What is 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

Further information

Return to the menu of the EU and UK Emissions Trading Scheme environmental topic