A guide to navigating climate change regulations for UK businesses

Published: 21 March 2025

Climate change regulations are evolving rapidly. For UK businesses to play their part in reducing emissions while remaining compliant and competitive, staying informed is essential.

This guide gives an overview of key climate change policies:

Climate Change Act 2008
Carbon budgets
UK Emissions Trading Scheme (UK ETS)
Climate Change Levy (CCL)
Energy Savings Opportunity Scheme (ESOS)
Streamlined Energy and Carbon Reporting (SECR)
PPN 06/21 and Carbon Reduction Plans
Carbon Border Adjustment Mechanism (CBAM)
Climate change risk assessments and adaptation plans

Let's explore each of these in more detail, along with guidance on how businesses can effectively navigate the regulations and the ways that we can support you.

Climate Change Act 2008

The Climate Change Act 2008 is a landmark piece of legislation that legally binds the UK to reduce greenhouse gas emissions. It sets out a framework for achieving long-term emissions reduction targets.

The original target was to reduce greenhouse gas emissions by at least 80% by 2050, but this was subsequently updated to a target of achieving net-zero emissions by 2050. The Act also established the Climate Change Committee (originally named the Committee on Climate Change), an independent body that advises the government on emissions targets and progress.

Under the Climate Change Act 2008, UK businesses must comply with several key regulations designed to reduce greenhouse gas emissions and promote sustainability.

Carbon budgets

The Climate Change Act 2008 introduced legally binding carbon budgets, which cap the total amount of greenhouse gases the UK can emit over a five-year period. Businesses must align their operations with these budgets to help the UK meet its long-term emissions reduction targets.

Understanding the implications of carbon budgets is essential for UK businesses to ensure compliance and sustainability.

Implications for UK businesses

Operational alignment: Businesses need to ensure their operations are in line with the carbon budgets. This involves implementing strategies to reduce emissions and monitoring progress to stay within the set limits.
Strategic planning: Companies must develop long-term plans to reduce their carbon footprint, including investing in low-carbon technologies and improving energy efficiency.
Regulatory compliance: Staying within the carbon budgets is crucial for regulatory compliance. Failure to do so can result in penalties and damage to a company's reputation.

UK Emissions Trading Scheme (UK ETS)

The UK ETS – which replaced the EU ETS after Brexit – is a cap-and-trade system designed to cost-effectively reduce greenhouse gas emissions. The scheme sets a cap on the total amount of greenhouse gases that can be emitted by sectors covered by the system, including power generation, heavy industry, and aviation.

Key features of the UK ETS include:

Cap and trade: Businesses are allocated or can buy emission allowances, which they can trade with other participants. The cap is reduced over time to ensure emissions decrease.
Free allowances: To prevent carbon leakage, some sectors receive free allowances to cover a portion of their emissions.
Market Stability: Mechanisms are in place to prevent excessive price volatility, ensuring a stable carbon market.

Implications for UK businesses

Navigating the UK ETS requires businesses to strategically manage their emissions and invest in low-carbon technologies.

Cost management: Businesses must manage their emissions to stay within their allocated allowances or purchase additional allowances if needed. This requires careful monitoring and strategic planning to avoid penalties and manage costs effectively.
Incentives for emission reductions: The cap-and-trade system incentivises businesses to reduce their emissions. Companies that can lower their emissions below their allowance can sell excess allowances, generating additional revenue.
Investment in low-carbon technologies: To stay within the cap and reduce the need to purchase additional allowances, businesses are encouraged to invest in low-carbon technologies and practices. This includes upgrading equipment, improving energy efficiency, and adopting renewable energy sources.
Compliance and reporting: Businesses must comply with the regulations and report their emissions accurately. This involves maintaining detailed records, submitting regular reports, and ensuring transparency in their emissions data.

Climate Change Levy (CCL)

The Climate Change Levy is a tax on energy delivered to non-domestic users in the UK. It aims to encourage businesses to improve energy efficiency and reduce carbon emissions.

