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

Footnotes

1 UK Emissions Trading Scheme: free allocation review - GOV.UK

2 UK Emissions Trading Scheme: free allocation review - GOV.UK

3 UK Emissions Trading Scheme: free allocation review - GOV.UK

4 UK Emissions Trading Scheme: free allocation review - carbon leakage - GOV.UK

5 A proportion of allowances that are set aside to be distributed for free in each scheme year.

6 A reserve of allowances that can be used if the industry cap is breached, which may be allocated until the reserve is exhausted. A flexible reserve of allowances for maintains market stability and sufficient carbon leakage mitigation

7 The CSCF is applied when the total amount of free allowances exceeds the scheme’s industry cap, i.e. the proportion of the total cap set aside for free allocations. If the CSCF is triggered in 2026, the UK ETS Authority will mitigate its application through the use of its allowance reserves.

8 UK-EU Summit - Common Understanding (HTML) - GOV.UK

9 The CLEF is used to adjust the number of free allowances an operator receives under the UK ETS, based on their sector’s exposure to carbon leakage risk. If a sector is deemed at high risk, the CLEF is set at 1, meaning the operator receives 100% of their calculated free allocation. For sectors not on the carbon leakage list, the CLEF is set at 0.3, resulting in only 30% of the calculated free allocations being provided.

10 UK ETS free allocation review: call for evidence

11 UK Emissions Trading Scheme: free allocation review - GOV.UK

12 UK Emissions Trading Scheme: free allocation review - carbon leakage - GOV.UK

13 UK Emissions Trading Scheme: free allocation review - GOV.UK

14 Factsheet: Carbon border adjustment mechanism - GOV.UK

15 At the time of completing the analysis for this impact assessment, updated EU benchmarks were not publicly available. For this reason, UK benchmarks have been used as a proxy. We test the potential implications of this proxy in Section 19.

16 The UK ETS Authority has an intent to use updated 2026 EU benchmarks in the free allocation calculation over 2028-2030, however will continue to use current benchmarks for the 2027 scheme year as the updated 2026 EU benchmark values were not available at the point of decision making.

17 UK-EU Summit - Common Understanding (HTML) - GOV.UK

18 Details can be found in Chapter 12 of the Authority Impact Assessment: UK Emissions Trading Scheme: free allocation review - GOV.UK

19 Opportunity cost refers to the economic concept of foregone value when a choice is made. In this context, it is the foregone financial value of the FAs which would have been received under the counterfactual but not under the policy option.

20 Traded carbon values used for modelling purposes, 2024 - GOV.UK

21 For sectors with support ratios greater than 100%, financial costs have been constrained to only consider possible ETS compliance costs and do not include the opportunity cost of reduced free allocations above estimated emissions.

22 UK Emissions Trading Scheme: free allocation review - GOV.UK

23 UK Emissions Trading Scheme (UK ETS): a policy overview - GOV.UK

24 Energy UK explains: Linking the UK and EU Emissions Trading Schemes - Energy UK

25 Participating in the UK ETS - GOV.UK

26 Climate Change (Scotland) Act 2009

27 UK-EU Summit - Common Understanding (HTML) - GOV.UK

28 UK Emissions Trading Scheme (UK ETS): a policy overview - GOV.UK