The UK has unveiled a set of reforms for its Emissions Trading Scheme (ETS) to strengthen emission limits in sectors like aviation, power, and energy-intensive industries starting in 2024. The UK ETS will expand to include new sectors such as domestic maritime transport in 2026, waste incineration, and waste-to-energy sectors in 2028.
Introduced in 2021 as a replacement for the EU’s Emissions Trading System, the UK ETS sets greenhouse gas (GHG) emission limits for key sectors, gradually reducing them to encourage emissions reductions aligned with sector climate goals. Companies receive allowances for their annual emissions, and those successfully reducing emissions below the limit can sell their allowances to other industry participants.
To prevent carbon leakage and support sectors facing international competition, free allowances are allocated. Recent reforms maintain the current levels of free allowances until 2026 and set the cap at the upper end of the range to provide flexibility for industries. Additional allowances will be introduced between 2024 and 2027 for a smooth transition to the new net-zero-aligned cap.
The UK ETS Authority also plans to phase out free allocations for the aviation industry in 2026, as the risk of carbon leakage is considered minimal. Furthermore, the authority aims to include Greenhouse Gas Removal (GGR) technologies like Direct Air Capture (DAC) in the UK ETS, subject to stringent standards, to incentivize investment. Nature-based GHG removal solutions are also being considered for potential inclusion.
