Energy UK warns against axing carbon pricing

Energy sector issues stark warning on carbon pricing proposals

Energy UK has delivered a blunt message to policymakers considering the removal of carbon taxes. The trade body, which represents Britain’s energy sector, describes the proposal as self-destructive. According to the organisation, scrapping carbon pricing would push up household gas bills, create new barriers to EU trade, and remove crucial incentives for low-carbon investment.

The warning comes as political debate intensifies around green levies and their role in household energy costs. However, Energy UK argues the reality contradicts the political rhetoric. Removing these mechanisms could do more harm than good.

For UK businesses, particularly those in energy-intensive sectors or engaged in EU trade, this debate carries significant commercial consequences. The outcome will affect operating costs, compliance requirements, and access to European markets.

How UK carbon pricing currently works

The UK operates its own Emissions Trading Scheme, established in 2021 after leaving the EU system. The UK ETS puts a price on carbon emissions by requiring businesses to buy allowances for each tonne of CO2 they release. This creates a financial incentive to reduce emissions.

As of early 2026, UK ETS allowances trade around £40 to £50 per tonne of CO2. These prices sit below the peaks seen in 2022 but remain high enough to encourage businesses to switch from coal to gas and invest in renewable energy.

The system works alongside other policies, including the government’s Clean Power 2030 target for a fully renewable electricity grid. Together, these measures aim to reduce emissions while maintaining energy security. The mechanism has proven effective since its introduction, driving fuel switching and supporting the growth of renewable generation capacity.

Meanwhile, the EU’s system continues to evolve. European carbon prices are projected to exceed €100 per tonne in 2026 for the first time since early 2023. This rise reflects tighter emission caps and ongoing shifts in gas and coal pricing dynamics across the continent.

Political proposals meet industry resistance

Recent political manifestos from Conservative and Reform UK candidates proposed scrapping green taxes, including elements of carbon pricing. The argument centres on household cost-of-living pressures and the immediate burden of environmental levies on energy bills.

Energy UK’s chief executive Emma Pincher responded directly to these proposals. She stated that axing carbon pricing would lead to new trade barriers and higher gas prices for households. The warning represents a clear rebuttal from an industry that understands the practical mechanics of energy markets.

The debate reflects a wider tension between short-term cost relief and long-term economic strategy. While removing taxes might appear to offer immediate savings, the industry argues this ignores the broader consequences for trade, investment, and energy security.

Globally, carbon pricing now covers approximately 24% of emissions as of 2024. The UK’s participation in this system helps align British businesses with international standards and maintains competitiveness in global markets. Stepping away from this framework could isolate UK companies from significant trading opportunities.

EU carbon border rules create new commercial reality

The European Union’s Carbon Border Adjustment Mechanism became fully operational in 2023. CBAM applies tariffs to carbon-intensive imports including steel, cement, and other materials. The system ensures products from countries without equivalent carbon pricing face additional costs when entering EU markets.

For UK exporters, this creates a direct link between domestic carbon policy and European market access. If Britain scraps its carbon pricing system, UK goods could face CBAM tariffs when sold into the EU. These additional costs would effectively negate any domestic savings from removing carbon taxes.

Industry modelling suggests this could increase costs for UK producers and consumers by 10 to 20% on affected goods. The impact would hit manufacturers particularly hard, especially those in sectors like steel, chemicals, and construction materials.

Recent post-Brexit trade discussions between the UK and EU have emphasised carbon pricing alignment as a key factor in avoiding tariffs. The 2025 trade deal review highlighted this issue explicitly. Consequently, any move to dismantle UK carbon pricing would complicate ongoing trade negotiations and potentially trigger new barriers.

British businesses exporting to Europe need to factor CBAM into their planning regardless of UK policy. However, maintaining equivalent domestic carbon pricing offers the clearest route to avoiding these additional tariffs.

What removal would mean for energy bills and investment

The claim that scrapping carbon taxes would reduce household bills requires closer examination. Energy UK warns the opposite could occur through two main channels.

First, removing carbon pricing would eliminate incentives for generators to switch from gas to renewable sources. This could lock in higher gas consumption at a time when gas prices remain volatile. Historical evidence shows carbon pricing has successfully driven fuel switching in the UK power sector, reducing reliance on fossil fuels.

Second, CBAM penalties on UK exports would increase costs throughout supply chains. These costs would inevitably pass through to consumers via higher prices for manufactured goods, construction materials, and other products.

Research from US policy institutions provides insight into carbon tax pass-through rates. Studies indicate firms pass approximately 100% of carbon costs to consumers initially. This suggests removal of carbon pricing would not automatically reduce bills if replaced by tariffs or other market inefficiencies.

Investment decisions present another crucial factor. The UK ETS provides long-term price signals that guide capital allocation in energy infrastructure. Removing this mechanism would create uncertainty for developers of renewable projects, potentially slowing the buildout of cheaper clean energy sources.

Analysis from Columbia University’s Energy Policy Center demonstrates that carbon taxes cause annual emissions to fall by 1,200 to 1,700 million metric tonnes between 2019 and 2030. These reductions translate into tangible air quality improvements and reduced health costs, benefits that would be lost under policy reversal.

Essential facts about carbon pricing and energy costs

• UK carbon allowances currently trade between £40 and £50 per tonne, down from 2022 peaks but sufficient to drive decarbonisation efforts.
• EU carbon prices are forecast to surpass €100 per tonne in 2026, reflecting tighter emission caps and market dynamics across European energy systems.
• The EU’s Carbon Border Adjustment Mechanism applies tariffs to imports from countries without equivalent carbon pricing, directly affecting UK export competitiveness.
• Industry analysis suggests scrapping UK carbon pricing could increase gas bills by 10 to 20% through lost efficiency incentives and CBAM penalties.
• Carbon pricing globally now covers approximately 24% of total emissions, with participation offering access to international carbon markets worth over €100 billion.
• The UK Emissions Trading Scheme has successfully driven fuel switching from coal to gas and renewables since its 2021 introduction, supporting emission reductions across the power sector.

