© Bloomberg The National Audit Office (NAO) has said it is difficult to assess how much the UK’s Emissions Trading Scheme (ETS) has incentivised emissions reductions across sectors the scheme covers.
Moreover, the relatively low price of carbon set by the scheme may have limited incentives for industry adoption of low-carbon technologies, the NAO said in its latest report, and could undermine the extent to which the ETS limits future emissions.
The UK ETS was launched in 2021, replacing the country’s participation in the European Union ETS after it exited the EU. The scheme involves setting a cap on the level of emissions that participants are allowed to emit over a given period.
Participants in the scheme can trade allowances in order to account for their emissions, which in turn sets a price on the carbon dioxide (CO2) they emit.
In its report released on June 30, the UK’s public spending watchdog described the UK ETS as a “key policy instrument for achieving net zero by 2050”, aimed at reducing emissions in a cost-effective way.
The scheme covers three sectors – industry, aviation and power generation. Across the three sectors, CO2 emissions are reported to have fallen by 11m tonnes from 108m tonnes to 97m tonnes between 2021 and 2023. However, the NAO said it was difficult to conclude whether the reduction can be attributed to participation in the scheme.
The reduction was mainly attributed to falling emissions across the power sector as it moved away from more carbon-intensive fuels such as coal to lower-carbon alternatives including natural gas and biofuels.
The power sector also decarbonised because of interventions such as government subsidies for renewables, the NAO noted, adding that a downturn in economic activity in the sectors covered by the ETS may have also contributed to a reduction in emissions.
The power sector’s emissions fell by 23% from 48.2m tonnes of CO2 in 2022 to 37m tonnes in 2023. Meanwhile, emissions from the industrial sector fell by 6.9% year on year to 51m tonnes, but emissions from aviation increased from 7.8m tonnes in 2022 to 8.8m tonnes in 2023, up by 13%.
The NAO said uncertainty about future carbon-reduction technologies was the most commonly cited barrier to cutting emissions in the 2023 evaluation of the ETS. Respondents pointed to the fact that technology for large-scale emissions reductions were at an early stage of development.
Some industrial sector respondents told the NAO that, in the absence of available technologies and wider government-led infrastructure provision, they would have few options for decarbonising in the future.
Expansion plans
The NAO’s report comes as the government prepares to expand the ETS. In 2024, the scheme had 490 participants from the industry sector, 387 from aviation and 191 from power generation, for a total of 1,068 participants.
The Department for Energy Security and Net Zero (DESNZ) has estimated that the three sectors in the scheme covered around 25% of total UK greenhouse gas (GHG) emissions in 2023. The government intends to expand the scheme to the maritime sector in 2026 and energy from waste in 2028 in an effort to capture more emissions and increase decarbonisation across the UK economy.
At the end of May 2025, the UK carbon price was £50 per tonne of CO2 while in the EU ETS it was £60. The NAO noted that, while the UK carbon price exceed that in the EU in 2022, it fell below its EU counterpart in January 2023 and has remained lower since. And this relatively lower price may be reducing incentives for participants to invest in low-carbon technologies, the NAO found.
The watchdog pointed to the Climate Change Committee (CCC) advising the government in November 2024 that the carbon price during H1 2024 had been significantly lower than the cost of many decarbonisation measures in the sectors that the scheme covers. The CCC stated at the time that the scheme alone does not provide sufficient incentive for these decarbonisation measures to be deployed.
The NAO concluded that a greater understanding of the scheme’s impact on investment in low-carbon technologies would help DESNZ make better plans for how the ETS will work alongside other policies in achieving future emissions reductions.
In line with this, one of its recommendations is that the UK ETS Authority – consisting of the UK, Scottish and Welsh Governments and Northern Ireland Department of Agriculture, Environment and Rural Affairs – should collect evidence on the type and value of investment in low-carbon technologies made by the scheme’s participants.
This would include the extent to which such investment has been driven by the carbon price. These findings can then be used to help inform the authority’s understanding of the future path of emissions reductions, the NAO said.
“After the successful transition from the EU cap and trade scheme, the scheme has encouraged green investment and decarbonisation in some key sectors,” stated the NAO’s head, Gareth Davies. “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.”
