4.  The Greenhouse Gas Emissions Trading Scheme Order 2020(2) is amended in accordance with this Part.

Article 4 amended (interpretation)

5.—(1) Article 4 is amended as follows.

(2) In paragraph (1)—

(a)in the definition of “full-scope flights” after “Gibraltar” insert “, Switzerland”;

(b)in the definition of “surrender” after “article 27 or 34” insert “or any other obligation referred to in paragraph (6) of this article”.

(3) After paragraph (4) insert—

“(5) Where an allowance is surrendered in circumstances in which the allowance may be treated as surrendered to comply with more than one obligation referred to in paragraph (6), or with one of those obligations but in respect of more than one scheme year, the regulator may treat the allowance as surrendered to comply with any one of those obligations, or in respect of any one of those scheme years; and consequently any provision of Part 7 under which a deficit notice may be given, or a civil penalty may or must be imposed, in respect of a failure to surrender allowances must be read accordingly.

(6) The obligations are obligations to surrender allowances under any of the following—

(a)article 27;

(b)article 34;

(c)a deficit notice under article 44A;

(d)a notice under paragraph 10 of Schedule 6;

(e)a surrender notice under paragraph 11 of that Schedule;

(f)a revocation notice under paragraph 12 of that Schedule.”.

Article 19 amended (cap for trading period)

6.—(1) Article 19 is amended as follows.

(2) In paragraph (a) for “736,013,432” substitute “633,116,297”.

(3) In paragraph (b) for “630,152,247” substitute “302,924,924”.

Article 20 amended (cap for scheme years)

7.—(1) Article 20 is amended as follows.

(2) In paragraph (1)—

(a)in the words before sub-paragraph (a) omit “the sum of”;

(b)in sub-paragraph (a)(ii) omit the “and” at the end of the paragraph;

(c)omit sub-paragraph (b).

(3) For paragraph (2) substitute—

“(2) But the restriction in paragraph (1) does not apply to the creation of allowances—

(a)for the flexible reserve (see article 23A);

(b)for the new entrants’ reserve (see article 34G);

(c)for allocation under the Greenhouse Gas Emissions Trading Scheme Auctioning Regulations 2021(3) or any other regulations made under section 96 of the Finance Act 2020(4).”.

(4) In paragraph (3) for “But such a direction may not override” substitute “Nothing in this article overrides”.

Article 22 amended (cap: base for scheme years)

8.—(1) Article 22 is amended as follows.

(2) In table B in column 2 (base)—

(a)for “142,968,239” substitute “92,062,882”;

(b)for “138,733,792” substitute “86,742,014”;

(c)for “134,499,344” substitute “79,059,690”;

(d)for “130,264,897” substitute “70,127,996”;

(e)for “126,030,449” substitute “53,498,502”;

(f)for “121,796,002” substitute “50,918,572”;

(g)for “117,561,555” substitute “49,320,164”.

Article 23A inserted

9.  After article 23 insert—

“Flexible reserve

23A.—(1) The flexible reserve is a reserve of allowances for the trading period from which allowances may be allocated until the reserve is exhausted.

(2) The flexible reserve consists of the following—

(a)allowances equal to the sum of the amounts set out in paragraphs (i) and (ii), if the sum is greater than zero—

(i)28,081,237;

(ii)the sum of A and C minus 53,294,847, where—

(aa)A is 240,342,255 (industry cap for 2021-2025 allocation period) minus B;

(bb)B is the final annual number of allowances approved by the UK ETS authority(5) under Article 16b of the Free Allocation Regulation(6) (final allocation at installation level for incumbent installations) to be allocated in respect of all installations for all scheme years in the 2021-2025 allocation period;

(cc)C is equal to the number of B that are not allocated or, if allocated, subsequently returned;

(b)allowances equal to the sum of D and F, where—

(i)D is—

(aa)121,169,970 (industry cap for 2026-2030 allocation period) minus E; or

(bb)if E is greater than 121,169,970, zero;

(ii)E is the final annual number of allowances approved by the UK ETS authority under Article 16b of the Free Allocation Regulation to be allocated in respect of all installations for all scheme years in the 2026-2030 allocation period;

(iii)F is equal to the number of E that are not allocated or, if allocated, subsequently returned;

(c)allowances equal to the number of allowances representing aviation free allocation entitlement (within the meaning of Chapter 2 of Part 4A) approved by the UK ETS authority but not allocated or, if allocated, subsequently returned.

