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Introduction
The UK Emissions Trading Scheme, commonly referred to as the UK ETS, is a central pillar of the United Kingdom’s carbon pricing framework. Established following the UK’s departure from the European Union, the scheme replaced the UK’s participation in the EU Emissions Trading System and now operates as a standalone carbon market. As the UK government moves to expand the scheme to additional sectors including maritime transport and waste, and as Phase II planning extends the system beyond 2030, companies both inside and outside the UK must understand how the system works and what compliance will require.
For multinational corporations, exporters to the UK, and shipping operators serving UK ports, the UK ETS extends far beyond a domestic climate policy. It represents a growing source of carbon cost exposure, reporting obligations, and regulatory complexity. With maritime coverage beginning in July 2026 and aviation free allocation ending in January 2026, preparation time is narrowing.
This article explains what the UK ETS is, which sectors are covered, how the scheme functions, what changes are coming in 2026 and beyond, and what companies need to do now to prepare.
What Is the UK ETS and How Does It Work?
The UK ETS is a cap and trade carbon pricing system. It sets a limit on total greenhouse gas emissions from covered sectors and creates a market for tradable emissions allowances. Each allowance represents one tonne of carbon dioxide equivalent emissions.
The system works through five core mechanisms:
- A declining emissions cap that limits total sector emissions.
- Distribution of allowances through auctions and free allocation.
- Mandatory annual monitoring, reporting, and verification of emissions.
- Surrender of allowances equal to verified emissions.
- Market mechanisms designed to manage price stability.
By reducing the cap over time, the scheme ensures emissions decline in line with the UK’s net zero targets. Companies that reduce emissions below their allocated level may sell excess allowances. Companies that exceed their allocation must purchase additional allowances through auctions or secondary markets.
Currently, the UK ETS covers approximately 25 percent of UK territorial emissions. The sectors included today are:
- Power generation
- Energy intensive heavy industry
- Aviation
The carbon price under the UK ETS fluctuates based on market supply and demand. An Auction Reserve Price sets a minimum level for auctioned allowances, and a Cost Containment Mechanism may be triggered if prices rise sharply.
For companies, this translates into direct financial exposure linked to verified emissions. The higher the emissions intensity, the greater the compliance cost.
Sector Coverage Today and Expansion to 2026
While power, heavy industry, and aviation are already covered, the UK ETS Authority has confirmed expansion plans.
Aviation
From 1 January 2026, free allocation for aviation will end. As a result, airlines will no longer receive free allowances and will need to obtain and surrender allowances equivalent to their verified emissions in line with the general rules of the scheme. This is expected to strengthen incentives to adopt sustainable aviation fuel and improve operational efficiency.
Maritime Transport
From July 2026, the UK ETS will expand to maritime transport.
The main requirements of the scheme are summarised below:
| Requirement Category | Description |
|---|---|
| Vessel threshold | 5,000 GT and above calling at UK ports, regardless of flag state |
| Covered GHGs | CO2, CH4, N2O |
| Domestic voyages | Emissions fully covered |
| At berth emissions | Covered while in UK ports |
| International voyages | Covered as defined under the scheme for voyages arriving at or departing from UK ports |
| Exclusions | Warships, fishing vessels, non-commercial government vessels (generally excluded) |
| Compliance entity | Responsible shipping company or ISM operator |
| Reporting | MRV obligations apply (monitoring, reporting, verification) |
| 2026 reporting period | 1 July 2026 to 31 December 2026 |
For 2026, the reporting period will run from 1 July to 31 December, reflecting a partial first year of application. Operators should prepare emissions accounting and reporting systems accordingly.
Industry reaction has been cautious. Parts of the UK shipping sector have raised concerns about the limited preparation window before maritime obligations begin in July 2026. Stakeholders have highlighted challenges related to data systems, allowance procurement strategies, and alignment with existing EU ETS requirements, arguing that implementation timelines leave limited room for operational adjustment.
Waste Incineration and Energy from Waste
From 2028, the scheme will expand to waste incineration and energy from waste facilities. A two year monitoring and reporting only period begins in January 2026, allowing operators to prepare before full cost exposure applies.
Why Companies Outside the UK Should Pay Attention
The UK ETS applies based on covered activities rather than corporate headquarters location. It applies to activities that fall within the scope of UK jurisdiction. This means:
- International shipping companies serving UK ports may be subject to maritime obligations.
- Airlines operating relevant UK routes must comply.
- Exporters selling carbon intensive goods to the UK may face indirect carbon cost pass through.
In parallel, the UK Carbon Border Adjustment Mechanism will begin in 2027. This mechanism applies a carbon price to certain imported goods to prevent carbon leakage. Together, the UK ETS and CBAM create a broader carbon pricing ecosystem affecting supply chains beyond UK borders.
For multinational corporations, the UK ETS may therefore influence:
- Supply chain carbon data requirements.
- Procurement decisions.
- Contract pricing and cost pass through clauses.
- Investment planning for low carbon technologies.
Companies operating in both the UK and EU must also manage interaction between the UK ETS and the EU ETS. Although discussions are underway about linking the two systems, they remain separate carbon markets with distinct rules.
What Companies Should Be Doing Under UK ETS
Preparation should begin with a structured compliance roadmap.
| Step | Action Area | Purpose |
|---|---|---|
| 1 | Determine applicability | Confirm whether operations fall within scope |
| 2 | Build emissions data systems | Ensure MRV compliance and verification readiness |
| 3 | Model carbon cost exposure | Estimate financial impact under different price scenarios |
| 4 | Align governance | Assign internal responsibility and strengthen controls |
| 5 | Monitor policy developments | Track expansion, cap changes, and EU linking discussions |
1. Determine Applicability
Companies must assess whether their operations fall within current or future sector coverage. For maritime operators, this includes reviewing vessel tonnage, voyage patterns, and port calls. For aviation operators, route analysis is required.
2. Build Robust Emissions Data Systems
The UK ETS relies on accurate monitoring, reporting, and verification. Companies must establish systems capable of:
- Tracking fuel consumption and emissions factors.
- Aligning data with regulatory MRV standards.
- Supporting third party verification.
Digital carbon accounting tools can significantly reduce administrative burden and compliance risk.
3. Model Carbon Cost Exposure
Companies should conduct forward looking cost modelling. This includes:
- Estimating allowance needs.
- Stress testing different carbon price scenarios.
- Evaluating hedging or purchasing strategies.
Financial planning teams must integrate carbon costs into long term budgeting.
4. Align Governance and Internal Controls
Clear responsibility must be assigned internally. Compliance typically requires coordination between sustainability teams, finance, operations, and legal departments.
Internal audit functions should review data controls to ensure readiness for regulator scrutiny.
5. Monitor Policy Developments
The UK ETS is evolving. Key developments to monitor include:
- Phase II cap trajectory beyond 2030.
- Integration of greenhouse gas removals.
- Potential linking with the EU ETS.
- Adjustments to maritime thresholds or scope.
Policy engagement and regular regulatory tracking are essential for strategic planning.
Conclusion
The UK ETS is expanding in scope and financial impact, with aviation free allocation ending in January 2026 and maritime inclusion beginning in July 2026. These changes increase carbon cost exposure and compliance obligations for companies operating in or connected to the UK market.
At the same time, affected sectors, particularly shipping, have raised concerns about the limited preparation period and operational readiness challenges. This tension between policy ambition and implementation capacity increases execution risk in the short term.
Businesses must therefore treat UK ETS readiness as an immediate priority. Clear scope assessment, robust emissions data systems, and forward-looking carbon cost planning will be critical to managing both regulatory and operational risk.
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