National Audit Office: Incentives for future decarbonisation from flagship scheme uncertain

According to a new NAO report,1 while emissions have fallen in the three sectors covered by the UK's flagship ‘cap and trade' scheme,2 a fall in the price that Scheme participants must pay for emitting carbon could undermine the extent to which it limits future greenhouse gas emissions.  

The UK Emissions Trading Scheme is a crucial part of the UK government's net zero strategy. By placing a price on carbon emissions, the government expects that, over time, businesses will invest in low-carbon technologies such as renewable energy, or switch the type of fuel used, as the carbon price becomes higher than the cost of that investment.  

The Scheme raised £17.8 billion in revenue for the government from 2021 to 2025 through the auction of allowances, each equal to 1 tonne of carbon dioxide.3   

More than 1,000 organisations in the power, industrial and aviation sectors are participating in the Scheme,4 and the government plans to expand it to include other industries in coming years.5  

The post-Brexit transition to the UK Scheme from its EU equivalent was delivered on time despite a tight timetable, leading to no losses in revenue. Loopholes that allowed firms participating in the Scheme to make windfall profits (worth up to £49 million in 2022) have also now been closed.  

Between 2021 and 2023, the carbon emissions covered by the Scheme decreased by 11 million tonnes overall. However, it is difficult to conclude whether this reduction can be attributed to the Scheme.6 

The Scheme's decarbonisation incentives also risk being undermined by the relatively low price set for UK carbon emissions. Despite initially exceeding the price in its EU equivalent, the price of carbon within the UK Scheme has decreased since 2023 and remains lower than EU carbon prices.7 The Scheme's future effectiveness could be undermined by uncertainties around the availability and take-up of low-carbon alternatives.8 Some technologies – for example, carbon capture and sustainable aviation fuel – are in their infancy and may take many years before they start making a difference to emissions. 

Stakeholders have expressed concerns that the Scheme could impact UK industry competitiveness, with international competition from firms facing lower carbon prices potentially resulting in economic activity moving abroad and continuing with unabated emissions (known as ‘carbon leakage').9 

While the UK ETS Authority (the joint body responsible for overseeing the Scheme) is a good example of innovative, collaborative policymaking,10 the relative size of administrative resources can make it challenging for the Authority. The NAO recommends that the Authority includes a broader commentary on the effectiveness of the Scheme as part of its existing annual reports on the functioning of the UK carbon market, and gathers data on the type of investments made in low-carbon technology by Scheme participants. 

The Authority should also consider working with other government bodies involved in the UK's industrial and energy sectors and improve communications with the Climate Change Committee to help anticipate the Committee's advice on the Scheme. 

Gareth Davies, head of the NAO, said:  

“The UK Emissions Trading Scheme plays a key role in the UK's progress towards its net zero goals. 

“After the successful transition from the EU cap and trade scheme, the Scheme has encouraged green investment and decarbonisation in some key sectors. 

“But to fulfil government's ambitions to expand the UK Scheme, the Authority must ensure that the Scheme is combining with other policies to create sufficient incentives for industry to invest in low carbon technologies and for organisations to participate in the Scheme.” 

ENDS 
Notes to editors

1. The Scheme works by setting a cap, divided into individual allowances, on the level of emissions which UK participants in the Scheme, are allowed to emit over a given period. An allowance is equal to 1 tonne of carbon dioxide. Participants in the Scheme can trade allowances in order to account for their emissions, which in turn sets a price on the carbon they emit. 
2. HM Treasury collects the revenue raised from auctioning allowances. HM Treasury does not regard the Scheme as a revenue-raising scheme. It expects that, over time, the Scheme should raise less revenue as participants invest in decarbonisation and then pay less into the Scheme. 
3. In June 2024, there were 490 participants in the industry sector, 387 in aviation and 191 in power generation, with a total of 1,068 participants in the Scheme. DESNZ estimates that the three sectors in the Scheme covered around 25% of total UK greenhouse gas emissions as at 2023.
4. The government has announced plans to expand the Scheme to the domestic maritime sector in 2026, and in the waste incineration and energy from waste sectors in 2028. This is with the aim of capturing more emissions under the Scheme and increasing decarbonisation across the economy.   
5. Across the three sectors in the Scheme, CO2 emissions have decreased from 108 million tonnes in 2021 to 97 million tonnes in 2023, although the aviation sector saw an increase in emissions. This overall reduction is largely a result of the power sector moving away from carbon intensive fuels such as coal to lower carbon alternatives such as gas and biofuels and decarbonising because of other interventions, such as government subsidies for renewables. Emissions may also be reducing because of a downturn in economic activity in those sectors.
6. At the end of May 2025, the UK carbon price was £50 per tonne of carbon dioxide and in the EU equivalent it was £60. See Figure 11 in the report for further comparative carbon pricing between the UK and EU Schemes.
7. Uncertainty about future carbon reduction technologies was the most commonly cited barrier to reducing emissions in the 2023 evaluation of the Scheme, with respondents highlighting that the necessary technical solutions for large scale emissions reductions are at an early stage of development.  Some industrial stakeholders were concerned that, in the absence of available technologies and wider government-led infrastructure (for example, on hydrogen and carbon capture networks), they would have few options in the future to decarbonise.  
8. The government is introducing a Carbon Border Adjustment Mechanism (CBAM) to tackle carbon leakage. Through the CBAM, the government would aim to ensure equal treatment of domestic and imported carbon-intensive goods: where imported goods come from countries with lower carbon costs, a charge would be applied to equalise their carbon costs with those of domestic producers. In May 2025, the government announced a commitment to link the UK ETS with the EU Emissions Trading System, with the suggestion this would improve conditions for low carbon investment and save UK industry from paying the EU CBAM.
9. The UK ETS Authority is made up of the UK Government, Scottish Government, Welsh Government, and the Department of Agriculture, Environment and Rural Affairs in Northern Ireland. The Department for Energy Security & Net Zero (DESNZ) provides the main ministerial and administrative lead on behalf of the UK Government, as well as the overwhelming majority of resources for the Authority.
10. All references to carbon or carbon dioxide include references to other greenhouse gases covered by the Scheme, expressed in terms of carbon dioxide equivalent (a unit used to measure the total impact of different greenhouse gases in terms of how much carbon dioxide would create the same effect on global warming).