The UK ETS Compensation Scheme is a significant opportunity for manufacturers in energy intensive industries to reduce the strain associated with rising carbon costs from the UK Emissions Trading Scheme and the Carbon Price Support Scheme.
What is the UK Emissions Trading Scheme?
The UK Emissions Trading Scheme (UK ETS) was created as a tactic within the Government’s drive towards achieving net‑zero emissions by 2050. The scheme caps the total emissions allowable in specific industries and allows a trading market for surplus or deficit allocations held by individual businesses, incentivising carbon‑efficient manufacturing.
The subsequent UK ETS Compensation Scheme provides financial relief for energy‑intensive industries (EIIs). This scheme allows eligible businesses to claim compensation for indirect carbon costs which may be disproportionately affecting them for manufacturers working with steel, cement, paper, and chemicals.
Eligibility for the ETS Compensation Scheme
To be eligible to claim compensation under this scheme, a business must meet the following criteria:
- The business must manufacture a product in the UK within an eligible sector from the list below.
- The business must pass the “5% test”, detailed in the following section.
Eligible sectors and SIC codes:
| Sector | SIC Code |
| Preparation and spinning of cotton-type fibres | 1310 |
| Manufacture of leather clothes | 1411 |
| Manufacture of veneer sheets and wood-based panels | 1621 |
| Manufacture of pulp | 1711 |
| Manufacture of paper and paperboard | 1712 |
| Manufacture of other inorganic basic chemicals | 2013 |
| Manufacture of other organic basic chemicals | 2014 |
| Manufacture of fertilisers and nitrogen compounds | 2015 |
| Manufacture of glass fibres | 2314 |
| Manufacture of basic iron and steel and of ferro-alloys | 2410 |
| Aluminium production | 2442 |
| Lead, zinc and tin production | 2443 |
| Copper production | 2444 |
| Manufacture of batteries and accumulators | 2720 |
What is the 5% test?
As well as manufacturing a relevant product from the sectors listed, your carbon cost from the ETS must be greater or equal to 5% of your Gross Value Added (GVA).
- The test must be met on a mean average basis over the past five years for which full financial accounts are available.
- You must exceed 5% for three of the five years.
You may make exclusions for financial years 2020/21 and 2021/22 to account for the impact of the Covid pandemic.
If five years of financial data are not available, you must submit the maximum amount of time possible, with a minimum of two quarters. Obviously, the more information you are able to provide during your submission, the easier it is for the Department of Business and Trade (DBT) to confirm your compensation award.
What is GVA?
GVA is the business’ earnings before interest, tax, depreciation and amortisation (EBITDA) plus the business’ staffing costs for the year.
Any year with negative GVA is set as £0 for the purposes of the 5% test calculation.
Draft GVA figures can be used if accompanied by a set of management accounts.
UK ETS Compensation Scheme features
Costs must be calculated at the aggregate business level, meaning the legal entity manufacturing the product, not group level.
Businesses manufacturing a mix of eligible and ineligible products should consult with the DPT prior to their application. A useful tip is to research a business manufacturing the same product which has been accepted. If the only reason you don’t pass the 5% test is due to the inclusion of an ineligible product in the calculation, it is advisable to try and apply energy consumption segmentation or conduct a carbon footprint assessment to determine the proportion of carbon emitted which is applicable to the eligible product.
How much subsidy is possible?
The scheme caps subsidy at the lower value of either 75% of their total indirect emissions costs or 1.5% of their GVA.
The government is clear that there is a limit to the budget available for the ETS Compensation Scheme and subsidy will be capped if it becomes overspent.
The calculation to understand the compensation you can access is complex in the fact that many of the values included are variable on at least an annual basis.
For example:
- The Digest of UK Energy Statistics (DUKES) study each year sets a changeable CO2 emissions factor which the DPT adopts for the ETS Compensation Scheme calculation. It is currently set at 0.44 tCO2/MWh.
- The current price for UK ETS compensation is £40.06 per tCO2/MWh. This is updated annually and can be sought here.
- The government wants to incentivise efficient manufacturing in these sectors. As such it applies a percentage benchmark to each product type. You can check the latest benchmarks, which are updated regularly, in Annex C of the guidance document, here.
The calculation is as follows:
(CO2 emissions factor
x
ETS compensation rate
x
product efficiency rate
x
your baseline energy consumption
x
percentage of electricity consumption eligible for ETS rates in the previous year)
–
1.5% x GVA of previous year
Obviously there is a lot of room for error in this calculation. We would recommend working with an expert to understand your potential for compensation or reaching out to the DBT.
Application tips
What you will need to hand to complete your application:
- Detailed financial statements.
- GVA and EBITDA calculations.
- Energy usage split by grid and off-grid sources.
- Explanation statements for any discrepancies between internal accounts and official filings.
- 5% test evidence for relevant years.
Updates and changes to energy usage or business processes relating to the manufacture of relevant products must be promptly communicated to DBT or they withhold the right to cancel and recover compensation payments that do not meet the scheme requirements.
UK ETS Compensation Scheme final thoughts
Whilst this scheme is welcome and useful for businesses grappling with indirect carbon costs as well as rising energy costs, calculating compensation due is difficult. The calculation is quite literally a moving feast, meaning businesses usually require the support of a business energy expert to understand their entitlements.
If you would like to investigate ETS Compensation, speak to Procure Smart for a free, no-obligation discussion. Simply complete a form below.
