In simple terms, emissions trading is an economic instrument based on the rationing of emission allowances to pollute. A cap is set on the total amount of emissions that can be emitted by installations covered by the scheme and this cap is reduced over time to reduce emissions released. Holders of emission allowances can usually trade their allowances depending on need or if they have a surplus keep them to cover future need.

The UK Government launched the UK Emissions Trading Scheme (UK ETS) in 2002, which came to an end in 2006. 2005 saw the introduction of the EU Emissions Trading Scheme (EU ETS), which is a compulsory greenhouse gas (GHG) trading scheme for heavy industry and aviation across Europe.

The UK has now left the European Union and is developing alternative options for the future of carbon pricing in the UK. The Government has confirmed that all operators currently participating in the EU ETS should comply with their obligations for the 2019 and 2020 scheme years and has announced its intention to deliver a UK ETS from January 2021.

Previously, high energy users outside the scope of the EU ETS were required to participate in the Carbon Reduction Commitment (CRC) Energy Efficiency Scheme. The final compliance year for this scheme was 2018–2019, but there are certain obligations for record-keeping until 2025.

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