Low ETS price could undermine UK’s net zero aspirations

The UK’s emissions trading scheme (ETS) has proved beneficial for decarbonisation – but reduced allowance pricing since 2023 could undermine its future effectiveness, according to the National Audit Office (NAO).

Within the UK’s cap and trade scheme, allowances were initially priced at the same level as in the EU ETS. But since 2023, they have been auctioned at a lower price than their EU counterparts: at the end of May 2025, a UK allowance cost £50 per tonne, while its EU equivalent was £60.

This relatively low price may not be sufficient to incentivise investment in low-carbon alternatives, the NAO warns.

“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,” said Gareth Davies, head of the NAO.

“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.”

11 million tonnes of emissions reduction in covered sectors

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

Between 2021 and 2023, GHG emissions in sectors covered by the UK’s cap and trade scheme went down by 11 million tonnes (though the NAO warns that it is “difficult to conclude” whether this decarbonisation was a direct result of the scheme).

The scheme has also generated  £17.8 billion in revenue for the government from 2021 to 2025.

Linking EU and UK ETS

But in order to deliver on its promise to spur decarbonisation and support the country’s net zero ambitions, the UK ETS needs to be priced sufficiently high – and complemented by other policies that can help low-carbon technologies such as carbon capture and sustainable aviation fuel go to market.

The linking of the UK and EU ETS, agreed by the two jurisdictions in May, could potentially support a higher price for allowances: the announcement alone made carbon prices jump by 8% in the UK. 

“​​Linking the Scheme with the EU ETS could bring several challenges. For example, shocks or developments in one system could be felt in the other partner’s jurisdiction. However, if managed properly, linking could provide more – and potentially cheaper – reduction options for one system, by providing access to cheaper allowances from the other. This would create a common carbon price and level the playing field for companies across the linked markets,” writes the NAO in the report.