The UK Emissions Trading Scheme (ETS) is a cap-and-trade scheme, where businesses bid for carbon allowances, with the number of allowances available (the cap) and demand setting the carbon clearing price at auction. Receipts collected by the government equal the auction price multiplied by the number of allowances sold. The UK ETS came into effect on 1 January 2021, when the transition period for the UK leaving the EU ended, replacing the UK’s participation in the EU ETS (from its introduction in 2005). In 2024-25, we estimate that UK ETS will raise £3.6 billion. This represents 0.3 per cent of all receipts and is equivalent to about £120 per household and 0.1 per cent of national income.
Emissions trading scheme (UK ETS)
This Forecast in-depth page has been updated with information available at the time of the March 2024 Economic and fiscal outlook. We are aware of a technical issue with our tableau charts across the site. Access the data from our March 2024 forecast supporting spreadsheets directly.
Recent trends and latest forecast
The charts below show tax receipts in both cash terms and as a share of national income (GDP), along with our March 2024 Economic and fiscal outlook (EFO) .
Receipts measured in cash terms are a simple metric for analysing trends over time. But without putting the cash amount into context – by asking how much national income is available to be taxed – interpreting changes in cash receipts is difficult, particularly over long time periods.
Trends in receipts as a share of GDP are useful to understand how they move in line with the underlying economic activity that is being taxed. In cash terms, both receipts and GDP will tend to rise over time because of economic growth and inflation. Receipts as a share of GDP is the most relevant metric when considering the sustainability of the public finances. Movements in this ratio can be thought of in two parts – movements in the tax base relative to national income (i.e. the number of permits auctioned, set by legislation) and changes in the effective tax rate (i.e. auction clearing price determined by the market).
Receipts between 2010-11 and 2018-19 have been fluctuating around £0.4 billion or 0.02 per cent of GDP driven by changes in the carbon price and the number of permits auctioned. Receipts as a share of GDP increased after 2018-19 as the carbon price increased from £5.1 per permit in 2017 to £21 per permit in 2020. The jump in receipts is recorded a year later than the jump in the carbon price because revenues are recorded when the permits are used (‘surrendered’), not when they are bought in auctions. Receipts as a share of GDP increased fourfold between 2020-21 and 2022-23 driven by a sharp rise in carbon price which increased from £21 per permit in 2020 to £73 per permit in 2022. Receipts as a share of GDP are forecast to fall sharply, mainly due to a large fall in carbon price (to £35 in 2024) and a reduction in the number of permits over the forecast period.
More details on the emissions trading scheme can be found in Box 3.2 of Working Paper 18 ‘Emissions and our tax ’.
Forecast methodology
Forecast process
The OBR commissions forecasts of emissions trading scheme receipts from HM Revenue & Customs for each fiscal event. These are scrutinised in a challenge process that typically involves two rounds of meetings where HMRC analysts present forecasts to the Budget Responsibility Committee and OBR staff. This process allows the BRC to refine the assumptions and judgements that underpin the forecasts before they are published in our Economic and fiscal outlooks (EFOs).
Forecasting models
For UK ETS, both the quantity of permits auctioned and the price per permit are forecast outside of the model. The model multiplies them together to arrive at its revenue forecast.
In addition to the UK ETS, we also forecast revenues gained from the Northern Ireland EU ETS (NI EU ETS). This is done in similar model, with an additional calculation for the Euro / Sterling exchange rate in the NI EU ETS, as auction revenues are received in euros.
Main forecast judgements
The most important judgements in our emissions trading scheme model are related to the number of permits being auctioned off and the carbon price.
- The number of permits the Government is planning to auction off (the tax base) is determined by the auctions schedule. The auction schedule represents the central expectation of future auction quantities by the Department for Energy Security and Net Zero (DESNZ) and since July 2023 is in line with the overall emissions cap consistent with the Government’s wider ambitions on Net Zero.
- The carbon price (the tax rate) is the price of a single ETS permit allowing the emission of one ton of CO2 equivalent. The forecast uses the settlement price of futures contracts for ETS permits in the first two years and assumes that the price remains flat in nominal terms after this point.
Previous forecasts
Before 2019-20, receipts were consistently below forecast due to lower-than-expected carbon prices. Since 2018, carbon prices have been rising significantly, reaching £73 per permit in 2022 compared to £5.1 per permit in 2017, as a result, receipts significantly exceeded our forecasts.
Policy measures
Since our first forecast in June 2010, governments have announced several policy measures affecting our forecast for ETS receipts. The original costings for these measures are contained in our policy measures database and were described briefly in the Treasury’s relevant Policy costings document. For measures announced since December 2014, the uncertainty ranking that we assigned to each is set out in a separate database. For those deemed ‘high’ or ‘very high’ uncertainty, the rationale for that ranking was set out in Chapter 3 (previously Annex A) of the relevant EFO. These policy costings include:
- In Spring Budget 2021, the Government announced the end of the UK’s direct participation in the EU Emissions Trading Scheme and the start of the replacement, standalone UK Emissions Trading Scheme. Northern Ireland remained in the EU ETS with revenues being paid to HM Treasury.
- In Autumn Budget 2023, the Government confirmed the reduction in ETS permits available to purchase and extended the scheme to cover emissions from domestic maritime and energy from waste from 2026 and 2028, respectively.