No More Free Allowances: How the End of UK ETS Aviation Free Allocation Affects Business Travel Costs

Key Takeaways

• Free allocation of UK ETS allowances to airlines ceased from January 2026 — airlines must now purchase all required allowances at auction or on the secondary market
• Airlines will pass these costs through to passengers via fare increases, estimated at £2–8 per domestic flight and £5–15 per short-haul flight depending on aircraft type and load factor
• Corporate travel budgets face a structural carbon cost increase — companies should factor this into travel policy reviews
• Scope 3 Category 6 (business travel) emissions reporting under UK SRS becomes more financially material as carbon costs are embedded in ticket prices
• The change strengthens the business case for virtual meeting technology, rail travel, and travel demand management programmes

What Changed

From 1 January 2026, airlines operating within the UK ETS no longer receive free allowances. During the transitional period (2021–2025), airlines received a proportion of their required allowances free of charge, with the remainder purchased at auction. The free allocation cushioned the carbon cost impact on air fares and airline profitability.

Full auctioning means airlines must now purchase 100% of their UK ETS allowances. At current UK ETS prices of approximately £40–55 per tonne of CO₂, and with average emissions of approximately 90–120g CO₂ per passenger-kilometre for short-haul flights, the cost per passenger increases measurably.

Historical Context: From EU ETS to UK ETS

Aviation carbon pricing in the UK has a complex lineage. The EU ETS first included aviation in 2012, initially covering all flights arriving at or departing from European Economic Area airports. Following significant international opposition, the scope was narrowed through the “Stop the Clock” provisions to cover only intra-EEA flights, a position that was formalised through successive regulatory amendments.

When the UK left the EU ETS on 1 January 2021, domestic UK aviation and flights between the UK and Gibraltar were brought into the newly established UK ETS. International flights from the UK to non-UK destinations were excluded from UK ETS scope, falling instead under the ICAO CORSIA framework.

During Phase I of the UK ETS (2021–2025), airlines received free allocation at the following approximate rates:

• 2021: Approximately 85% of benchmarked allocation provided free
• 2022–2023: Approximately 75–80% free allocation
• 2024: Approximately 50% free allocation
• 2025: Approximately 25% free allocation (final year)

This phased reduction was designed to give airlines time to adjust their commercial models and invest in fleet efficiency. The complete cessation from January 2026 means the transition period is over: airlines now bear the full carbon cost of domestic UK flying within the UK ETS.

CORSIA and UK ETS: Understanding the Dual Regime

Airlines operating in the UK face two distinct carbon pricing regimes, each covering different flight segments. Understanding how these interact is essential for accurate carbon cost modelling and Scope 3 reporting.

UK ETS covers domestic UK flights (including flights between England, Scotland, Wales, and Northern Ireland) and flights between the UK and Gibraltar. These are the flights affected by the end of free allocation from January 2026. The compliance mechanism is allowance-based: airlines must surrender one UK Allowance (UKA) for each tonne of CO₂ emitted.

CORSIA (Carbon Offsetting and Reduction Scheme for International Aviation) is ICAO’s global market-based mechanism covering international flights between participating states. CORSIA entered its first phase in 2024, with participation mandatory for flights between states that have volunteered. The UK has volunteered for CORSIA. Under CORSIA, airlines must offset the growth in international aviation CO₂ emissions above 2019 baseline levels by purchasing eligible emissions units.

The key distinctions for corporate travel managers are:

• London to Edinburgh — UK ETS applies. Full auctioning from January 2026. Carbon cost embedded in fare.
• London to Paris — CORSIA applies (international flight). Offsetting obligation applies only to emissions growth above 2019 levels.
• London to New York — CORSIA applies if both states participate. Offsetting obligation on growth above baseline only.

Because CORSIA only requires offsetting of growth above 2019 levels rather than all emissions, and because CORSIA-eligible offset prices are typically lower than UK ETS allowance prices, the per-passenger carbon cost impact is significantly higher for domestic UK flights than for international flights. This asymmetry strengthens the case for rail alternatives on domestic routes.

Impact on Business Travel

For companies with significant air travel expenditure, the end of free allocation has several implications:

Direct cost increase. Airlines will pass carbon costs through to customers. The magnitude depends on route, aircraft efficiency, and competitive dynamics, but estimates suggest £2–8 per domestic flight and £5–15 per European short-haul flight per passenger.

