Environmental guidance for your business in Northern Ireland & Scotland

EU Emissions Trading Scheme

Climate change is a global problem. Under the Kyoto Protocol, by 2012 the European Union (EU) member states agreed to reduce emissions of greenhouse gases - such as CO2 - by 8 per cent below 1990 levels. The UK agreed to reduce its emissions by 12.5 per cent by 2012.

Emissions trading - such as the EU Emissions Trading System (EU ETS) - is a key policy measure being used to help the EU (and UK) to meet their emissions reduction targets. The EU ETS can affect businesses from energy-intensive sectors such as the energy industry and certain manufacturers. If your business is covered by the EU ETS, you must meet targets by either cutting your business' emissions or by trading allowances.

The EU Emissions Trading System has been revised through the adoption of Directive 2009/29/EC. The revised Directive took effect from 1 January 2013 and runs to 31 December 2020. It introduces significant changes to the scope of the EU ETS, as well as changes to operator entitlement to free allowances and how they will be issued.

Department of Energy and Climate Change (DECC): EU ETS Phase III

Large organisations not covered by the EU ETS are covered by another scheme called the CRC Energy Efficiency Scheme (CRC). This was previously known as the Carbon Reduction Commitment.

This guide explains how the EU ETS works, which businesses are affected and how they can comply.

Emissions trading is the buying and selling of greenhouse gas emission allowances. It allows an organisation to decide how and where they will reduce greenhouse gas emissions - such as CO2 - through trading their emissions allowances, so that emissions are reduced at the least cost. The cost of emissions allowances is determined by the carbon market and by the demand/availability of allowances.

What are the greenhouse gases?

There are many greenhouse gases. Most are naturally occurring, while others result from manufacturing processes, such as refrigeration. A number of greenhouse gases contribute towards climate change, and six of the main greenhouse gases are covered by the Kyoto Protocol. These are known as the 'greenhouse gas basket', and include:

  • CO2
  • methane (CH4)
  • hydrofluorocarbons (HFCs)
  • nitrous oxide (N2O)
  • perfluorocarbons (PFCs)
  • sulphur hexafluoride (SF6).

Different activities emit different gases. For example, burning fossil fuels releases CO2, methane and N2O into the atmosphere, while producing aluminium releases CO2 and perfluorocarbons.

The easiest way to calculate your greenhouse gas emissions is to use your activity data and multiply it by the emission factor. The equation you'll use looks like this:

Activity data x emission factor (carbon contents of the fuels) = greenhouse gas emissions

Most activity data is easy to obtain, relatively accurate and can be found on your gas, electricity and water bills, invoices and receipts. You should look for numbers followed by specific units of measure:

  • electricity bill - total kilowatt hours (kWh)
  • natural gas bill - total kWh
  • water bill - total water supplied in cubic metres (m³)
  • water treatment - total water supplied in m³
  • water disposal recycling - tonnes of waste treated by waste type, eg glass, paper, waste gone to the landfill as provided by your waste collection provider.

For emission-releasing activity in vehicles, you'll need the amount of fuel used in company vehicles. Look for the litres of fuel purchased as seen on your receipts or invoices.

It is normal practice to measure greenhouse gas emissions over a 12-month period. You might want to match this up to your accounting period for ease in recordkeeping.

The emission factors for the individual fuels can be found in the Department for Environment, Food and Rural Affairs (Defra) guidelines, using their greenhouse gas conversion factors. These emission factors are updated annually.

GOV.UK: Guidelines on greenhouse gas conversion factors for 2013 (PDF, 1.3MB)

To use these, you will need the data you have collected, eg annual gas use from your gas bill. You can then input these annual figures into the appropriate spreadsheets of the conversion factors guidelines. The spreadsheet will automatically calculate the greenhouse gas emissions associated with this gas use.

GOV.UK: calculating your greenhouse gas emissions

EU ETS

The EU ETS is a European-wide emissions cap and trade system. The cap is the limit on the total emissions allowed from all installations covered by the EU ETS.

Each year, operators of sites covered by the EU ETS must monitor and report their CO2 emissions and surrender enough allowances to meet their target. They can do this by cutting their CO2 emissions and trading allowances. To see if your business is affected, see the page in this guide on EU Emissions Trading System: who is affected.

