The UK tax rules governing the trading of emissions allowances

Caps on the greenhouse gases that can be emitted by certain businesses encourage the reduction of total emissions. We examine the UK tax rules governing the trading of emissions allowances.

Emissions trading is a market based approach to controlling the production of carbon dioxide and other greenhouse gases. Since carbon dioxide is the principal greenhouse gas, many people speak simply of trading in ‘carbon’. Both mandatory and voluntary emissions trading schemes exist.

Perhaps the most common example of a mandatory scheme is the European Union’s Emissions Trading System (EU ETS), launched in 2005 to reduce emissions in high carbon-emitting industries. Similar systems operate in New Zealand, China, parts of the US and Canada, and the UK following the UK’s departure from the EU.