Carbon pricing puts a cost on greenhouse gas emissions so that polluting activities pay for some of the damage they cause. In the UK the main instrument is the UK Emissions Trading Scheme, a cap-and-trade market covering about 25% of UK territorial emissions. Alongside it sit the Carbon Price Support tax on fuel used to generate electricity (around £18 per tonne of CO2e, due to end in April 2028), the Climate Change Levy on business energy, and from 1 January 2027 a carbon border tax on certain imports.
Each works differently, and a business can be caught by more than one. Here is how they fit together.
Two ways to price carbon
A carbon tax fixes the price and leaves the quantity of emissions to the market. A cap-and-trade scheme does the reverse: the government caps total emissions, issues allowances up to the cap, and lets the market set the price. The UK uses both: a trading scheme for heavy emitters and taxes for energy use and imports.
The UK Emissions Trading Scheme
The UK ETS replaced UK participation in the EU ETS on 1 January 2021. It is run by the UK ETS Authority, made up of the UK, Scottish and Welsh governments and Northern Ireland's Department of Agriculture, Environment and Rural Affairs.
- Allowances. Each UK Allowance (UKA) covers one tonne of CO2 equivalent. Every year, covered operators must surrender enough allowances to match their emissions;
- Getting allowances. Operators buy them at government auctions or on the secondary market, or receive free allocation if eligible;
- Price floor at auction. The Auction Reserve Price was set at £28 from 8 April 2026 and rises to £29.01 from 1 January 2027, with yearly inflation increases after that;
- Who is in. Heavy industry, power, aviation and, since 1 July 2026, domestic maritime. For installations, the trigger includes combustion units with a total rated thermal input above 20MW.
Smaller sites get lighter treatment. A hospital or small emitter, meaning an installation below 35MW with emissions under 25,000 tonnes of CO2e a year, has simplified obligations. An ultra-small emitter, under 2,500 tonnes a year, needs no permit but must still monitor its emissions.
Free allocation
Some allowances are given free to sectors at risk of carbon leakage, the risk that production and its emissions move abroad to escape the price. Free allocation for aviation ended on 1 January 2026. The second free allocation period was moved from 2026 to 2027 to align with the start of the carbon border tax in 2027.
What is expanding, and what has been delayed
- Maritime. From 1 July 2026 the scheme covers ships of 5,000 gross tonnage and above, whatever their flag, on domestic voyages and in UK ports. The first scheme year runs from 1 July to 31 December 2026. Including international voyages to and from the UK is under consultation;
- Waste. Energy from waste and waste incineration were due to join from 2028, after a voluntary monitoring and reporting period from 1 January 2026. In August 2026 the Authority confirmed that this will not happen in 2028 and that a new timeline will follow. Budget 2026 lists the delay among its policy decisions;
- Greenhouse gas removals. The Authority aims to legislate by the end of 2028, with the system expected to be operating by the end of 2029;
- Beyond 2030. The scheme will continue into a ten-year Phase II from 2031 to 2040, and the UK and EU are negotiating to link their emissions trading systems.
The carbon price floor and Carbon Price Support
Generators in Great Britain pay Carbon Price Support (CPS) rates of the Climate Change Levy on the gas, LPG and coal they burn to make electricity. CPS is how the carbon price floor, introduced on 1 April 2013, raises the carbon cost of fossil-fuel generation. The rates have been unchanged since 1 April 2016: £0.00331 per kWh of gas, £0.05280 per kg of LPG and £1.54790 per GJ of coal.
Budget 2026 confirms that CPS rates will end in Great Britain from April 2028, removing "£18/tCO2e on fossil-fuel powered electricity generation" to bring down energy bills.
The Climate Change Levy
Businesses pay the main rates of the Climate Change Levy through their energy bills. Supplies to domestic users, and to charities for non-business use, are not charged. The main rates from 1 April 2026 are:
| Commodity | Main rate from 1 April 2026 | From 1 April 2027 | Discount with a climate change agreement |
|---|---|---|---|
| Electricity | £0.00801 per kWh | £0.00827 per kWh | 92% |
| Gas | £0.00801 per kWh | £0.00827 per kWh | 89% |
| LPG | £0.02175 per kg | £0.02175 per kg | 77% |
| Other taxable commodities (e.g. coal) | £0.06264 per kg | £0.06468 per kg | 89% |
Worked example. A manufacturer uses 500,000 kWh of electricity in 2026/27. The levy is 500,000 × £0.00801 = £4,005. With a climate change agreement, the 92% discount leaves it paying 8%, or £320.40.
Budget 2026 announced that the main rates on electricity and LPG will be frozen from April 2028 at their 2027-28 levels, while the rates on gas and solid fuels will rise in line with RPI.
The UK carbon border adjustment mechanism
From 1 January 2027 the UK CBAM charges a carbon price on imports of aluminium, cement, fertilisers, hydrogen, and iron and steel. Importers must register if they import £50,000 or more of these goods in a rolling 12 months, or expect to within 30 days. Rates by sector are published at the start of each quarter and reflect the effective UK ETS carbon price. Budget 2026 announced country-specific default values from 2029 and an intention, subject to consultation, to add refined products. Our UK CBAM guide covers registration, returns and payment in detail.
What it means for your business
Most small businesses meet carbon pricing only through the Climate Change Levy on their energy bills. Energy-intensive manufacturers, generators, airlines, shipping operators and importers of CBAM goods face direct obligations and real costs. Those costs feed into pricing, budgets and, increasingly, climate disclosures. See our guides to ESG reporting and TCFD reporting.
Acumon's ESG assurance team provides assurance on emissions data and climate reporting, and our business tax advisers help importers and energy-intensive businesses model the cost of the levy and CBAM.