The EU ETS helps to ensure that emissions are reduced at the lowest cost by enabling participants to trade allowances. For example, organisations with lower emission reduction costs can reduce these further than they need to and sell allowances to organisations that have higher emission reduction costs.

CRC Energy Efficiency Scheme

The mandatory CRC Energy Efficiency Scheme began in April 2010. The scheme uses an emissions trading mechanism to target CO2 emissions that are not covered by the EU ETS or climate change agreements.

The CRC covers large non-energy-intensive organisations within the UK public and private sector. This will account for around 5,000 organisations that are responsible for about 10 per cent of emissions in the UK. The scheme is expected to deliver emissions savings of at least 4 million tonnes of CO2 per year and save participants approximately £1 billion per year by 2020.

Participant organisations in the CRC will have to register and then monitor their annual emissions. They will then have to buy and surrender allowances each year equal to their annual emissions or face financial penalties.

For more information, see our guideline: The CRC Energy Efficiency Scheme.

Further information

Department of Energy and Climate Change: Guidance for operators

DOENI: The EU Emissions Trading Scheme

SEPA: The EU Emissions Trading Scheme

The European Union Emissions Trading System (EU ETS) affects installations in industrial sectors which produce significant quantities of greenhouse gases, such as:

  • power stations
  • refineries
  • offshore - eg oil refineries
  • iron and steel production
  • cement and lime manufacturing
  • paper manufacturing
  • food and drink processing
  • glass production
  • ceramics production
  • engineering
  • vehicle manufacturing.

Other organisations may also be covered by the EU ETS, including universities and hospitals.

SEPA: Participating in the EU ETS

DOENI: The EU Emissions Trading Scheme

Businesses affected by the regulations are those that carry out activities listed in Annex 1 of the EU ETS Directive

Businesses affected in the future

From 2012, aviation has been included in the EU ETS. For existing aircraft operators there is a requirement to monitor and report emissions.

From 2013, the EU ETS has been expanded to cover a number of other industry sectors including:

  • production of bulk organic chemicals
  • production of hydrogen
  • production of ammonia
  • production of aluminium
  • production of nitric, adipic and glyoxylic acid
  • capture, transport and geological storage of carbon dioxide emissions.

The EU ETS will also be extended to include other greenhouse gases - such as perfluorocarbons and nitrous oxide - for some industry sectors.

During this time, the revised EU ETS Directive will also provide for:

  • a centralised EU-wide cap on emissions
  • an increase in auctioning levels with 100 per cent auctioning to the power sector in the UK
  • a non-legally binding commitment from EU member states to spend at least half of their auctioning revenues to work on climate change
  • free allocated allowances to those industrial sectors based on product benchmarks
  • sectors that are at risk of relocating outside of the EU due to the carbon price to receive 100 per cent of the benchmarked allocation for no cost
  • sectors not at risk received 80 per cent of their benchmarked allocation at no charge in 2013, reduced to 30 per cent in 2020 and 0 per cent in 2027.

Further information

SEPA: The EU ETS

DOENI: The EU Emissions Trading Scheme

Scottish Government: EU Emissions Trading Scheme

To comply with the European Union Emissions Trading System (EU ETS), your installation must legally hand over (surrender) enough allowances to cover your emissions from the previous year. Allowances are issued every February for the following year.

The deadline for surrendering allowances is 30 April every year. Failure to comply is met with financial penalties - €100 for every tonne of CO2 for which you fail to surrender allowances - plus you have to make up for the shortfall the following year.

Greenhouse gas permits

The regulations require that if you carry out a listed activity releasing CO2, after 1 January 2005, you must have a permit. The activities covered by the regulations are known as 'Schedule 1 activities'. It is a criminal offence to carry out a Schedule 1 activity resulting in CO2 emissions without a permit.

When you apply for a permit, you must also submit a plan for monitoring and reporting emissions. This will require approval from your regulator. This is the Scottish Environment Protection Agency (SEPA) for installations in Scotland or the Department of Energy and Climate Change (DECC) for offshore installations.

