Greenhouse Gas Emissions Trading Scheme (Amendment) Order 2026

Baroness McIntosh of Pickering Excerpts

Wednesday 28th January 2026 Grand Committee

[The Minister of State, Department for Energy Security and Net Zero (Lord Whitehead) (Lab)]

My Lords, this order was laid before Parliament on 16 December 2025.

The UK Emissions Trading Scheme, or UK ETS, was established—perhaps I should say “re-established”—under the Climate Change Act 2008 by the Greenhouse Gas Emissions Trading Scheme Order 2020 as a UK-wide greenhouse gas emissions trading scheme, contributing to the UK’s emissions reduction targets and net-zero goal. The scheme is run by the UK ETS Authority, which is a joint body comprising the UK Government and the devolved Governments acting as one. Our aim is to be predictable and responsible guardians of the scheme and its markets.

Under the UK ETS, operators are required to monitor, report on and surrender allowances in respect of their greenhouse gas emissions. Although most allowances are purchased at regularly held auctions, operators in certain sectors at risk of carbon leakage are given a number of allowances for free; there are referred to as “free allocations”. Free allocations reduce the exposure to the carbon price for sectors at risk of carbon leakage and reduce the risk that decarbonisation efforts could be undermined by production and the associated emissions moving to other countries.

Under the UK ETS, an operator is the person or company with control over an installation. Installations are stationary units at which regulated activities take place. Sub-installations represent operations carried out at an installation for which operators that receive free allocation are required to report activity levels for the purposes of the UK ETS.

We have brought forward this statutory instrument to enable important changes and improvements to the scheme. The first change it makes is to enable operators of installations to be able to notify their regulator that they wish their activity data for the 2020 scheme year, or 2020 and 2021 scheme years, to be excluded from the calculation of their historical activity levels for the 2027-30 free allocation period. This is in recognition of the fact that production levels may have been impacted during the Covid-19 pandemic. These operators will be able to notify their regulator during the second stage of the 2027-30 free allocation application, from 1 April 2026 to 30 June 2026, that they wish to exclude their activity data for 2020, or 2020 and 2021.

A legal change to the free allocation regulation is needed because existing legislation would require regulators to calculate historical activity levels using activity data from all five years of the baseline period from 2019 to 2023. So, if amendments are not made, there will be no legal basis for regulators to exclude data from 2020, or 2020 and 2021, from the historical activity level calculation for any applicant. Using activity data for these years could result in historical activity levels that do not reflect normal activity, meaning that operators would receive less free allocation than they would otherwise be entitled to receive.

The second change the instrument makes is to gradually phase out free allocation for sectors covered by the UK carbon border adjustment mechanism—the UK CBAM—starting over the 2027-30 allocation period. This phase-out will be implemented through applying a UK CBAM reduction factor to the calculation of free allocation, and will apply at sub-installation level. To do this, operators will be required to report on which of their sub-installations serve the production of UK CBAM goods. This will enable regulators to apply the UK CBAM reduction factor to the relevant sub-installations.

A legal change is needed as operators currently classify their sub-installations only by a specific benchmark and the corresponding carbon leakage status of that sub-installation. This instrument requires operators also to classify each sub-installation as “UK CBAM” or “not UK CBAM”. Benchmarks are the efficiency standards used to calculate each installation’s free allocation entitlement. Installations closer to their benchmark have a higher proportion of emissions covered by free allocation, rewarding more efficient installations and incentivising decarbonisation.

The third change the instrument makes is to use current benchmarks for the purpose of calculating free allocation for stationary installations for the 2027 scheme year. This instrument also provides for the ability to update the benchmark values used to calculate free allocation for the years 2028, 2029 and 2030 of the 2027-30 allocation period. Maintaining current benchmarks for the 2027 scheme year will allow time for industrial participants to adjust to the changes.

A legal change to the free allocation regulation is necessary because, under existing legislation, there is no provision to update benchmarks during an allocation period. The principal intent is to use the updated ETS phase 4 benchmarks in the 2028, 2029 and 2030 scheme years; this will be decided once the EU benchmark values are available and will be subject to assessment of the impact.

Installations that permanently cease to operate are required to report on their activity in the final year of operation so that free allocation can be recalculated to reflect the cessation of activity. This amendment clarifies that operators must report on their activity levels in instances of permanent cessation or the surrender or revocation of their permit.

These intended changes follow comprehensive engagement and consultation with stakeholders. The UK and devolved Governments carried out consultations that covered the provisions included in this statutory instrument. The free allocation review consultation ran between 18 December 2023 and 11 March 2024, seeking views on proposals to alter the free allocation methodology for UK ETS stationary sectors to better target those most at risk of carbon leakage and ensure that free allocations are fairly distributed. The free allocation review carbon leakage consultation ran between 16 December 2024 and 10 March 2025. It sought views on a draft UK-focused carbon leakage list compiled by applying UK data to the existing carbon leakage list, as well as the trajectory for phasing out free allocations for sectors that will be covered by the UK carbon border adjustment mechanism. The relevant responses to these consultations were summarised in the UK ETS authority’s response.

In conclusion, the changes in the draft order will deliver on commitments made by the UK ETS authority, improve the fairness of the scheme and increase certainty for both regulators and operators. These changes will ensure that free allocation continues to provide meaningful support to UK industry while maintaining the incentive to decarbonise and rewarding efficient installations. The amendments to the UK ETS will support its role as a key pillar of the UK’s climate policy. They demonstrate that we will take action to improve the scheme where necessary. I beg to move.

