Environmental guidance for your business in Northern Ireland & Scotland

What is emissions trading?

Emissions trading

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


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

GOV.UK: Guidance for operators

DAERA: The EU Emissions Trading Scheme

SEPA: The EU Emissions Trading Scheme

In this Guideline

What is emissions trading?

EU Emissions Trading System: Who is affected

EU Emissions Trading System: How to comply

EU Emissions Trading System: Trading allowances

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