A Look Back: Delivering Impact through the UK Emissions Trading Scheme
Since its inception in 2021, the United Kingdom’s domestic Emissions Trading Scheme (ETS) has achieved measurable success. The programme, covering aviation, power and heavy industry, has contributed to a reduction of 11 million tonnes of carbon dioxide emissions within its first two years. This is no small feat.
Transitioning away from the European Union’s ETS post-Brexit posed operational and regulatory complexities. Yet, the scheme was implemented in a timely and well-managed fashion, showing that structured climate governance at a national level can indeed deliver. For a country seeking to maintain credibility in global climate diplomacy, this kind of institutional capability signals readiness to lead.
Warning Signs: The Price of Carbon and Its Implications
Despite these successes, a recent report by the National Audit Office highlights a clear inflection point. The challenge no longer lies in implementation but in relevance and resilience.
One core issue identified is the price signal offered by the UK ETS. Since its launch, the price per tonne of carbon has dropped from £50 to an average of £37 in 2024—significantly lower than the current price under the EU’s equivalent system. This discrepancy has wide-reaching consequences.
When the cost of emitting remains cheaper than the cost of decarbonising, industries delay or downscale investment in clean technologies. For sectors like aviation and heavy industry, where capital-intensive innovation is essential, this can entrench dependence on legacy systems.
The lowered carbon price also underperforms compared to the UK Government’s own carbon values used in non-traded sectors. This creates a fragmented economic narrative around carbon, where incentives and disincentives are not aligned across the economy.
Looking Ahead: Expansion and Sectoral Inclusivity
To maintain momentum, the scheme is preparing for an expansion to include energy-from-waste and waste incineration sectors. Additionally, total allowance volumes are being recalibrated downward—an attempt to tighten the cap and push for steeper emissions cuts.
This is an encouraging development. Including more sectors within market-based decarbonisation efforts helps create a unified approach, offering a stronger foundation for reaching the UK’s legally binding carbon budgets. Moreover, a broader coverage makes the system more robust to market distortions and leakage.
However, as pointed out by the NAO, inclusion alone is insufficient. If pricing mechanisms remain weak or unpredictable, the incentive structure that drives ETS effectiveness will not mature.
Innovation Gaps: Between Vision and Feasibility
Another challenge lies in the technology landscape itself. Future emissions reductions will hinge on advancements in carbon capture, sustainable fuels, and clean industrial processes—particularly in sectors such as aviation.
Yet many of these solutions remain commercially unproven or require long-term investment cycles. Uncertainties around policy alignment, return on investment, and market readiness further delay private sector action.
This is where coordinated leadership is essential. The integration of cap-and-trade policies with complementary instruments—such as public funding, procurement policies, and infrastructure rollouts—can reduce perceived risks and accelerate adoption timelines.
International Alignment: Linking Ambition with Scale
The UK and EU have recently struck a deal to align their emissions trading systems, though implementation details are sparse. If executed meaningfully, this alignment could yield €770 million in transaction cost savings by 2030. More importantly, it would offer clarity and consistency to businesses that operate across both markets.
Globally, momentum around ETSs is accelerating. As of January 2025, there are 38 such systems in force, covering 20% of all global emissions and nearly 60% of GDP. Emerging economies like China, Brazil and India are stepping forward with their own frameworks, recognising both the environmental and economic logic behind carbon markets.
This proliferation is more than symbolic. It lays the groundwork for linking systems, harmonising methodologies, and preventing carbon leakage. In effect, a well-aligned UK ETS could ensure that the nation remains competitive, even as other markets race to define the standards of a decarbonised global economy.
Addressing the Carbon Border Adjustment Challenge
A tangible risk in this global context is the phenomenon of carbon offshoring. Without protective mechanisms, low-carbon regions can end up importing high-emission goods at the expense of domestic industry.
To mitigate this, both the UK and EU are preparing to implement Carbon Border Adjustment Mechanisms (CBAM). While the EU version is set to begin in 2026—with potential delays—the UK’s system is planned for January 2027. These measures are vital to safeguarding industry transitions while maintaining economic resilience.
Crucially, the effectiveness of a CBAM is strengthened when domestic pricing mechanisms reflect the true cost of carbon. A misaligned ETS could dilute the credibility of the UK’s border measures, reducing their ability to act as both shield and signal.
Turning Risk into Strategy
The findings of the NAO report, while sobering, offer a roadmap. They underline the importance of not resting on early successes but using them as a springboard for deeper change.
Effective emissions trading must offer more than a token price on carbon. It must actively shape market behaviour, drive investment decisions and signal a long-term commitment to clean growth. This means that technical rigour, policy integration and pricing credibility must all move in lockstep.
Transport sectors like aviation stand to gain or lose significantly depending on how these policies evolve. With demand recovery post-pandemic and growing scrutiny from both investors and regulators, the sector is at a crossroads.
Similarly, industrial actors facing carbon constraints require not only compliance pathways but strategic foresight. The presence of structured, long-term decarbonisation roadmaps—anchored in robust ETS design—can become a source of competitive differentiation.
Conclusion: The Strategic Horizon for ETS Reform
The UK’s Emissions Trading Scheme is not merely a compliance mechanism—it is a lens through which the country’s climate intent is made visible. Its early years demonstrate what is possible with determination and institutional alignment.
Now, the task is to strengthen its architecture: align prices with ambition, pair market signals with technological readiness, and harmonise policies across jurisdictions. In doing so, the UK can ensure that its ETS remains not just a regulatory framework, but a strategic lever for economic and environmental leadership.
As more global jurisdictions join the emissions trading movement, those already in the game must lead by example—through design, through execution, and through impact. That leadership will rest on subtle but vital shifts: from pricing to purpose, from compliance to competitiveness, and from policy to progress.