UK To Scrap Carbon Tax On Power By 2028 As Coal Exit Reshapes Energy Policy

Carbon Price Support tax abolished from April 2028

The government has confirmed it will scrap the Carbon Price Support levy on electricity generation in April 2028. This removes an additional tax that has sat on top of the UK Emissions Trading Scheme since 2013, originally designed to make fossil fuel power generation more expensive and accelerate the shift away from coal.

Exchequer Secretary to the Treasury James Murray announced the decision in the House of Commons on 17 April 2026. He said the tax had done its job and was no longer needed now that coal has left the grid and the UK ETS has developed into a mature carbon pricing system.

The change affects electricity generators that burn fossil fuels. It does not alter the UK Emissions Trading Scheme itself, which will continue to operate as the primary mechanism for pricing carbon emissions from power stations and other industrial facilities.

How the Carbon Price Support levy worked

The Carbon Price Support came into force in April 2013. It was introduced when the UK was still part of the EU Emissions Trading Scheme, at a time when European carbon prices were considered too low to drive meaningful emissions reductions in the power sector.

The levy added a supplementary charge on fossil fuels used in electricity generation. This created a higher effective carbon price for UK power stations than the EU ETS price alone would have delivered. The policy aimed to make coal generation uneconomical and encourage gas, renewables, and nuclear power instead.

Over the past decade, the tax helped accelerate the closure of coal plants across Britain. The last coal-fired power station is expected to shut down by the end of 2024, completing a transition that has fundamentally reshaped the electricity grid. Consequently, renewable sources, gas, and nuclear now dominate UK power generation.

The government froze the Carbon Price Support rate at £18 per tonne of CO2 in the previous budget. That freeze was scheduled to last until April 2028, which is now when the tax will disappear entirely.

Why the government is removing the tax now

Ministers say the levy has achieved its original purpose. Coal has been driven out of the electricity system, which was the primary target when the policy was designed. Meanwhile, the UK Emissions Trading Scheme has matured into a more robust pricing mechanism since Britain left the EU ETS and established its own system.

The UK ETS now covers emissions from power generation, heavy industry, and aviation. Its cap on total emissions tightens over time, creating a price signal that continues to encourage low-carbon investment without the need for an additional tax on electricity generators.

The government also says removing the Carbon Price Support will help offset costs associated with the British Industrial Competitiveness Scheme. That initiative reduces electricity bills for energy-intensive manufacturers, supporting the government’s wider industrial strategy. Scrapping the levy on generators should reduce overall electricity costs, which helps limit the fiscal impact of industrial support measures.

Furthermore, the tax has become less relevant as the electricity system evolves. With coal gone, the levy now primarily affects gas-fired power stations. However, gas generation is already subject to the UK ETS carbon price, which provides sufficient incentive for continued decarbonisation as the cap tightens and allowance prices rise.

What changes from April 2028

From 1 April 2028, electricity generators will no longer pay the Carbon Price Support levy. This applies to all fossil fuel generation, which in practice now means predominantly gas-fired power stations and any backup or peaking plants that burn oil or other fossil fuels.

Generators will still participate in the UK Emissions Trading Scheme. They must surrender one emissions allowance for each tonne of CO2 they emit, as they do now. The ETS price fluctuates based on market conditions, currently trading well above the frozen £18 per tonne Carbon Price Support rate.

The change does not affect other energy taxes or levies. Generators still pay business rates, connection charges, and other operational costs. The removal specifically targets the supplementary carbon charge that was layered on top of the ETS.

The government will include the necessary legislation in a future Finance Bill. This will formally abolish the tax and set out any transitional arrangements needed to ensure a smooth handover from the current system to the post-April 2028 framework.

Impact on electricity prices and industrial costs

Removing the Carbon Price Support should reduce generation costs for gas-fired power stations. Those savings could flow through to wholesale electricity prices, potentially lowering bills for households and businesses. However, the actual impact on consumer bills will depend on numerous other factors, including gas commodity prices, renewable generation levels, and grid balancing costs.

Industry groups have welcomed the decision. The Chemical Industries Association said the change would help reduce energy costs for manufacturing sectors that face intense international competition. Lower electricity prices make UK production more viable compared to facilities in countries with cheaper power.

The move also supports the British Industrial Competitiveness Scheme, which provides bill relief to energy-intensive industries. By reducing underlying generation costs, the government can limit the amount of compensation needed to keep industrial electricity prices competitive. This means the scheme costs less to run, reducing pressure on public finances and limiting any pass-through costs to other billpayers.

Nevertheless, some analysts caution that the benefit to consumers may be modest. Wholesale electricity costs represent only part of a household or business bill. Network charges, policy costs, operating costs, and supplier margins make up the remainder. A reduction in the generation component may translate to just a few pounds per year for an average household, though businesses with higher consumption will see larger savings.

Questions about gas generation and decarbonisation

Critics may argue that removing the Carbon Price Support weakens the incentive to decarbonise gas generation. Gas currently provides flexible backup when renewable output is low, particularly during periods of limited wind and solar generation. The tax created an additional cost for burning gas, beyond the ETS price, which encouraged operators to improve efficiency or consider carbon capture technology.

