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.

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.

  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.

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  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.

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  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.

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