Explanatory note

The United Kingdom Emissions Trading Scheme (the “UK ETS”) was established by the Greenhouse Gas Emissions Trading Scheme Order 2020 (the “UK ETS Order”). Operators of certain industrial “installations” that engage in a “regulated activity” are required to monitor, report on, and surrender “allowances” equivalent to, their greenhouse gas emissions in each “scheme year”. Allowances are sold at auction, but some participants receive an allocation of allowances free of charge each scheme year, the number depending on the installation’s activity levels from year to year. For installations that meet the eligibility criteria, there are two schemes in addition to the main scheme, one for “hospitals or small emitters”, the other for “ultra-small emitters”. Operators of installations in the main scheme and in the hospital and small emitters scheme are required to have a permit.

This Order amends the UK ETS Order, Commission Delegated Regulation (EU) 2019/331 (the “Free Allocation Regulation”) and Commission Implementing Regulation (EU) 2019/1842 (the “Activity Level Changes Regulation”). The main changes are as follows.

The definition of when an installation “ceases operation” is changed to refer to the permanent cessation of regulated activities (see substituted paragraph (3) of article 4 of the UK ETS Order). Operators of installations with a permit are required to notify the regulator if all regulated activities authorised by the permit have ceased at the installation (see new sub-paragraph (8) of paragraph 4 of Schedule 6 to the UK ETS Order and article 19 of this Order). The regulator is given the power to determine when a cessation is permanent for UK ETS purposes (see new paragraph 10A of Schedule 6 to the UK ETS Order).

Similar provision is made in relation to “sub-installations”, which are relevant to installations that receive free allocation (see substituted paragraph 3 of Article 2, new Article 2a and new paragraph 9 of Article 3 of the Activity Level Changes Regulation).

The operator of an installation in receipt of free allocation must submit a report on activity levels in the year in which the installation ceases operation (see new paragraph 1a of Article 3 of the Activity Level Changes Regulation). For such installations, and where an individual sub-installation has ceased operation in a scheme year, free allocation for the scheme year will be recalculated to reflect actual activity level in the scheme year (see new Article 3za), and the operator may be required to return any previous overallocation for that year in accordance with existing scheme rules. Exceptionally, where a product benchmark sub-installation ceases operation and is replaced by new infrastructure that results in the decarbonisation of production at an installation, the operator may apply to retain the final year’s free allocation without adjustment (provided that there has been no material reduction in the overall level of production at the installation) (see new Articles 3zb and 3zc).

This Order also omits some provisions of the Activity Level Changes Regulation that are now spent.

No impact assessment has been produced for this instrument. However, the impact of this instrument on business, charities or voluntary bodies is set out in an analytical annex which is available from the Industrial Decarbonisation and Emissions Trading Directorate, Department for Energy Security and Net Zero, 3-8 Whitehall Place, London SW1A 2JP and which has been published alongside the Government Response to the 2023 consultation ‘UK Emissions Trading Scheme: free allocation review’ published on 28 November 2024 at https://www.gov.uk/government/consultations/uk-emissions-trading-scheme-free-allocation-review.