Policy paper

UK Emissions Trading Scheme markets

Updated 25 October 2024

Background

The UK Emissions Trading Scheme (UK ETS) went live on 1 January 2021, replacing the UK’s participation in the EU ETS. Under the Ireland/Northern Ireland Protocol, electricity generators in Northern Ireland remained within the EU ETS.

The 4 administrations of the UK – the members of the UK ETS Authority – have established the scheme to increase the climate ambition of the UK’s carbon pricing policy, while mitigating the risk of carbon leakage through free allowances. The UK ETS will promote cost-effective decarbonisation, allowing businesses to cut carbon emissions where it is cheapest to do so.

Read further guidance on participating in the UK ETS.

UK ETS markets

This page explains the supply of allowances in the UK ETS in the early years of the scheme. It sets out background information on the functioning of the auctions and secondary market, free allocation, and the market stability mechanisms that the ETS Authority has in place to support smooth market operation. It also signals that the UK ETS Authority will monitor the market closely as it develops and will actively consider at the earliest opportunity actions to support smooth market operation.

Should excessive market instability compromise the scheme, the Authority may consider further interventions beyond the cost containment mechanism (CCM) aimed at calming instability, without affecting the integrity of the scheme. These could include putting in place rules to require participants to manage or limit their UK allowance holdings and limiting the size of auction bids.

UK ETS Auctions

UK ETS auctions began on 19 May 2021 and are hosted by ICE Futures Europe (ICE).

Auctions are held every 2 weeks, as set out in the ICE auction calendar. The auction calendar confirms the volume of allowances available in each auction.

2022

The total number of allowances available for auction in 2022, as set out in the 2022 auction calendar, is around 81 million.

2023

The total number of allowances available for auction in 2023, as set out in the 2023 auction calendar, is around 79 million.

The 2023 auction calendar was first published by ICE on 28 October 2022, with a revised version published by ICE on 5 September 2023. The revised calendar takes account of the updated figure for Aviation operators’ free allocation entitlements, which have increased since the initial estimate. As the cap remains the same for 2023, the amendment to the 2023 auction volume is a reduction of 119,500 allowances spread across auctions to the end of the year from and including the 20 September 2023 auction.

2024

The 2024 auction calendar was published by ICE on 5 October 2023.

Just under 69 million allowances will be auctioned in 2024, reflecting that the new net zero consistent cap for the scheme announced in July 2023 is being implemented. Auctions will continue to take place fortnightly.

2025

The 2025 auction calendar was published by ICE on 25 October 2024.

Just under 56 million allowances will be auctioned across 25 auctions, starting on 8 January 2025. Auctions will continue to take place fortnightly.

Determining the Auction Clearing Price

Auction clearing price rules determine the prices paid by participants in UK ETS auctions.

Regulation 7 of the Greenhouse Gas Emissions Trading Scheme Auctioning Regulations 2021 No 484 sets out how the auction clearing price is calculated by the auction platform.

a) The auction clearing price is the price of the bid at which the sum of the volumes bid matches or exceeds the volume of allowances auctioned.

b) Where the price calculated through this methodology would be significantly below the price on the secondary market prevailing during and immediately before the bidding window, the auction clearing price becomes the price of the lowest bid that is not significantly below the prevailing secondary market price (this process is illustrated visually in Figure 1).

c) Before the auction starts, the auction platform must:

• decide on the methodology for determining whether the clearing price is significantly below the prevailing secondary market price
• determine what the prevailing price in the secondary market is
• consult the auctioneer (BEIS) and notify the FCA about this methodology. The methodology used by the auction platform is not public information

d) There is also an auction reserve price, currently set at £22, below which bids will not be accepted.

Figure 1: Calculating the auction clearing price when the price at which the sum of volumes bid exceeds the number of allowances auctioned is significantly below the prevailing secondary market price.

Key for Figure 1

PA: Price where the sum of volumes bid exceeded the number of allowances auctioned (would otherwise be auction clearing price).

PB: The prevailing secondary market price.

PC: Auction clearing price because PA is significantly below (determined by ICE) PB

QA: Quantity of allowances available at auction

QB: Quantity of allowances bid at secondary market price

QC: Quantity of allowances sold

Pmin: Auction reserve price

6 October 2021 auction

An auction of 5,187,500 allowances was held by ICE on 6 October 2021. The auction partially cleared, with 4,149,000 allowances being successfully sold at the auction clearing price of £60.00. This is the first time that a UK ETS auction has partially cleared, with 10 previous UK ETS auctions having fully cleared.

Bids that were below £60.00 were determined, according to the methodology employed by ICE, to be significantly below the prevailing secondary market price. £60.00 therefore became the auction clearing price and bids below this level were unsuccessful, resulting in 1,038,500 allowances remaining unsold.

In line with the scheme legislation, these 1,038,500 allowances have been allocated across the next four auctions on 20 October, 3 November, 17 November and 1 December.

ICE published an updated auction calendar reflecting the partially cleared 6 October auction on 8 October. However, the auction calendar was further revised following the addition of surplus aviation free allocation allowances and published by ICE on 19 October.

Auctioning these allowances will help to support the liquidity of the UK ETS and enable operators to build allowance positions ahead of the compliance deadline of 30 April 2022.

The secondary market

The first trade date of the UK Allowance Futures Contract will coincide with the launch of the first auction on Wednesday 19 May 2021, with the UK Allowance Daily Futures following on Friday 21 May 2021. These products allow market participants to trade contracts for the delivery of allowances on specified dates in the future.

