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Publications / Briefings and explainers

UK Emissions Trading Scheme

Linking the UK and EU Emissions Trading Schemes (ETSs) will ensure we have a robust carbon price in the UK, helping UK industry to decarbonise with maximum efficiency.

  • The UK was the first country in the world to pilot a national ETS in 2002. This became the basis of the EU ETS, in which the UK participated until Brexit. A new UK ETS was introduced in 2021.1
  • An ETS works by placing an overall cap on emissions and auctioning allowances (permits that allow a certain amount of pollution) to companies that emit.
  • Over time, this cap shrinks in size and fewer allowances are auctioned annually. This will lead to a tighter market, pushing up prices and making it more cost-effective to decarbonise than continue to pollute. The combination of a legally binding cap on emissions and strong market incentives means an ETS is the most efficient and effective way of pricing carbon emissions in an economy.
  • The UK ETS Authority (consisting of the UK Government and Devolved Administrations) announced in 2023 that this cap will be consistent with the UK’s Net Zero targets.2
  • Pricing emissions through the EU ETS, and the UK ETS from 2021, has been one of the most important factors in the fall of almost 50% of UK greenhouse gas emissions since 1990.
  • The UK ETS is roughly ten times smaller than the linked EU and Swiss ETS. This means that there are relatively fewer allowances in circulation in the UK ETS. A smaller market means the UK ETS suffers from low liquidity. When liquidity is low, there is limited visibility of what the ‘true’ value of the product and the price should be. This means buying or selling that product involves more risk and potentially large swings in market value, creating a more volatile market.
  • The UK ETS Authority recently consulted on how these issues, and other risks to market functioning, could be resolved.3 Energy UK has responded to this consultation.4
  • In 2023, the UK ETS price fell substantially. Weak and volatile carbon prices reduce the incentive to decarbonise in the UK.
  • In addition to sending a poor signal for decarbonisation and low-carbon investment, lower carbon prices lead to significantly reduced revenues for the Exchequer. Energy UK analysis of forecasts by the Office for Budget
  • Responsibility shows that in April 2024, the forecast revenue raised by the UK ETS had fallen by £19 billion over the next five years compared to the forecast revenue in April 2023.
  • The EU is introducing a Carbon Border Adjustment Mechanism (CBAM) from January 2026.5 This will impose a tax at the border on imported goods in certain sectors, including electricity, which have paid a lower carbon price than the EU ETS. UK companies will have to pay the difference between the UK and EU ETS prices. This money will stay in the EU.
  • On current trends, Energy UK analysis suggests that the EU CBAM is likely to cost UK industry around £2.2bn over the duration of the next Parliament.
  • The combination of a weak UK ETS sending poor signals for decarbonisation and low carbon investment, and the imminent arrival of an EU CBAM that is likely to cost British companies billions of pounds, is simply unacceptable.
  • The only solution which neatly solves both these problems is for the UK to link the UK and EU ETS.
    Linking the two schemes would lead to carbon price convergence between the two jurisdictions, and exempt UK companies from the EU’s CBAM.
  • Linkage would also ensure that there is a robust carbon price in the UK. This will create significantly higher revenues for the UK exchequer and provide a stronger signal in favour of low carbon investment.
  • We need to ensure that British companies are not required to pay a CBAM tax to trade with their largest export market and cut red tape for exports to ensure that British companies will not have to submit complex carbon declarations at the border about their products.
  • For further information on the case for linkage, Energy UK’s briefing on the subject is available on our website.6

1 UK ETS Authority (2020), The Future of UK Carbon Pricing – UK Government and Devolved Administrations’ Response
2 UK ETS Authority (2023), Developing the UK Emissions Trading Scheme: Main Response
3 UK ETS Authority (2023), UK ETS: Future Markets Policy
4 Energy UK (2024), Energy UK Response to UK ETS Future Markets Policy Consultation
5 European Commission (2024), Carbon Border Adjustment Mechanism
6 Energy UK (2023), Without linking emissions trading systems, UK companies face higher bills and red tape