However, the government maintains that the UK ETS provides sufficient impetus for continued emissions reductions. The ETS cap declines each year, which pushes allowance prices higher over time and makes fossil fuel generation progressively more expensive. As renewable capacity expands and grid flexibility improves through battery storage and interconnectors, gas generation should decline naturally in response to ETS pricing.

The government is also working on separate reforms to reduce the influence of gas on wholesale electricity pricing. These measures aim to ensure renewable generation sets the marginal price more often, rather than gas plants. That work continues in parallel with the Carbon Price Support removal.

In addition, the Clean Power 2030 mission seeks to decarbonise the electricity grid by the end of this decade. That target relies on massive expansion of wind, solar, and nuclear capacity, alongside improved energy storage and demand flexibility. If successful, gas generation will play a much smaller role, making the Carbon Price Support less relevant regardless of whether it remains in place.

How this fits into broader climate policy

The decision reflects a shift in how the UK prices carbon emissions. When the Carbon Price Support was introduced in 2013, the EU ETS price was below £5 per tonne, which was considered too weak to drive power sector decarbonisation. The supplementary tax corrected that by raising the effective carbon price for UK generators to around £15 to £30 per tonne during the 2010s.

Since then, the UK ETS has become significantly stronger. Allowance prices now regularly exceed £40 per tonne, and the market expects further increases as the cap tightens in line with net zero targets. This means the ETS alone now delivers a carbon price comparable to or higher than the combined CPS and ETS rate from earlier years.

Simplifying to a single carbon pricing mechanism makes the system easier to understand and administer. Generators face one carbon price through the ETS rather than navigating two overlapping charges. This reduces complexity for investors, improves market transparency, and aligns the UK more closely with international carbon pricing norms.

The change also frees up fiscal capacity for other climate policies. The revenue previously collected through the Carbon Price Support can be redirected toward supporting renewable energy deployment, grid infrastructure upgrades, or industrial decarbonisation programmes. This helps the government balance competing priorities within the overall climate budget.

Moreover, the move demonstrates confidence in the UK ETS as the primary tool for managing power sector emissions. By relying on a cap-and-trade system rather than a fixed tax, the government allows the carbon price to respond dynamically to market conditions while maintaining environmental integrity through the declining emissions cap.

Key points for UK businesses

• The Carbon Price Support levy on electricity generation will be abolished from 1 April 2028, removing a supplementary tax that has applied to fossil fuel power stations since 2013.
• The UK Emissions Trading Scheme will continue unchanged, providing the sole carbon pricing mechanism for electricity generators after the CPS removal.
• Electricity generators burning gas or other fossil fuels should see reduced costs, which may translate to lower wholesale power prices and modest reductions in business electricity bills.
• The government will include the necessary abolition legislation in a future Finance Bill, with details of transitional arrangements to follow.
• Energy-intensive manufacturers may benefit from reduced electricity costs, supporting the goals of the British Industrial Competitiveness Scheme and wider industrial strategy.

What businesses should consider

If your organisation operates in a sector with high electricity consumption, this policy change merits attention in your energy procurement planning. Lower generation costs from April 2028 onwards could influence wholesale prices, although the scale of any reduction will depend on gas prices, renewable output, and other market factors at that time.

For businesses with long-term power purchase agreements, review contract terms to understand whether any Carbon Price Support costs are currently itemised or passed through. Some agreements link pricing to specific tax and policy costs, which may require renegotiation or adjustment when the levy disappears.

Manufacturers considering investment in on-site generation should note that this change affects the economics of backup or combined heat and power systems using gas. The removal of the supplementary tax improves the financial case for gas-based generation, although you must still account for UK ETS costs and the long-term trajectory of carbon prices.

Businesses pursuing net zero commitments should continue focusing on reducing electricity consumption and sourcing renewable power. The policy change simplifies the carbon pricing landscape but does not alter the underlying need to decarbonise operations. The UK ETS will keep pushing up the cost of fossil fuel generation, making renewable electricity progressively more competitive.

Companies involved in electricity generation or power-intensive industries should engage with government consultations on related energy market reforms. The removal of the Carbon Price Support is part of a broader set of changes aimed at reforming wholesale pricing, improving grid flexibility, and supporting clean power deployment. Understanding these interconnected policies will help you position your business for the evolving energy landscape.

If your operations depend on stable, predictable electricity costs, consider how the shift from dual carbon pricing to a single ETS-based system affects your risk exposure. ETS prices fluctuate based on market dynamics, whereas the Carbon Price Support was a fixed-rate tax. This may require adjustments to hedging strategies or financial planning assumptions for energy costs beyond 2028.

Where to find more information

The government provides detailed guidance on the UK Emissions Trading Scheme through the UK ETS collection on GOV.UK, which includes information on how the scheme operates, who must participate, and how allowance prices are determined.

For updates on energy policy and the Clean Power 2030 mission, visit the Department for Energy Security and Net Zero website, which publishes consultation documents, policy announcements, and analysis of electricity market reforms.

The Chemical Industries Association and other trade bodies provide sector-specific perspectives on how energy costs affect UK manufacturing competitiveness. These organisations often publish guidance for members on responding to policy changes and accessing support schemes.

Businesses seeking support with carbon reporting, emissions reduction, or compliance with net zero requirements can explore resources through our compliance advisory services, which help SMEs navigate the regulatory landscape and implement practical carbon management strategies.