for third party verification
- no requirement to hold an active registry account
- less burdensome rules for target adjustment following an increase in installation capacity
Further details on the scheme are contained in the documents listed below. Please note that these documents will be updated later in 2015. The consultations referred to in the ‘Frequently asked questions’ document are now closed.
Participants in the opt-out scheme
Operators of installations that are excluded from the EU ETS and participating in the Opt-out Scheme should refer to the document European Union Emissions Trading System (EU ETS) Phase III: Guidance for installations – How to comply with the EU ETS and Small Emitter and Hospital Opt-out Scheme.
The application period for the opt-out scheme ran from 23 May to 18 July 2012. Operators of 247 installations were approved to participate in the opt-out scheme by the European Commission as excluded from the EU ETS.
The EU ETS Directive does not provide for further installations to join the opt-out scheme.
Previous information on the development of the scheme including, the application period, policy development and the small emitters workshop held on the 12 June 2012, can be viewed on the National Archives website.