On 21 July 2025, the UK government published responses to three consultations regarding the UK Emissions Trading Scheme (ETS), relating to:
These responses follow public consultations conducted in 2024, during which stakeholders, including industry representatives, environmental groups, and the general public, were invited to provide feedback on proposed policy changes. The government has now published its responses, outlining decisions and planned actions based on the feedback received. These responses serve as official government positions.
This article examines the status of the UK ETS scheme and recent developments from the UK-EU summit, and discusses aspects of the consultation responses that were published.
The UK ETS came into force on 1 January 2021. Prior to this, the UK was a participant in the EU’s ETS (which was established in 2005). Emissions trading schemes establish a price on greenhouse gases emitted by domestic producers through a “cap-and-trade” system. Under this scheme, total carbon emissions and allowances for key emitting sectors are capped, with the cap decreasing over time, hence reducing the overall level of emissions that may be produced by participating sectors. Businesses emitting more than their allocated allowances must purchase additional ETS allowances (at the prevailing market price), while those reducing emissions below the cap can sell allowances on the secondary market.
Currently, the UK ETS applies to energy-intensive industries, the power generation sector, and aviation. In 2024, the government published consultations seeking views on proposals to expand the scope of the UK ETS to include maritime activities and waste.
While the UK ETS was initially designed to mirror the EU ETS, some aspects of the schemes have diverged over time, including the sector coverage, emissions reduction targets, and permit prices. As a result, although market prices for allowances under the two schemes have broadly correlated most of the time, the two schemes operate and trade independently of each other.
In May 2025, at the UK-EU Summit, leaders committed to working towards linking the respective ETSs, as part of a broader initiative to “strengthen bilateral cooperation” following the UK’s departure from the bloc.For more information on the UK-EU deal, refer to this Latham article. This involves ensuring that carbon allowances from either ETS are valid under the other, granting UK and EU exporters mutual exemptions from their respective Carbon Border Adjustment Mechanisms (CBAMs) — which impose a carbon tax on imports.The EU CBAM Regulation already imposes certain obligations on importers of specific carbon-intensive products, although its “definitive period” will only start to apply from 1 January 2026 and the regulation is subject to further changes (see this Latham article). In October 2024, the UK government confirmed that a UK CBAM will be introduced on 1 January 2027. The linkage of the ETSs is expected to offer further benefits, with a European Parliament briefing referring to potential “increased market access, reduced carbon leakage, and improved climate action”.See the European Parliament briefing here.
In July 2025, the government published interim responses to the UK ETS scope expansion consultations regarding the maritime and waste sectors. These interim responses are intended to support operators in preparing to comply with the new requirements and aid regulators to conduct onboarding activities in preparation for implementation of the extension. The final responses from the government are expected to be published later this year.
The maritime sector expansion will commence on 1 July 2026, with the first scheme year running from 1 July 2026 to 31 December 2026 (future scheme years will run annually from January). In-scope emissions are those from domestic voyages and within UK ports. The UK-EU Summit has prompted an intention to expand the UK ETS to include emissions from international voyages in the future, with further proposals and details to be confirmed.
Regarding the waste sector, a voluntary “monitoring, reporting and verification” (MRV) scheme will apply from 1 January 2026, covering combustion and process emissions. The MRV period aims to help businesses adjust to emissions reporting and assist regulators and the UK ETS AuthorityThe UK ETS Authority is made up of the UK government, Scottish government, Welsh government, and the Department of Agriculture, Environment and Rural Affairs for Northern Ireland. in designing the future scheme. Information collected during the MRV period, alongside technical advice on decarbonisation opportunities for fossil fuel-derived wastes, will be considered before confirming plans for the waste sector’s inclusion in the UK ETS.Note that the 2024 consultation featured an intention for the waste sector to be included in the UK ETS from 2028, preceded by a two-year transitional MRV phasing period. The UK ETS Authority will publish a second response detailing the final policy design for the sector’s inclusion.
The UK’s decision to expand the UK ETS to include the maritime and waste sectors aligns with the EU’s approach, following the commitment to work towards relinking the respective schemes. The EU began integrating the maritime sector into its ETS on 1 January 2024. Further, as of 1 January 2024, municipal waste incineration is included in the EU ETS for MRV purposes. The European Commission is mandated to assess the feasibility of including municipal waste incineration in the EU ETS by July 2026, with potential inclusion by 2028.
The third consultation response announced the integration of GGR into the UK ETS, allowing companies to use carbon removals to address hard-to-abate emissions and meet their limit under their permit. The UK ETS Authority will maintain the gross cap for initial integration by replacing emissions allowances with GGR allowances on a one-for-one basis. This approach aims to preserve market stability and support decarbonisation incentives. In the long-term, a new net cap may be considered, such as capping only the number of emissions allowances, and not removal allowances. This would only be considered once removals deployment is more established and is considered a potential long-term option for the direction of the scheme.
The consultation response details aspects of allowance design and permanence. Only removals occurring in the UK will be eligible for UK ETS removal allowances (for initial integration). For inclusion in the UK ETS, removal technology must be of “high quality and integrity”. In this context, the technology must be ensured by a minimum 200-year storage period for carbon, liability measures,Liability measures could include financial penalties for non-compliance, and insurance products to cover the cost of a reversal event, for example. The UK ETS authority will continue to develop its position on liability measures. and the use of “buffer pools” where operators receive fewer allowances than the carbon stored to allow a buffer for reversals.
The integration of GGRs will focus on engineered removals, such as direct air capture or bio-energy with carbon capture and storage technologies. The UK government is also considering integrating high-quality woodland removals into the UK ETS, but has not yet announced a decision.
The UK government aims to complete legislation to integrate removals into the UK ETS by the end of 2028, with integration becoming operational by the end of 2029, subject to further regulatory assessments and consultation.
At present, the EU ETS does not allow for GGRs, although the EU is actively assessing the potential integration, with a public consultation launched in April 2025 to gather input on the integration. The consultation seeks to assess the potential impacts and design considerations for such integration, with a report expected by July 2026. This follows the EU Council approving the Carbon Removals Certification Framework in November 2024, a regulation establishing the first EU-level certification framework for permanent carbon removals as well as carbon farming, and carbon storage in products. This voluntary framework aims to facilitate and encourage high-quality carbon removal and soil emissions reduction activities across the EU, and could be seen as a foundational step towards integrating carbon removals into the EU ETS.
The expansion of the UK ETS aligns with the broader ambition to harmonise the UK ETS with the EU scheme. As the UK government continues to refine its ETS framework, the prospect of a future linkage agreement with the EU ETS may present an opportunity to strengthen bilateral cooperation.
Latham & Watkins will continue to review developments in relation to the UK ETS and global climate-related frameworks more generally.
This article was prepared with the assistance of Samantha Banfield at Latham & Watkins.