UK ETS Free Allocation Review – Final Business and Regulatory Impact Assessment

Executive summary

The UK Emissions Trading Scheme (UK ETS) was established on 1 January 2021 by the UK ETS Authority (the “Authority”) – formed by the Scottish, UK and Welsh Governments and the Department of Agriculture, Environment and Rural Affairs in Northern Ireland (DAERA) for Northern Ireland. When it was established, the Authority committed to increasing the climate ambition of the scheme and the Authority consulted on a number of proposals to strengthen the UK ETS and align it with net zero targets across the UK.

Following extensive engagement with stakeholders through the Free Allocation Review (FAR) Consultation (December 2023 – March 2024)^[3] and the Carbon Leakage Consultation (December 2024 – March 2025)^[4], the UK ETS Authority Response, published on 26 November 2025, sets out the Authority’s final policy decisions on reforms to free allocation rules. In summary, the Authority’s proposed changes to the UK ETS include:

• An option for operators to choose to have activity data for either the scheme years 2020 only, or 2020 and 2021, excluded for the purpose of determining historical activity level (HAL) for the 2027-2030 allocation period.
• The retention of current benchmarks for 2027, with the in-principle intent to adopt updated EU benchmark values from 2028-2030.
• A decision to retain the current carbon leakage list, with no introduction of tiering of free allocation for sectors at risk of carbon leakage, and no early phase out of free allocations of allowances for sectors not on the carbon leakage list.
• No additional methodologies to be introduced in 2027, which would introduce conditions on the provision of free allocation, with a pathway set out to reconsider their introduction for future allocation periods, and
• A gradual phase out of free allocations for sectors covered by the UK Carbon Border Adjustment Mechanisms (CBAM) from 2027, with an indicative trajectory of 9 years.

These changes are set out in detail in the Authority Response. Changes will be legislated for via the statutory instrument the Greenhouse Gas Emissions Trading Scheme (Amendment) Order 2026.