The UK Emissions Trading Scheme (UK ETS), which replaced the EU’s ETS in 2021, aims to drive cost-effective emission reductions and support the UK’s net-zero goals after Brexit. Recent calls for the ETS and the Carbon Border Adjustment Mechanism to be scrapped by the leader of the Conservative opposition, Kemi Badenoch, would likely undermine climate targets, increase policy costs, and reduce business certainty.

Following the UK’s departure from the European Union, the UK ETS was introduced to replace participation in the EU ETS, which had been in operation since 2005. The EU ETS established a cap-and-trade approach to carbon pricing across power generation, heavy industry and aviation, and has, despite limitations relating to pricing and free allocations, been widely regarded as a central mechanism for reducing greenhouse gas emissions in a cost-effective way. While the UK has retained the core structure of this system, it now operates independently, with its own emissions cap, auctioning arrangements, and regulatory framework.

By placing a clear and increasing cost on carbon, the scheme provides an ongoing incentive for businesses to reduce emissions, improve efficiency, and invest in low-carbon technologies, while also offering a degree of long-term certainty for investors. As the cap tightens over time, the scheme is expected to play a central role in delivering the UK’s carbon budgets and net-zero target. Following consultation, the government has confirmed the continuation of the UK ETS into a second phase from 2031 to 2040, signalling its continued importance within the UK’s climate policy framework, alongside potential expansion into additional sectors such as maritime transport and waste.

Scrapping the ETS would negatively impact British business, the public purse, and the environment. Let’s take a look at the evidence.

Risks to businesses

One of the key arguments put forward by politicians and certain business leaders in favour of removing the ETS is that it reduces competitiveness. However, at a practical level, the absence of an ETS for UK businesses would in fact likely drive-up costs of British exports, particularly to the EU, which remains the UK’s main trading partner. If the UK ETS were to be scrapped, UK businesses exporting to the EU could face significantly higher costs due to the EU’s Carbon Border Adjustment Mechanism (CBAM), which applies a carbon price linked to the EU Emissions Trading Scheme (EU ETS). Without an ETS, UK businesses could be liable to pay the full costs of the CBAM, which became fully operational on the 1st of January 2026. A UK CBAM is planned for 2027 and as part of the new EU-UK Strategic Partnership, the UK and EU have agreed to work towards linking the UK ETS and the EU ETS. The Energy and Climate Intelligence Unit has noted that a “well-designed” CBAM could help “rejuvenate British industry”, helping make it more competitive with other cheaper countries. The chair of the British Energy Efficiency Federation has previously called in an IEEP guest blog for alignment with Swiss or Norwegian-style integration into the EU ETS to prevent future penalties for British businesses.

Additionally, if the UK were to remove its ETS and future CBAM initiatives, there would be a far greater risk of high-emission and cheaper materials entering the UK market, diverted away from the EU due to its CBAM, which would be threatening to British industry. This issue was highlighted in 2024 by British Steel, which made clear its concerns around divergence from the EU’s CBAM.  

Finally, the removal of the ETS could potentially reduce innovation and slow shifts to renewable sources and energy efficiency measures in some sectors and businesses, forfeiting a key benefit of carbon pricing mechanisms.

Cost to the public purse

Scrapping the UK ETS would also reduce the revenue that the scheme generates through the sale of carbon allowances, with some estimates suggesting a potential loss of around £3.1 billion by 2030. In addition, it could undermine the alignment established with the EU following Brexit, as the UK’s independent trading scheme is intended to operate in coordination with the European carbon market, supporting cross-border consistency and trade. Much of this revenue that the Treasury currently collects would simply be transferred to the EU when British industry exports to the EU. While often flowing into the general government budget, some of the funds raised by the UK ETS are also used to support the transition to net zero and invest in low-carbon technology.

Reduction in emissions

Whilst some consider that both the UK and EU ETS emission prices are too low to reflect the real costs of polluting the environment and that they often allocate too many free allowances, the evidence does suggest that these schemes can support in the reduction of greenhouse gas emissions. Though the UK ETS is still in its infancy, evidence from EU institutions shows that emissions from stationary installations such as power plants and refineries covered by the EU ETS are now nearly 50% below 2005 levels and the system is on track to meet its 2030 climate targets, with notable reductions such as a 16.5% drop in 2023 alone driven by fuel switching and increased renewables. Academic research confirms the ETS has contributed to measurable cuts, for example, around a 10% emissions reduction across regulated firms in its early phases and with no negative impact on the economic performance of regulated firms. 

It is perilous when effective environmental policies become political targets, and it is essential that environmental wins, including progress toward climate goals, are protected from the whims of party-political winds. Environmental protections require consensus and long-term policy commitments. The UK ETS is still in its infancy, but its benefits to business, the public purse, and emissions reductions are clear.

Photo by Marek Piwnicki on Unsplash