The UK Emissions Trading Scheme (ETS) commenced in 2002 and is the world's first national greenhouse gas emissions trading scheme. It was established to prepare for the EU ETS and runs from 2002 through 2006, with final reconciliation in March 2007. Thus it runs alongside the EU ETSs first phase 2005-2007. Participants can opt out of the first phase of the EU ETS.

The scheme is unique in that it allows for voluntary entry, but imposes mandatory penalties upon participants which have once committed to the programme.

Under the sUK ETS, companies could chose to enter either through a timed auction as a direct participant with absolute targets, (34 companies did so), or through Climate Change Levy Agreements (CCAs). Effectively providing 'automatic entry' to the UK ETS, these CCAs have been negotiated with some 40 industry sectors, and are covering some 6,000 companies. Companies subject to a CCA are not obliged to trade, but many have found it beneficial to use trading, as it helps to achieve most cost-effective emission reductions.

Background:

The UK is considered an Annex I and Annex B nation in the Kyoto Protocol, with an emission reduction target of 8% below 1990 levels during the first commitment period of 2008 to 2012. Above this, the UK has commited to a target of 12.5% below 1990 levels, as part of the burden share agreement within the EU. The starting point is that the government has acknowledged that deep cuts in GHG emissions are required to avoid dangerous climate change, and set itself strong targets to reduce carbon dioxide emissions by 20% by 2010, relative to 1990 levels, and has announced in 2006 to work towards reductions of 60% by 2050.