(3) For the purposes of paragraph (2)—

(a)any increase approved by the UK ETS authority under article 20(5) of the Greenhouse Gas Emissions Trading Scheme (Amendment) Order 2023(7) (free allocation for 2024 and 2025 scheme years: lime and malt extract) that in accordance with article 34B(3A) of this Order was required to be added to the amount included in column A of the allocation table for the 2021-2025 allocation period must be treated as if approved under Article 16b of the Free Allocation Regulation;

(b)a reference to allowances that are returned is a reference to allowances transferred or returned in accordance with a notice under article 34U or 34V or, in the case of other allowances to which a person is not entitled (as set out in article 34S(3) or 34T(3)), returned voluntarily without the need for such a notice to be given.

(4) Allowances from the flexible reserve may be used—

(a)for free allocation in respect of incumbent installations (within the meaning of the Free Allocation Regulation(8));

(b)for allocation under the Greenhouse Gas Emissions Trading Scheme Auctioning Regulations 2021 or any other regulations made under section 96 of the Finance Act 2020.”.

Article 34 amended (surrender of allowances by aircraft operators)

10.—(1) Article 34 is amended as follows.

(2) Omit paragraphs (2) and (3).

Article 34G amended (new entrants’ reserve)

11.—(1) Article 34G is amended as follows.

(2) In paragraph (1)—

(a)for “30,249,066” substitute “20,725,431”;

(b)after “trading period” insert “from which allowances may be allocated until the reserve is exhausted”.

(3) After paragraph (1) insert—

“(1A) Allowances from the new entrants’ reserve—

(a)unless used as mentioned in sub-paragraph (b), must be used for allocation in respect of installations in accordance with paragraphs (2) to (5);

(b)may be used for allocation under the Greenhouse Gas Emissions Trading Scheme Auctioning Regulations 2021 or any other regulations made under section 96 of the Finance Act 2020 (even if the allocation exhausts the new entrants’ reserve before the end of the trading period).”.

(4) In paragraph (6) after “article 34U or 34V” insert “or returned voluntarily without the need for such a notice to be given”.

Article 34N amended (aviation allocation table for 2021-2025 allocation period)

12.—(1) Article 34N is amended as follows.

(2) In paragraph (4) after “of certain applicants)” insert “, article 42 of the Greenhouse Gas Emissions Trading Scheme (Amendment) (No. 2) Order 2024 or article 34M of this Order (as applied by article 43 of that Order)”.

Article 34R amended (errors in aviation allocation table)

13.—(1) Article 34R is amended as follows.

(2) In paragraph (2)—

(a)in sub-paragraph (a) after “34Q” insert “or under article 43 of the Greenhouse Gas Emissions Trading Scheme (Amendment) (No. 2) Order 2024”;

(b)in sub-paragraph (b) after “(including under this article)” insert “or article 42 or 43 of the Greenhouse Gas Emissions Trading Scheme (Amendment) (No. 2) Order 2024”.

Heading of Chapter 1 of Part 7 amended

14.  In Part 7 in the heading of Chapter 1 after “Enforcement notices” insert “, deficit notices”.

Article 44A inserted

15.  After article 44 insert—

“Deficit notices

44A.—(1) This article applies where—

(a)the operator of an installation fails to surrender allowances equal to the installation’s reportable emissions in a scheme year (the “relevant scheme year”), contrary to—

(i)article 27;

(ii)the requirements of a surrender notice under paragraph 11 of Schedule 6 (see paragraph 11(4)(b)(iii));

(iii)the requirements of a revocation notice under paragraph 12 of that Schedule (see paragraph 12(5)(b)(iii));

(b)a person who is an aircraft operator in relation to a scheme year (the “relevant scheme year”) fails to surrender allowances equal to the person’s aviation emissions in that year, contrary to article 34.

(2) The regulator may give a notice (a “deficit notice”) to the operator of the installation or to the person.

