UK ETS

What it is

The UK Emissions Trading Scheme (UK ETS) was set up on 1 January 2021 by the UK, Scottish and Welsh governments and Northern Ireland's DAERA. It covers power, industry, aviation and domestic maritime, which GOV.UK says is about 25% of UK territorial emissions.

It works on "cap and trade". A total cap is set and divided into allowances, each equal to one tonne of carbon dioxide equivalent. Covered operators must hand over enough allowances each year to match their emissions. The cap falls over time.

Where you will see it

You will not see a UK ETS line on a normal business bill. It affects you indirectly: power stations burning fossil fuels need allowances for their emissions, and that carbon cost is one of the inputs to their running costs. How much of it reaches wholesale prices, and so your bill, is not something GOV.UK's overview quantifies, so treat it as background rather than a figure you can check. The reason electricity prices follow gas is a related story.

Why it matters

If you run a large industrial site, you may be a participant yourself. For most small businesses, UK ETS is just one of the forces behind how business energy prices are set. It is separate from the climate change levy, which is a tax you do see on your bill.

Example

An allowance covers one tonne of CO2e, so a plant emitting 10,000 tonnes in a year must surrender 10,000 allowances. At a hypothetical £40 each the cost would be 10,000 × £40 = £400,000. The price moves in the market, so this is only to show the arithmetic.

Related terms

See capacity market, REGO and green business energy tariffs.