[Baroness McIntosh of Pickering (Con)]

My Lords, I am grateful to the Minister for so comprehensively outlining the contents of the SI. Once again, I welcome him to the House and his position. We knew each other in the other place over a number of years and I was a great admirer of his during that time. I also welcome my noble friend to his Front Bench position, and I look forward to working with him in that capacity. I congratulate the noble Earl on the Lib Dem Benches for his conversion to a life peerage. We are now equals in that regard.

I will take the opportunity to put a few questions to the Minister. I understand that the year 2026 is a stand-alone year before we proceed to 2027 onwards. Is that of particular significance in regard to the changes that the Minister outlined? I understand from paragraph 11 of the Secondary Legislation Scrutiny Committee’s report that, in response to a number of concerns that were raised, the department

“emphasised that UK industry and wider stakeholders had ‘repeatedly’ called for linking with the EU ETS”.

The committee went to great pains to say:

“According to the DESNZ, linking does not mean re-joining and is expected to reduce costs for UK businesses by giving them access to a larger, more liquid market”,


and it said that it had published the submission.

Perhaps I ought to say that I am a pro-European Conservative, so it would not bother me if we rejoined the EU ETS. I know that I am in a minority of one in the Conservative Party on this point, but I want to put that on the record. It raises the question of why industry will be concerned. As I understand it, the UK ETS is very ambitious and operates with a stricter emissions cap, initially set at 5%, which I understand is higher than that set by the EU ETS. If that is the case, does the Minister agree that there are very strong arguments that the UK industry would wish to follow the EU ETS in this regard?

--- Later in debate ---

[Lord Whitehead (Lab)]

I thank the noble Lord for that correction as far as his status in previous Governments is concerned. I was making a point not about his own distinguished period as an Energy Minister, which I appreciate was much earlier and perhaps in a rather happier energy era than we have today, but about the mangled response from the Conservative Government to the last gas volatility crisis in this country, and what resulted in terms of the money going out of the Exchequer for the attempts to protect domestic consumers and businesses from that spike, since he raised it as one of his concerns about this SI.

I ought to add, by the way, that, in the Government’s industrial strategy—yes, we have an industrial strategy, unlike previous Administrations—we announced additional support for 7,000 energy-intensive firms through the British industrial competitiveness scheme, which will reduce electricity costs by up to £40 per megawatt-hour. Through the British Energy supercharger, the Government are increasing support for the most energy-intensive firms by covering more of the energy network charges they normally have to pay. From 2026, the discount on these charges—namely, legacy costs, capacity market feed-in tariffs and so on—will be discounted by 90% from their present 60% level. That is a substantial boost to industry, as far as prices are concerned, by the direct actions of the Government under these circumstances.

I am conscious that I have spent rather too long addressing what the noble Lord, Lord Moynihan, has perhaps wound me up to talk about more than I might otherwise have done. I have to now address the questions that were put to me by the noble Baroness, Lady McIntosh of Pickering—who I applaud for being, as it were, on the side of these particular measures and ideas from the other side—and the noble Earl, Lord Russell.

I have, to some extent, covered the questions that the noble Baroness put to me. The first allocation period will be extended to 2026 to ensure that the changes implemented from the free allocation review come into force in 2027, to align with the introduction of UK CBAM. On her questions on bills, emissions trading has been a key element of power sector decarbonisation. Therefore, maintaining a strong UK ETS and, dare I say it, aligning it with the much wider market that we can enter into, for the stability of the ETS, will not be a joining of the EU ETS but a linkage of the UK ETS to the EU ETS. The UK ETS will continue. It has been determined following a recent consultation discussion that it will continue until at least 2040.

[Baroness McIntosh of Pickering]

I want to press the Minister. We are being more ambitious under his scheme than under the original scheme, the EU ETS to which the UK originally subscribed. We are going for a stricter emissions cap, initially of 5%, and will probably be more ambitious as we go forward. We also have a shorter timeframe in which to subscribe. We are all being clobbered by this. It impacts on the Government’s growth agenda, as I mentioned, and on the cost of living that my noble friend mentioned from the Front Bench. I am honorary president of the warm homes front, and I know that particularly those living in challenging circumstances in heating their homes and in fuel poverty will find this incredibly difficult.

[Lord Whitehead (Lab)]

The issue is fairly complex because of the benefits and disbenefits that apply from having a really ambitious carbon pricing target. On the one hand, it drives the decarbonisation of home heating, domestic electricity delivery and all sorts of things like that in a low-carbon way, and, arguably, that is a substantial reducer of the price of household bills in the longer term.

[Baroness McIntosh of Pickering (Con)]

If it is going up from £100 to £138 per household, when are we going to see the reduction that we were promised in the general election?

[Lord Whitehead (Lab)]

The Government recently introduced an average reduction of £150 off electricity bills, through placing legacy bills into Exchequer arrangements rather than putting them back to households through obligations. We will continue to look at that on a wider basis. That is a good start for reducing energy bills, as it changes the nature of how the low- carbon economy works.

The noble Lord, Lord Moynihan, asked why we are changing these arrangements in a fairly rushed way. Part of the answer is that, if we are to have a good CBAM in place—after all, it is coming in a year after the EU CBAM—we have to get our skates on. We also have to get our skates on in linking the UK ETS with the EU ETS. The noble Earl, Lord Russell, is aware that, just six months after the linkage arrangements were agreed in principle at the EU-UK summit last April, the November negotiations and discussions started, and they are still under way at the moment. There are a number of answers on timescale and so on that I cannot give right now, but I assure the noble Earl that these are clearly under way and that there is a clear out from those negotiations.

I am conscious that we have spent a long time on this. I will write to the noble Earl and the noble Baroness on the remaining outstanding issues. I hope that I have been able to give a reasonably reassuring position on the need for this SI and the wider context of the underlying direction of all this policy and why this SI leads to a much better and more stable series of arrangements for both the UK ETS and CBAM, as it comes forward.