Businesses must pay the levy on their energy consumption, although there are exemptions and discounts available for those who meet certain energy efficiency criteria, including:

Electricity generated from renewable sources: Electricity generated from renewable sources before 1 August 2015 is exempt from the main rates of the CCL.
Combined heat and power (CHP) schemes: Supplies to or from certain CHP schemes registered under the CHP Quality Assurance (CHPQA) programme are exempt.
Electricity used in generating stations: Electricity used in generating stations with a capacity of 2MW or greater is exempt.
Non-fuel use: Supplies that are not used as fuel are also exempt.

These exemptions help promote the use of renewable energy and support businesses in reducing their carbon footprint.

Implications for UK businesses

Energy-efficiency improvements: To reduce the financial impact of the levy, businesses are encouraged to invest in measures for energy efficiency. This can include upgrading equipment and installing renewable energy sources on-site to reduce costs, improve insulation and optimise energy use.
Financial planning: Companies need to account for the cost of the levy in their financial planning. Understanding the exemptions and discounts available can help reduce the overall tax burden.
Compliance: Ensuring compliance with the levy requirements is essential to avoid penalties and additional costs.

Energy Savings Opportunity Scheme (ESOS)

ESOS is a mandatory energy assessment scheme for large organisations. Businesses must conduct energy audits every four years to identify cost-effective energy-saving measures. Compliance with ESOS can help businesses reduce energy consumption and lower costs.

Organisations that meet the qualifying criteria need to report on their energy use every four years, look for cost-saving ways to reduce consumption, and develop an energy saving action plan.

The qualification criteria for large undertakings are:

More than 250 employees in the UK; or
A turnover exceeding £44.1m AND a balance sheet exceeding £37.9m; or
Part of any corporate group that contains at least one ‘large’ company as defined above.

The purpose of the action plan is to make organisations consider the actions they may wish to take before the next ESOS phase, as well as planning future action to implement energy savings which they will publicly commit to.

This action plan must outline what a company intends to do to reduce their energy consumption over the next 3 years, including the total estimated energy savings and the timeline for when these initiatives will be completed. Companies must report on their progress against these targets on an annual basis.

Implications for UK businesses

Energy audits: Companies are required to conduct comprehensive energy audits to identify opportunities for energy savings. These audits must be carried out by qualified ESOS lead assessors.
Implementation of measures: Identified energy-saving measures should be implemented to improve energy efficiency and reduce costs. This can include both low-cost and more significant investments.
Regular reviews: Businesses must review their energy use and savings regularly to ensure continuous improvement and compliance with ESOS requirements.

We are now in ESOS phase 4 and all large companies have until December 2027 to conduct a representative sample of energy audits across buildings, transport and processes. Any energy audit conducted between January 2024 and December 2027 can count towards your compliance.

The deadline for submitting ESOS phase 4 action plans is 5 March 2025.

Streamlined Energy and Carbon Reporting (SECR)

Streamlined Energy and Carbon Reporting (SECR) is a legal requirement for all large organisations to disclose their energy and carbon emissions within their annual director’s report or a separate sustainability report.

Large companies and limited liability partnerships under SECR are defined as meeting at least two of the following three criteria:

Turnover exceeding £36m
Balance sheet exceeding £18m
250 or more employees

In addition, quoted companies of any size, listed on a major stock exchange, and incorporated in the United Kingdom must also report. SMEs are encouraged to participate in SECR, as it represents best practice in environmental disclosures and helps to identify opportunities to reduce environmental impact and save money.

Implications for UK businesses

Legal compliance: Large organisations must ensure they meet the SECR reporting requirements to avoid penalties and ensure transparency.
Best practices: SMEs are encouraged to adopt SECR practices to improve their environmental performance and identify cost-saving opportunities.
Enhanced reporting: Accurate and comprehensive reporting can enhance a company's reputation and demonstrate its commitment to sustainability.

PPN 06/21 and Carbon Reduction Plans

PPN 06/21 is a procurement policy note introduced in June 2021 which requires any business with public sector contracts worth at least £5 million per annum to have calculated their carbon footprint and have a net-zero target and action plan.

There is evidence that Carbon Reduction Plans are also being requested on smaller local authority contracts.

By extension, if you are a supplier to another organisation working on a public sector contract, you may find that carbon reporting requirements are passed down to you.

