What is the UK Emissions Trading Scheme (UK ETS)?

The UK previously participated in the EU ETS. During this time, the UK Government introduced a Carbon Price Support mechanism (CPS) in 2013. Subsequently, following the UK’s decision to exit the EU, the UK ETS came in to force during 2021.

The UK ETS is a key part of the UK’s efforts to reduce greenhouse gas emissions and help tackle climate change. Acting as a carbon emissions trading scheme for the UK, the ETS places an overall cap on emissions and auctioning allowances for organisations. The cap-and-trade system works by effectively reducing these, with the overall goal of reducing emissions over time.

What is the Carbon Price Support Mechanism (CPS)?

The CPS is a method used by the government where greenhouse gas emissions are given a monetary cost. This is to help drive organisations across the UK to reduce fossil fuel combustion – the key driver of climate change.

How does the UK ETS work?

Cap on emissions

The UK ETS sets a cap on the total emissions allowed across participating industries. The government determines this cap. This is then reduced on an annual basis in line with the UK’s broader climate targets such as net zero.

Allowances

Each company within the scheme is issued allowances (permits) to emit a certain amount of greenhouse gases. One allowance typically permits the emission of one tonne of CO₂ (or its equivalent in other greenhouse gases).

Trading

Companies that reduce their emissions below their allowance can sell their excess allowances on the open market to other companies that may be exceeding their cap. This creates a financial incentive for companies to reduce emissions, as they can profit from selling unused allowances.

Who is affected by the UK ETS?

The scheme applies to energy intensive industries, the power generation sector and aviation. There is more information on the scopes that go into detail around aviation and installations here.

If your organisation undertakes an activity that is covered by the UK ETS, you must have a greenhouse gas emissions permit. You can apply for this online.

The government acknowledges that carbon pricing mechanisms, such as the UK ETS and CPS, could indirectly impact wholesale electricity prices, leading to higher retail electricity costs in the short to medium term.

For the UK’s most energy-intensive industries, a high carbon price can reduce the competitiveness of electricity prices. Also heightening the risk of carbon leakage. This can particularly affect organisations operating in international markets and are unable to pass these costs to consumers.

To address this, the government provides a compensation scheme to the electricity-intensive industries identified as being at significant risk of carbon leakage.

Are you eligible for UK ETS Compensation?

Your organisation may be eligible for compensation on costs accrued from the UK ETS and the CPS mechanism.

To assess whether your organisation is eligible, there are two areas to identify:

1. Your business must manufacture a product within the UK that falls within an eligible sector (see below table).
2. Your business must pass the 5% filter test (details further below).

Here are the eligible sectors, each identified with a 4-digit Standard Industrial Classification (SIC) code:

It’s important to note that if your business sells or resells any of the eligible products but does not manufacture them, your organisation is not eligible.

The 5% filter test

• You must show evidence that your business’s indirect carbon costs are equal to or more than 5% of your gross value added (GVA). Both the electricity costs and GVA are to be calculated at a collective business level.
• You will need to demonstrate that you have met the 5% test on a mean average basis over the past 5 years (of which financial accounts are available).
• Your organisation must be above the 5% threshold for a minimum of 3-5 years.

How is the UK ETS compensation calculated?

While the 5% test is applied at the overall ‘business-level,’ the compensation amount is determined using data from individual installations. Therefore, businesses with multiple installations must submit the necessary information for each eligible installation to receive compensation under the scheme. In this context, an installation refers to a stationary technical unit where one or more activities related to the production of the eligible product take place, including any directly associated activities on the same site.

How can Consultiv help?

Consultiv can review your business and assess your eligibility for compensation. Our team can manage the application process and facilitate the compensation payments.

If you would like to arrange a free consultation with one of our energy specialists to discuss how we can assist you with your business energy, please get in touch.