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

Section 5: Next steps and implementation

Recommendations/ preferred options

The final policy positions of the Free Allocation Review can be found in the Authority Response to the consultation. In summary, the Authority’s proposed changes in the UK, including Scotland, are:

• 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.

Considering all the policy package comparisons, as detailed in Section 3, package F appears to provide a strong balance between implementing changes to free allocations in light of the introduction of a new UK CBAM from 2027, ensuring businesses face a smooth transition without excessive cost, and providing a policy landscape consistent with potential future EU ETS linking^[28]. Changes to ALCs would include COVID mitigations to avoid including abnormal historic years, while EU benchmarks would be used from 2028. The phase-out of free allocations for CBAM sectors would be aligned with the EU’s phase-out, with a 1 year delay reflecting that the UK CBAM is expected to be introduced 1 year after the EU’s CBAM. There would be no early non-carbon leakage phase-out from 2027, and no consideration of conditionality. Consequently, package F provides a balance across the different policy packages considered while being slightly closer to the least ambitious option package B than the most ambitious option package A.

Changes to the UK ETS may increase costs for participating businesses through the costs associated with investment in decarbonisation technologies and the costs associated with purchasing of allowances. However, these costs are associated with reductions in emissions and will therefore support our ambitious climate targets. The proposed changes presented in the Authority Response and resulting costs to businesses are deemed to be proportionate given the importance of our national climate targets.

Implementation considerations/ plan

This policy does not change the current implementation or delivery processes already in place for the UK ETS for the second free allocation period (2027-2030). These processes are built on top of existing practices and procedures.

The second stage of the application for free allocation for 2027-2030 will take place between 1 April and 30 June 2026. During this window, operators will be required to confirm or withdraw their initial applications for free allocation made in 2025, now that the free allocation review has concluded. In addition, some operators who are impacted by the UK CBAM will need to resubmit information relating to their affected sub-installations. Operators will also have the opportunity during the second stage to state whether their 2020, or 2020 and 2021, scheme year data should be excluded from the calculation of their HAL. Further guidance on how to comply with the requirements of this second stage application will be published in advance of the window. Regulators will notify operators when this is available.

The Authority will continue to engage with stakeholders on the implementation of these changes in the lead up to 2027.

Post implementation review

Under Article 17 of The Greenhouse Gas Emissions Trading Scheme Order 2020, the UK ETS Authority has a statutory requirement to undertake and publish a review by 31st December 2028 on the operation of the UK ETS and make appropriate recommendations for future operations. Further information on the UK ETS monitoring and evaluation plan can be found in the Authority Impact Assessment.