Organisations are required to report the following:

Scope 1: Directly combusted fuels (petrol, diesel, natural gas, LPG, refrigerants)
Scope 2: Indirect energy use (purchased electricity, heat and steam)
Scope 3: Indirect supply chain (transport of goods, business travel, employee commuting, waste)
Baseline year emissions and subsequent years emissions
Net-zero target date
Progress against targets

Implications for UK businesses

Legal compliance: Any organisation with large government contracts of more than £5m per annum are required to measure and disclosure their carbon footprint.
Winning work: Businesses who are already working within the supply chain on large government contracts, or looking to do so in the future, should have a PPN 06/21-compliant Carbon Reduction Plan in place to meet the expectations of tenders.
Trickle-down effect: Tier 1 suppliers with government contracts need to report their scope 3 emissions. This means reporting requirements are likely to be disseminated down the supply chain.

Carbon Border Adjustment Mechanism (CBAM)

CBAM is the world’s first carbon border tax. It was introduced by the EU in October 2023 and will be fully implemented in the UK by 2027.

The aim of the legislation is to mitigate carbon leakage by applying a carbon cost to imported and exported goods. It will initially apply to carbon intensive products such as steel, iron, fertilisers, cement, aluminium, hydrogen and electricity. It is expected that the scope of CBAM will be expanded to include other sectors thereafter.

It will apply to importers of CBAM-eligible goods worth more than £50,000 over a rolling 12-month period.

Implications for UK businesses

Verification: The embodied carbon of qualifying goods will need to be independently verified by accredited third-party assessors using verified calculation tools.
Levies: CBAM-qualifying companies will have to complete and submit a tax return, evidencing their CBAM liability. For 2027, this will be on an annual basis and, from then on, on a quarterly basis. The level of tax has yet to be decided.
Accurate reporting: While default values for many products are available, this will mean an inability to account for carbon levies paid elsewhere, such as the country of origin or manufacturer. A detailed life cycle assessment helps to obtain accurate data and potentially reduce tax liability.

Climate change risk assessments and adaptation plans

All regulated facilities with an environmental permit issued by the Environmental Agency are required, by law (as set out in The Environmental Permitting (England and Wales) Regulations 2016), to incorporate a climate change risk assessment and adaptation plan into their management systems.

Risk assessment should consider the direct and indirect impacts resulting from natural hazards such as extreme rainfall, flooding, sea-level rise, storms, heatwaves, droughts and wildfires.

A climate change risk assessment must assess the potential impacts to your site, and indirect impacts to and from the wider locality, based on climate projections of a 2°C rise by 2050 and a 4°C rise by 2100.

Implications for UK businesses

Legal compliance: If a permit was issued on or after 1 April 2023, then you must integrate climate change adaptation into your management system. If your permit was issued before April 2023, then you must complete a climate change risk assessment by 1 April 2024.
Disruption to business: Failure to incorporate an appropriate risk assessment and adaptation plan may result in an environmental permit being revoked, impacting a business’s ability to operate.
Asset adaptation: Where risks are identified in the climate change risk assessment, you must demonstrate you are taking appropriate action to mitigate the risks. This may lead to increased maintenance or enhancement capital spending.

Leveraging regulations for competitive advantage

Although it can seem overwhelming, by proactively addressing climate change and complying with these regulations, businesses can enhance their brand reputation and potentially reduce costs. As consumers and stakeholders increasingly value sustainability, demonstrating a commitment to reducing emissions can improve a company's image and attract environmentally conscious customers.

The UK government offers various financial incentives to support businesses in their transition to a low-carbon economy. These can include grants, tax reliefs and subsidies for investing in renewable energy and measures for energy efficiency. By taking advantage of these incentives, businesses can reduce the financial burden of compliance and accelerate their sustainability efforts.

Businesses that lead in sustainability can gain a competitive edge in the market. By adopting innovative low-carbon technologies and practices, companies can differentiate themselves from competitors, improve operational efficiency and reduce costs. Additionally, being ahead of regulatory requirements can position businesses as industry leaders and open new market opportunities.

How we can help

We help organisations achieve their sustainability and ESG ambitions by assessing and improving their impact on people and planet, so they can enhance their reputation and commercial advantage in a responsible way. From effective baseline assessments, due diligence, corporate reporting, action planning, and strategy, we can provide expert support at every stage.

Have a project in mind? We’re here to help. Contact us to discuss your requirements or environmental challenges in more detail and arrange next steps.