Cost implications extend beyond immediate bill impacts

Understanding the full cost picture requires looking beyond headline energy prices. Carbon pricing affects multiple aspects of business operations and national economic performance.

For manufacturers, carbon costs influence production methods, supply chain decisions, and capital investment priorities. Companies have adapted operations to reduce emissions and lower their carbon liability. Removing this price signal would disrupt established efficiency programmes and could reverse progress made in recent years.

The construction sector faces particular challenges. CBAM tariffs on steel and cement would directly increase project costs if UK exporters face border adjustments. Builders and developers need clarity on these costs for accurate project planning and competitive tendering.

Public sector procurement represents another affected area. Many government contracts now include carbon reduction requirements. Changes to national carbon pricing policy could complicate compliance with these tender criteria and affect how authorities evaluate bids.

Small and medium businesses often lack the resources of larger corporations to navigate policy uncertainty. Clear, consistent carbon pricing provides a level playing field where efficiency investments deliver predictable returns. Policy reversal would disproportionately impact SMEs through increased complexity and unclear cost trajectories.

Evidence from emissions data and market performance

The EU ETS provides the longest-running evidence base for carbon pricing effectiveness. European Commission data shows the system has reduced power sector CO2 emissions by 47% since 2005. This demonstrates that carbon pricing delivers measurable environmental results alongside economic efficiency.

During the 2022 energy crisis, high carbon prices helped drive continued emission reductions despite extreme market volatility. The system discouraged consumption of emissions-intensive energy sources even when gas prices spiked. This counter-cyclical effect provides climate benefits during periods of market stress.

UK-specific data shows similar patterns since the domestic scheme launched. The combination of carbon pricing and renewable support has shifted the generation mix substantially. Coal has virtually disappeared from the electricity system, while wind and solar capacity has grown significantly.

However, price volatility presents genuine challenges. The 2022 spike created affordability concerns and prompted discussions about price collars or other stability mechanisms. These design questions deserve attention without necessarily abandoning the overall approach.

International evidence from carbon pricing systems in other jurisdictions shows broadly consistent results. Emissions fall in response to price signals, though the magnitude depends on specific policy design and complementary measures.

Supply chain effects and renewable energy deployment

Carbon pricing shapes investment decisions across energy supply chains. Developers of wind farms, solar installations, and other renewable projects factor carbon prices into their financial models. Higher fossil fuel costs from carbon pricing improve the relative economics of clean energy.

This effect operates through multiple channels. Direct generation costs shift in favour of renewables when carbon costs apply to gas and coal. Additionally, corporate buyers increasingly seek renewable power purchase agreements to manage carbon liability and meet sustainability commitments.

Manufacturing supply chains respond to these signals by relocating production to areas with cleaner energy or investing in on-site renewable generation. The UK’s carbon pricing regime influences these location decisions, affecting where companies choose to invest and expand operations.

Removal of carbon pricing would eliminate a key differentiator for UK renewable energy. This could slow the deployment of new projects at a time when additional capacity is needed to meet 2030 targets. The resulting delay in building cheaper renewable generation would extend reliance on more expensive gas-fired power.

For businesses planning significant capital investments in energy infrastructure or manufacturing facilities, policy stability matters enormously. Uncertainty around carbon pricing makes long-term planning difficult and increases the risk premium required for major projects.

Trade relationships and regulatory alignment considerations

The UK’s relationship with EU carbon markets extends beyond simple tariff calculations. Regulatory alignment on climate policy facilitates trade negotiations and provides a framework for ongoing cooperation.

Post-Brexit trade discussions have repeatedly returned to environmental standards and carbon pricing as areas requiring coordination. The EU views carbon policy as fundamental to its economic model going forward. British divergence on this issue complicates broader trade arrangements.

Other trading partners are also developing carbon border mechanisms or considering similar approaches. The global trend points toward increased carbon pricing coverage rather than retreat from these systems. UK policy choices need to account for this international direction.

For businesses operating across borders, alignment between UK and EU carbon systems reduces compliance complexity. Companies can apply consistent methodologies for measuring and reporting emissions rather than navigating incompatible frameworks.

Professional services sectors also benefit from alignment. Consultancies, auditors, and technical specialists can offer expertise across both markets when systems remain compatible. Divergence would fragment this knowledge base and increase transaction costs.

Additional information and authoritative sources

The Department for Energy Security and Net Zero publishes regular updates on UK ETS performance and policy development. Their website provides emission data, allowance auction results, and consultation documents on scheme design.

The European Commission maintains comprehensive resources on the EU ETS and Carbon Border Adjustment Mechanism. These materials explain how CBAM tariffs are calculated and which sectors face requirements. UK exporters should consult these sources to understand potential cost implications.

Energy UK represents over 100 companies across electricity generation, supply, and infrastructure. Their policy briefings offer industry perspective on energy market developments and regulatory changes affecting business operations.

Academic research centres including the Grantham Institute at Imperial College London and the Smith School at Oxford University publish analysis of carbon pricing effectiveness and design options. These institutions provide evidence-based assessment of policy outcomes.

For businesses seeking practical guidance on carbon management and compliance, specialist advisory support helps navigate reporting requirements and develop response strategies to changing policy landscapes.