Scope 3 materiality. Under UK SRS S2, Scope 3 Category 6 (business travel) emissions are reportable on a comply-or-explain basis. As carbon costs become embedded in ticket prices, business travel carbon becomes both an environmental metric and a financial cost line. This increases executive attention on travel demand management.

Travel policy review. Companies should review business travel policies to reflect the structural carbon cost. Practical measures include: mandatory virtual-first meeting protocols for internal meetings, rail mandates for journeys under 3 hours, and carbon budgets per department or division.

Sustainable aviation fuel (SAF). Airlines investing in SAF blending can reduce their UK ETS exposure. Companies can support this transition through corporate SAF purchase agreements or by selecting airlines with higher SAF blending rates. The UK SAF mandate requires 2% blending from 2025, rising to 10% by 2030.

Financial Impact Modelling

To illustrate the scale of the cost impact, consider a mid-size airline operating 50,000 domestic UK flights per year. Average fuel burn per domestic flight is approximately 3.5 tonnes of jet fuel, producing roughly 11 tonnes of CO₂ per flight (using the standard emission factor of 3.15 kg CO₂ per kg of jet fuel).

Total annual emissions: 50,000 flights × 11 tCO₂ = 550,000 tCO₂

The UK ETS allowance cost at three price scenarios:

Under the pre-2026 regime with 25% free allocation (the 2025 rate), the airline would have received approximately 137,500 free allowances, saving £5.5–9.6 million depending on price. With free allocation at zero, this saving disappears entirely. The full cost is passed through to ticket prices, supply chain partners, and ultimately to corporate travel budgets.

For a large UK corporation spending £5 million per year on domestic air travel, the embedded carbon cost increase from the end of free allocation is estimated at £75,000–200,000 annually, depending on route mix and airline pass-through rates. This is not transformational in isolation, but it is directional: carbon costs in aviation will only increase as the UK ETS cap tightens through Phase II (2031–2040).

Sustainable Aviation Fuel: The Compliance Advantage

Sustainable aviation fuel represents the most significant near-term lever for reducing aviation carbon costs under the UK ETS. SAF produces up to 70% fewer lifecycle CO₂ emissions compared to conventional jet fuel, depending on the feedstock and production pathway.

The UK SAF mandate, introduced under the Energy Act 2023 and the SAF (Revenue Support Mechanism) Regulations, sets binding blending obligations for fuel suppliers:

• 2025: 2% SAF blending requirement (by energy content)
• 2028: 5% SAF blending requirement
• 2030: 10% SAF blending requirement
• 2040: 22% SAF blending requirement
• 2050: Target of at least 50% SAF blending

For UK ETS compliance purposes, SAF usage reduces reported emissions because SAF is classified as a biomass fuel with a lower emission factor. An airline blending 10% SAF into its fuel supply would reduce its reported UK ETS emissions by approximately 7% (10% blend × 70% lifecycle reduction), translating directly into fewer allowances required. At £55/tCO₂, a 7% reduction in emissions for our example airline (550,000 tCO₂) saves approximately £2.1 million in allowance costs per year.

CORSIA maintains a list of eligible fuels and sustainability certification schemes. SAF that meets CORSIA sustainability criteria can generate CORSIA-eligible emissions reductions, providing a compliance benefit under both the UK ETS (for domestic flights) and CORSIA (for international flights). However, the same SAF batch cannot be claimed under both schemes — double counting is prohibited.

For corporate buyers, selecting airlines with higher SAF blending rates has a dual benefit: it reduces the Scope 3 Category 6 emissions reported under UK SRS S2, and it supports the commercial viability of SAF production. Several airlines now offer corporate SAF programmes, allowing companies to purchase SAF certificates that fund additional SAF procurement above the mandated minimum.

What You Should Do Now

• Quantify your business travel carbon cost exposure using your travel management company data
• Update your Scope 3 Category 6 methodology to reflect actual airline carbon costs rather than industry averages
• Review your travel policy — introduce rail mandates, virtual-first protocols, and departmental carbon budgets
• Engage with airline sustainability programmes — corporate SAF agreements and carbon offset programmes
• Model forward carbon cost scenarios — with UK ETS prices expected to rise through Phase II, travel budget assumptions should be stress-tested at £70–120/tCO₂
• Understand the CORSIA/UK ETS distinction — ensure your Scope 3 methodology correctly attributes domestic and international flight emissions to the appropriate regulatory regime

Need Help with Scope 3 Business Travel Accounting?

Our carbon accounting team can quantify your business travel emissions, model cost scenarios, and design travel demand management programmes that reduce both cost and carbon.

Explore Our Capabilities
Book a Free Call