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”). The UK ETS runs for ten “scheme years” beginning with 2021, split into two five-year “allocation periods”. Operators of certain industrial installations and certain aircraft operators are required to monitor, submit verified reports on, and surrender “allowances” equivalent to, their greenhouse gas emissions in each scheme year. Allowances (which are tradable) are held in accounts in the UK ETS registry, and there is a cap on the number of allowances that may be created. Allowances are sold at auction, but some operators of installations and aircraft operators receive an allocation of allowances free of charge. Free allocation for installations may change from year to year depending on the installation’s activity level. For installations that meet the eligibility criteria, there are two schemes in addition to the main scheme, one for “hospital or small emitters”, the other for “ultra-small emitters”.

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”).

For the purpose of calculating free allocation in the 2024 and 2025 scheme years, the product benchmark for lime is increased and the production of malt extract is included as a sector at risk of carbon leakage: see article 20 of this Order and amendments to articles 34B and 34C of the UK ETS Order. Installations that currently benefit from free allocation will have their allocation recalculated.

The benchmarks used for calculating free allocation for scheme years in the 2021-2025 allocation period (which are currently in EU legislation) are set out in a new Annex 8 to the Free Allocation Regulation. (See also amendments to Articles 16 and 18 of, and to section 4 of Annex 7 to, that Regulation.) These benchmarks (rather than those used for the EU Emissions Trading System) will also be used for calculating free allocation in the 2026-2030 allocation period (unless the legislation is amended).

Operators of installations whose allocations were reduced by the 2021 activity level changes process may apply for activity level changes to be recalculated, using data from other years instead of 2020 to calculate average activity levels: see amendment to article 34C of the UK ETS Order and amendment to Article 5b, and new Article 5c, of the Activity Level Changes Regulation.

An amendment to Article 6 of the Activity Level Changes Regulation (which relates to when adjustments (upwards or downwards) to free allocation as part of the activity level change process may be rejected on energy efficiency grounds) provides for the codes in Sections B and C of NACE rev.2 to be used where there is no PRODCOM code.

The information that the operator of a hospital or small emitter or an ultra-small emitter that returns to the main scheme and wishes to benefit from free allocation must provide now includes an additional requirement to provide information to enable the “historical activity level” of sub-installations to be determined where not previously determined as part of the original application: see amendments to article 34G of, and Schedule 8A to, the UK ETS Order.

Holders of operator and aircraft operator holding accounts may apply for a new type of permission for account authorised representatives, limited to enabling representatives to surrender, and return overallocated, allowances: see amendments to paragraph 16 of Schedule 5A to the UK ETS Order.

Article 24 of the UK ETS Order provides that Commission Implementing Regulation (EU) 2018/2066 (the “Monitoring and Reporting Regulation 2018”) has effect for the purposes of the UK ETS, with modifications. A further signposting modification is made to Article 49 of the Monitoring and Reporting Regulation 2018: see the amendment to Schedule 4 to the UK ETS Order.

An impact assessment is available from the Industrial Decarbonisation and Emissions Trading Directorate, Department for Energy Security and Net Zero, 1 Victoria Street, London SW1H 0ET and is available alongside this Order on www.legislation.gov.uk. The assessment covers the policy given effect to by article 20 of this Order.