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

Section 4: Additional implementation considerations

Enforcement/ compliance

This policy does not change the current enforcement, sanctions or monitoring processes already in place for the UK ETS. These processes are built on top of existing practices and procedures, and it is a matter for SEPA to make operational.

SEPA are responsible for the regulation of all Scottish installations affected by the proposals and will implement relevant changes that may be required. This includes the periodic Baseline Data Collection and annual Activity Level reporting processes for which installations in receipt of free allocation participate in.

SEPA will continue to support operators in meeting their regulatory obligations in terms of free allocation and will communicate any changes as a result of this policy. The monitoring, reporting and verification system METS (Manage your Emissions Trading Scheme) will be utilised and is in the process of being updated to support this policy.

Non-compliance may result in financial penalties as outlined in the Greenhouse Gas Emissions Trading Scheme Order 2020. SEPA engages closely with operators to ensure compliance however and overall compliance with the current free allocation policy remains high.

UK, EU and International Regulatory Alignment and Obligations

We do not expect these policy changes to impact on intra-UK trade as it has been developed and agreed on a UK-wide basis, in conjunction with the UK Government and other Devolved Governments.

International Trade Implications

As outlined above in Section 3’s Scottish Firms’ International Competitiveness, the measures covered by this BRIA aim to incentivise business to decarbonise in a cost-efficient way, including by improving efficiency which could result in increased competitiveness in global markets. Where companies are deemed at risk of carbon leakage, they receive a proportion of their allowances for free.

To ensure the UK CBAM applies an effective cost on imports and to maintain the carbon price signal to drive decarbonisation, the phase-out of free allocations must be coordinated with the phased introduction of the CBAM to ensure parity between domestic and import pricing. The Authority has decided to gradually phase out free allocations for sectors covered by the UK CBAM from 2027, with a trajectory that mirrors the EU’s phase out period, ensuring a gradual and coordinated transition to the UK CBAM as the primary carbon leakage mitigation measures. By aligning the start of the phase out with the implementation of the UK CBAM, the Authority ensures that domestic producers are not exposed to carbon leakage risks before border measures are in place. This phase out will occur at sub-installation level to ensure only free allocations corresponding to products where a UK CBAM will be applied are affected.

EU Alignment consideration

As announced as part of the UK-EU Summit on 19 May 2025, and then set out in the shared Common Understanding, the UK and EU have agreed to work towards linking their respective Emissions Trading Systems.

The positions set out in the Authority Response, Authority Impact Assessment and this document will be implemented in the UK ETS from 1 January 2027 but it should be noted that the UK’s free allocation policy in a linked market may be subject to change, in particular where these would avoid creating competitive distortions, as recognised in the Summit text^[27]. Further updates related to linking negotiations will be provided by UK Government at the appropriate times.

Legal Aid

Not applicable.

Digital impact

All UK ETS operators make use of the online platform METS in their interaction with the scheme. In terms of free allocation, the system is used by operators and regulators to submit and process relevant reports.

METS will be used to implement aspects of this policy, including the application of the COVID mitigation and association of CBAM with the 2025 Baseline Data Report, used to set the baseline for free allocation over the 2027-2030 period. Development of METS for this purpose is ongoing.

Operators are familiar with the METS platform in general, however, SEPA will provide clear instruction to operators on any new components arising from this policy.

Business forms

This process does not require new forms as it is built on top of existing practices and procedures and is a matter for SEPA to make operational.

No new standalone business forms will be introduced as part of the implementation of this policy, however, amendments to existing forms will be required – namely the Baseline Data Report and going forward the Activity Level Change Report for the 2027-2030 period. Operators are familiar with these report templates and will be provided instruction and support with any amendments.

All compliance and reporting obligations will be managed through existing digital platforms, primarily the METS system and the UK ETS Registry.