Supply of allowances

Total emissions from the UK’s EU ETS participants in 2019 were just under 130 million tonnes of CO2 equivalent (down from 236 MtCO2e in 2013 at the start of the EU ETS Phase III). The COVID-19 pandemic has affected activity in 2020 and continues to do so in 2021. Provisional UK traded sector verified emissions in 2020 were just under 105 million tonnes of CO2 equivalent.

The cap sets the limit on allowances that can be created each year: as set out in Chapter 2 of The Greenhouse Gas Emissions Trading Scheme Order 2020, this is 155,671,581 in 2021. We expect an adequate supply of allowances in the UK ETS over the course of 2021 and 2022, based on the cap set out in the legislation. The impact assessment published alongside the design of the UK ETS in June 2020 shows the analysis underpinning this expectation.

Net zero consistent cap review

The UK government and devolved administrations have committed to reviewing and consulting on the UK ETS’s cap and setting a trajectory for it that is consistent with our emissions reduction commitments.

The UK ETS Authority will consult in the coming months on the trajectory for the scheme’s cap. We acknowledge both the updated advice of the Climate Change Committee, issued in June, and the UK government’s Net Zero Strategy. We are analysing options and will bring forward proposals as soon as possible.

Changes to the cap will be implemented in 2023, or 2024 at the latest, and we will communicate the specifics of policy changes to market participants well in advance of implementation.

As part of the consultation, to ensure we consider changes in a rounded way, we also intend to continue our review of free allocation in the UK ETS, which we started with a call for evidence in spring 2021.

Free allocation

A portion of allowances is issued for free. The Allocation Table, which sets out stationary installations’ entitlement to free allowances for scheme years 2021-2025, is expected to be published by Wednesday 12 May. There will be approximately 40 million allowances allocated for free to stationary installations in 2021. The Aviation Allocation Table will be published in June and will detail free allocation entitlements for the 2021-2025 period, for eligible operators who submitted an application. The deadline for aviation operators to submit an application was 31 March 2021 and these applications are currently being processed. Allowances for aviation Free Allocation and the New Entrants’ Reserve are also part of the overall cap. Allocations will be issued to Operator and Aviation Operator Holding Accounts in the UK ETS Registry as soon as possible after the respective allocation tables have been published.

Free allocations for 2022 will be issued by 28 February 2022 for stationary installations and aircraft operators – well ahead of the 2021 compliance deadline.

As per the current legislation, with allocated free allowances beneath the industry cap, these additional allowances that were not allocated to operators are currently intended to be held to mitigate potential future application of a cross-sectoral correction factor in the 2026-2030 allocation period. The UK ETS Authority is considering options for these allowances being brought to market and will provide additional information on GOV.UK in due course.

Market stability mechanisms

The UK ETS Authority monitors all UK ETS markets closely, working with our regulatory and operational partners to ensure we have a complete picture of their operation. This includes tracking of registry holdings, auction outcomes, secondary market reporting, and any impact of UK ETS on other markets.

In the event of excessive market instability , including persistently high price levels or volatility, the UK ETS Authority will actively consider at the earliest opportunity actions in response to how the markets are functioning.

When the UK ETS was first established, market policies were implemented to support the stable launch of the new ETS market and the effective functioning of the scheme in its early years. The UK ETS is now in its fourth year in operation and continues to evolve. Existing market stability policy includes an Auction Reserve Price (ARP) and the Cost Containment Mechanism (CCM). The UK ETS auction regulations set the ARP (the minimum price for bids in UK ETS auctions) at £22. At the other end of the scale, the CCM is intended to mitigate sustained high prices. The UK ETS Authority is currently consulting on the future of UK ETS markets policy and intends to respond to the consultation in 2024.

Cost Containment Mechanism (CCM)

The operation of the CCM is set out in the explanatory memorandum to the UK ETS auctioning regulations. The CCM provides a powerful tool for the UK ETS Authority to intervene if prices are elevated for a sustained period.

The CCM will be triggered where the monthly average carbon price is more than:

a. 2 x the 2-year average carbon price for 3 consecutive months, if the last consecutive month is in 2021
b. 2.5 x the 2-year average carbon price for 3 consecutive months, if the last consecutive month is in 2022, or
c. 3 x the 2-year average carbon price for 6 consecutive months, if the last consecutive month is in 2023 or any subsequent year

The UK ETS Authority will update the Taking part in the UK Emissions Trading Scheme Markets page on a monthly basis with the price at which the CCM would be triggered.

If the CCM is triggered, the Authority will consider the most appropriate interventions given the market context and will implement them in a timely manner. The interventions the Authority may take in this instance are changing distribution of allowances to be auctioned within the year or increasing the number of allowances to be auctioned within the year by bringing forward allowances from future years, releasing allowances from the New Entrants’ Reserve or releasing allowances from the market stability mechanism account. As indicated above, the Authority may also consider additional interventions should the circumstances warrant further or earlier action.

Participating in the UK ETS auctions

Those interested in participating in UK ETS auctions should read the guidance on eligibility on GOV.UK, ICE Futures Europe’s UK ETS auctions page and contact ICE Futures Europe at sales-utilities@theice.com.

Operators and traders will need to open accounts on the new UK Emissions Trading Registry. The participating in the UK ETS guidance includes a section on the registry and links to relevant detailed guidance.