Emissions trading scheme

An Emission Trading Scheme (ETS) is a cap-and-trade system which caps the total level of greenhouse gas emissions, creating a carbon market with a carbon price signal to incentivise decarbonisation.

Participants are required to obtain and surrender allowances to cover their annual greenhouse gas emissions. Participants can purchase allowances at auction or trade them amongst themselves, which allows the market to find the most cost-effective way to reduce emissions. Industrial sectors considered at risk of carbon leakage (whereby carbon costs would make them uncompetitive prompting industry to relocate outside the country in which the ETS applies) receive a proportion of allowances for free.

The EU ETS was established in 2005, and is currently the largest carbon market globally. Phase 4 of the EU ETS begins in January 2021. Scotland participated in the EU ETS from 2005 until the UK left the EU.

On 1 June 2020, the Scottish Government, UK Government, Welsh Government and Northern Ireland Executive jointly announced plans to establish a UK Emissions Trading Scheme (UK ETS) from January 2021. This was in response to the 2019 consultation for a replacement for the UK’s participation in the EU Emissions Trading System after EU Exit.

The UK ETS aims to:

  • incentivise cost-effective greenhouse gas emissions reductions for sectors currently in scope of the EU ETS, while balancing this ambition with the competitiveness of UK industry
  • be at least as ambitious as the current EU ETS and to provide a smooth transition for all relevant sectors

Commenting on the announcement, the Cabinet Secretary for Environment, Climate Change and Land Reform emphasised that the Scottish Government’s preference is for a UK ETS linked to the EU ETS to provide Scottish businesses continued access to the world’s largest carbon market that ensures cost effective decarbonisation, and provides protection against carbon leakage.

However a UK ETS linked to the EU ETS is subject to ongoing negotiations with the European Union. In the event that linking is not agreed, the Scottish Government would support a standalone UK ETS as a fallback, but not a reserved carbon emissions tax.

UK ETS design features

The UK ETS will create a single UK-wide emissions trading scheme modelled on phase IV of the EU ETS. The UK ETS legislation will allow the UK ETS to operate as either a standalone scheme, or to link to the EU ETS if an agreement is reached with the EU. It will play an important role in delivering Scotland’s net-zero targets and ensure a continued carbon price to drive decarbonisation for our largest greenhouse gas emitters after we leave the EU Emissions Trading System (EU ETS).

The UK ETS maintains the scope of the EU ETS, with participation mandatory for the power sector, energy intensive industries and aviation. It will cover around 100 participants in Scotland who account for 28% of Scotland’s greenhouse gas emissions.

The UK ETS sets a cap on emissions at 5% less than the UK’s notional share of the EU ETS cap. We have committed to review this cap within 9 months of the Committee on Climate Change’s Sixth Carbon Budget, and implement any changes by 2024, to ensure the cap is in line with our net zero ambitions.

The UK ETS obligations on participants, in particular for monitoring, reporting and verification, are based on the EU ETS phase IV requirements. The Scottish Environment Protection Agency (SEPA) will continue to regulate Scottish participants with enforcement powers to ensure compliance with the UK ETS rules.

The first phase of the scheme will run from January 2021 to December 2030, with two whole-system reviews in 2023 and 2028 to assess the performance of the scheme. Other reviews of specific aspects of the UK ETS will take place as needed – e.g. changes to the cap will be reviewed.

Consultation

In May 2019, we launched a joint consultation with the UK Government and other Devolved Administrations on the Future of UK Carbon Pricing once we have left the European Union. This focused on seeking stakeholders’ views on the design of a UK ETS.

The consultation received 149 response from a variety of industry sectors. We published a joint Government Response to the consultation on 1 June 2020.

Operational guidance  

Further guidance for participants under the UK ETS will be issued later in 2020 to ensure operators are prepared for the start in January 2021.

Additional resources

Additional resources regarding emissions trading and related information are available below:

For further information, please email: emissions.trading@gov.scot