NIEA: Greenhouse gas permit applications

SEPA: Greenhouse gas permit applications

Operational changes

If the operation of your installation changes, you will need to contact your regulator for a variation to your permit and monitoring plan. Any changes to the way you monitor your emissions, even replacement of a meter, may affect your monitoring plan so you should notify your regulator.

If operations at your installation cease or the emissions drop below threshold levels, you should contact your regulator to see if your EU ETS obligations are affected. A partial or temporary closure will not usually affect your annual allowance allocations, but you should check with your regulator before these closures take place. You should notify your regulator if the temporary closure will extend beyond 50 days.

If your installation closes permanently, allowances for the subsequent year will be withheld. You should apply to your regulator to surrender your permit and provide verified reports up to the date of closure.

Monitoring, reporting and verification

Regulators are responsible for overseeing the monitoring, reporting and verification of emissions from installations. All applications, reports and notifications for regulated sites in Northern Ireland and Scotland must be made through the ETSWAP web portal.

ETSWAP: Information and Login

European Commission: Guidance on monitoring and reporting CO2

You must have all annual reports and monitoring verified by an independent and accredited verifier. Verifiers are private companies, accredited by the UK Accreditation Service, who will charge a fee to check that the information and data in annual emissions reports are free from:

  • inconsistencies in monitoring
  • material omissions
  • misrepresentations
  • errors.

The verifier will also confirm your annual emissions figure and produce a verification opinion statement that must be sent to your regulator. To enable the surrender of an appropriate number of allowances, it is essential you have a verified emissions figure in the registry by 1 April each year. Although you can surrender allowances without a verified report, you take the risk that following later verification there is a shortfall and the €100 per tonne of CO2 penalty is enforced.

UKAS

DECC Monitoring, reporting and verification

Each member state of the European Union (EU) has a national emissions trading registry for greenhouse gas allowances. These online databases are vital components of the EU Emissions Trading System (EU ETS) as they enable participants of the scheme to trade allowances.

If you operate an installation with EU ETS obligations, you must open an operator holding account with the UK emissions trading registry. The registry also contains person holding accounts. Any individual or organisation can apply to open such an account.

The EU ETS Registry is managed by the Environment Agency in the UK. It records:

  • CO2 allowance allocations for installations
  • annual verified emissions
  • movement of allowances and units between accounts, including allocations, transfers, surrender and cancellations
  • annual reconciliation of allowances and verified emissions.

Accounts are available through online registration and are subject to a nominal fee, which covers the cost of security checks.

NIEA: How to apply for a UK registry account

SEPA: Participating in the EU Emissions Trading Scheme

You can buy or sell EU allowances in several ways:

  • trading directly with other businesses
  • buying or selling from intermediaries, eg banks and specialist traders
  • using the services of a broker
  • joining one of the several exchanges that list carbon allowance products
  • UK government or other EU member state auctions.

Auctions

In Phase II of the EU ETS (the current phase), the UK government will auction 7 per cent of EU allowances. These competitive auctions are open to anyone who has an EU ETS Registry account. To place a competitive bid in an auction, you need to submit bids through an intermediary known as a Primary Participant who has direct access to the auctions.

The UK government is also holding non-competitive auctions, which are open to anyone with a greenhouse gas permit from any EU member state. In these auctions, participants can submit a bid for up to 10,000 allowances and will pay the clearing price from the competitive auctions.

DECC: Information about EU ETS auctions

You can also email the DECC EU ETS auctioning team at eu.ets@decc.gsi.gov.uk.

Meet EU Emissions Trading System requirements

There are a number of areas that you could focus on when cutting your carbon emissions. You could also use the services provided by the Carbon Trust to help cut your carbon emissions. The Carbon Trust promotes a low carbon economy and the development of new low carbon technology.

The Carbon Trust can help business by offering services such as:

  • advice and cost saving tips
  • energy use identification and education
  • loans.

Carbon Trust: Cutting carbon emissions

The Carbon Trust has also developed the Carbon Trust Standard to combat climate change. This can help businesses reduce their carbon use through good practice in carbon measurement, management and reduction.

To be awarded the Carbon Trust Standard, your business will need to meet qualifying criteria and pay a fee.

Carbon Trust: The Carbon Trust Standard

Further information

Resource Efficient Scotland: Services for business and the public sector

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Permits

NIEA - Apply online

SEPA - Application forms