The UK risks losing up to £8 billion in government revenue over the next six years if it does not integrate its emissions trading scheme (ETS) with the EU’s, according to a new report by Frontier Economics.
Commissioned by major UK energy firms including Centrica, Drax, Equinor, National Grid, SSE and Uniper, the report highlights the financial implications of maintaining separate carbon markets post-Brexit.
The UK’s ETS, established after its withdrawal from the EU, operates on a cap-and-trade basis similar to the EU’s system.
This mechanism requires installations to acquire and surrender allowances equivalent to their greenhouse gas emissions, with allowances being tradeable.
Linking the UK and EU ETS would permit the use of EU allowances in the UK system and vice versa, promoting more efficient trade and reducing overall decarbonisation costs, analysts note.
Since early 2023, UK carbon allowance prices have significantly lagged behind those in the EU, potentially leading to a cumulative revenue loss of between £3.5 billion and £8 billion from 2025 to 2030 if the price gap persists, according to the report.
Since spring 2023, the price of UK ETS allowances has consistently been lower than that of EU ETS allowances, with the discount peaking at £31 per tonne of carbon dioxide in September 2023 and averaging £13 per tonne in June 2024.
The research also found that the upcoming EU Carbon Border Adjustment Mechanism, set to begin in 2026, could impose additional costs on UK exporters, who might have to pay up to £800 million into the EU budget due to the price differential.