(3) The deficit notice must set out—

(a)the relevant scheme year and the installation’s reportable emissions, or the person’s aviation emissions, in that year;

(b)the number of allowances (if any) surrendered in compliance with article 27, the requirements of a surrender or revocation notice or article 34 (including any surrendered after the date by which allowances were required to be surrendered);

(c)the number of allowances representing the difference (the “deficit”) between allowances equal to the installation’s reportable emissions, or the person’s aviation emissions, in the relevant scheme year and the number referred to in sub-paragraph (b);

(d)the date (the “deficit surrender date”) on or before which the person to whom the notice is given must surrender allowances equal to the deficit;

(e)information about rights of appeal.

(4) The person to whom a deficit notice is given must surrender allowances equal to the deficit on or before the deficit surrender date.

(5) The regulator may withdraw a deficit notice at any time by giving notice of the withdrawal to the person to whom the deficit notice is given.

(6) A deficit notice may be given in respect of a failure to surrender allowances that arises before as well as after this article comes into force.

(7) In the case of a transfer of a permit under paragraph 9 of Schedule 6 (other than a partial transfer)—

(a)after the transfer date, a deficit notice may be given to the new operator only, including in respect of a failure to surrender allowances arising before the transfer date;

(b)where a deficit notice in respect of a failure to surrender allowances is given to the transferring operator before the transfer date and has not been complied with, a new deficit notice may be given to the new operator in respect of the same failure provided that the original notice is first withdrawn.

(8) A deficit notice may not be given—

(a)to the operator of an installation, if the operator holding account for the installation has been closed under paragraph 27 of Schedule 5A;

(b)to a person who is an aircraft operator in relation to a scheme year, if the person’s aircraft operator holding account has been closed under paragraph 28 of that Schedule;

(c)in respect of allowances which a transferring operator failed to surrender in a scheme year as a result of an error of the kind referred to in paragraph 10(1) of Schedule 6 (transfer of permits: underreporting discovered after transfer).

(9) In this Article—

“new operator” and “transferring operator” have the meanings given in paragraph 7(1) of Schedule 6;

“transfer date” has the meaning given in paragraph 9(6) of that Schedule.”.

Article 47 amended (penalty notices)

16.—(1) Article 47 is amended as follows.

(2) After paragraph (2)(c) insert—

“(d)article 65A (failure to comply with deficit notice), but the regulator is not required to impose the daily penalty under paragraph (2)(b) of that article.”.

(3) After paragraph (5) insert—

“(5A) Where the person is liable to a civil penalty under article 53 or 65A, an initial notice may not be given until at least 28 days have expired since—

(a)in the case of a civil penalty under article 53, the day on or before which the person is required to transfer or, as the case may be, surrender allowances;

(b)in the case of a civil penalty under article 65A, the deficit surrender date set out in the deficit notice (see article 44A(3)(d)).”.

(4) In paragraph (7A) for “article 64A(2)(b)” substitute “article 53(2)(b), 64A(2)(b) or 65A(2)(b)”.

(5) In paragraph (12) in the definition of “daily penalty”—

(a)after “51(3)(b),” insert “53(2)(b),”;

(b)after “55(2)(b),” insert “60A(2)(b),”;

(c)after “65(2)(b)” insert “, 65A(2)(b)”.

Article 48 amended (penalty notices: supplementary)

17.—(1) Article 48 is amended as follows.

(2) After paragraph (3)(c) insert—

“(d)a penalty notice imposing a civil penalty under article 65A, but if the penalty imposed consists of both a non-escalating penalty and a daily penalty, paragraphs (1) and (2) apply to the notice in relation to the daily penalty only.”.

Article 51 amended (installations: failure to comply with conditions of permit, etc.)

18.—(1) Article 51 is amended as follows.

(2) After paragraph (2)(b) insert—

“(c)article 57.”.

Article 52 amended (failure to surrender allowances)

19.—(1) Article 52 is amended as follows.

(2) Omit paragraph (3).

(3) In paragraph (11)—

(a)for “(CPI₂ -CPI₁ )/CPI₁” substitute “CPI₂ /CPI₁”;

(b)for “most recent March for which the consumer prices index is published when the penalty notice is given” substitute “month preceding the month that includes the day on or before which the allowance was required to be surrendered”.

Article 53 amended (installations: failure to transfer or surrender allowances where underreporting discovered after transfer)

20.—(1) Article 53 is amended as follows.

