The importance of carbon pricing to the UK

Executive Summary

Carbon pricing is the cornerstone of the UK’s decarbonisation policy. By embedding the cost of climate change into commercial decisions, it harnesses the power of the market to reduce emissions in the most efficient and cost-effective way possible.

The UK has maintained at least one form of carbon pricing since 2002, providing a consistent signal that has accelerated the roll out of clean energy and industrial processes. While early debates in the 1990s and 2000s raised concerns that mechanisms like carbon pricing could constrain economic growth, the UK’s experience has demonstrated the opposite. Emissions have fallen by over 50% since 1990 while GDP has grown by 69%, demonstrating that decarbonisation and economic growth can go hand in hand.^{[1], [2]}

Carbon pricing is not a silver bullet, and it’s critical that that it exists in tandem with support for companies to invest in industrial decarbonisation and electrification. But the solution to the UK’s competitiveness issues will not be found in scrapping carbon pricing. Energy UK analysis shows that removing the UK’s Emissions Trading Scheme (ETS) would mean:

• Increasing UK gas demand and emissions by up to 25%
• Increasing gas demand would cause a rebound effect in UK gas prices, negating much of the saving from removing the ETS. Scrapping the UK ETS would reduce the effective price of gas by the equivalent of 26p per therm for companies that currently pay the carbon price, but increased demand would cause an increase in prices of around 12p.
• Increases in the price of gas for domestic heating and CfD top up payments mean that a typical household would spend an extra £74 per year on gas if the ETS was removed, and overall household energy bills would increase.
• Exposing British companies exporting to the European Union (EU) to £10 billion of extra taxes between 2026 and 2035, as they would be forced to pay the full amount due under the EU’s Carbon Border Adjustment Mechanism (CBAM) regime.

It is the last point that is so crucial as to why scrapping carbon pricing would provide only the illusion of supporting the UK’s long-term competitiveness. Carbon Pricing is rapidly spreading across the world. Jurisdictions operating an ETS account for 63% of global GDP and more than half the world’s population.^[3] Of the world’s largest trading blocs, carbon pricing already exists in the EU, China, across many US states, and from this year, India also. Jurisdictions like the EU are already implementing a CBAM, which expose imports to their carbon price, ensuring that domestic production doesn’t face unfair competition from countries with weaker environmental rules. As countries like China and India expand and strengthen their carbon pricing regimes, a proliferation of CBAMs could have profound consequences for British exports.

A UK which abandons carbon pricing is a UK left out in the cold, locked out of key markets as others steal a march on the industries of the future. Maintaining a pragmatic approach to carbon pricing, and pursuing a linkage agreement with the EU to ensure decarbonisation can be achieved more quickly and at lower cost, is the only way to deliver an enduring solution to the UK’s competitiveness challenges.

[1] Climate Change Committee (2025), Progress in reducing emissions – 2025 report to Parliament

[2] World Bank (2025), UK, GDP Annual Growth (%)

[3] ICAP (2026), Emissions Trading Worldwide ICAP Status Report 2026