(2) For paragraphs (2) and (3) substitute—

“(2) The civil penalty is—

(a)CP x 1.5 for each allowance that the person fails to transfer or surrender, where CP is the carbon price for the scheme year after the scheme year to which the report referred to in sub-paragraph (1) of paragraph 10 of Schedule 6 relates; and

(b)a daily penalty at a daily rate of £1,000 for each day that sub-paragraph (3) or, as the case may be, (4) of that paragraph has not been complied with, beginning with the day on which the initial notice is given (see article 47(5)).”.

Article 56 amended (hospitals and small emitters: under-reporting of emissions)

21.—(1) Article 56 is amended as follows.

(2) In paragraph (2)—

(a)for “(UE x CP)” substitute “(UE x £10 x the inflation factor)”;

(b)omit “CP is the carbon price for the scheme year”.

(3) After paragraph (2) insert—

“(3) In this article, “inflation factor” has the meaning given in article 52(11), except that CPI₂ is the consumer prices index (as defined in article 52(12)) for the month preceding the month that includes the day on or before which the emissions report was required to be submitted.”.

Article 57 amended (hospitals and small emitters: failure to notify when ceasing to meet criteria)

22.—(1) Article 57 is amended as follows.

(2) In paragraph (3)—

(a)in sub-paragraph (a) for “£5,000” substitute “£2,500”;

(b)for sub-paragraph (b) substitute—

“(b)if there is a penalty year, subject to paragraph (4A), the operator is liable (after the end of the last penalty year), to a civil penalty of the sum of the avoided compliance costs for all penalty years.”.

(3) After paragraph (4) insert—

“(4A) When setting the amount of the civil penalty to be imposed under paragraph (3)(b), the regulator may increase the sum of the avoided compliance costs for all penalty years (before any reduction under article 48) by 10% of the total or £2,500, whichever is higher.”.

Article 60 amended (ultra-small emitters: failure to notify where reportable emissions exceed maximum amount)

23.—(1) Article 60 is amended as follows.

(2) In paragraph (2)—

(a)in the words before sub-paragraph (a) for “The civil penalty is the sum of” substitute “Subject to paragraph (5), the civil penalty is”;

(b)omit sub-paragraph (a).

Article 60A inserted

24.  After article 60 insert—

“Installations: failure to submit information under article 27A

60A.—(1) The operator of an installation is liable to a civil penalty where the operator fails to comply (or to comply on time) with the requirements of article 27A.

(2) The civil penalty is—

(a)£5,000; and

(b)a daily penalty at a daily rate of £500 for each day that the operator fails to comply with the requirements of article 27A, beginning with the day on which the initial notice is given, up to a maximum of £45,000.”.

Article 65A inserted

25.  After article 65 insert—

“Failure to comply with deficit notice

65A.—(1) A person is liable to a civil penalty where the person fails to surrender (or to surrender on time) sufficient allowances, contrary to the requirements of a deficit notice given under article 44A.

(2) The civil penalty is—

(a)CP x 1.5 for each allowance not surrendered on or before the deficit surrender date set out in the deficit notice, where CP is the carbon price for the scheme year after the relevant scheme year set out in the notice; and

(b)a daily penalty at a daily rate of £1,000 for each day that the requirements of the deficit notice have not been complied with, beginning with the day on which the initial notice is given (see article 47(5)).”.

Article 70 amended (appeals)

26.—(1) Article 70 is amended as follows.

(2) After paragraph (2)(c) insert—

“(ca)article 44A (deficit notices);”.

Schedule 1 amended (aviation activity)

27.—(1) Schedule 1 is amended as follows.

(6B) In sub-paragraph (6A)—

“gas storage facility” means a gas storage facility as defined in section 12(6) of the Gas Act 1995(12) or a gas storage facility as defined in Article 3(1) of the Gas (Northern Ireland) Order 1996(13);

“gas transporter” means a gas transporter as defined in section 7(1) of the Gas Act 1986(14) or the holder of a licence under Article 8(1)(a) of the Gas (Northern Ireland) Order 1996;

“liquefied natural gas import or export facility” means an LNG import or export facility as defined in section 12(6) of the Gas Act 1995 or an LNG facility as defined in Article 3(1) of the Gas (Northern Ireland) Order 1996;

“petroleum” has the same meaning as in Part 1 of the Petroleum Act 1998(15) and includes petroleum that has undergone any processing.”.

Schedule 4 amended (Monitoring and Reporting Regulation 2018)

29.—(1) Schedule 4 is amended as follows.