UK Carbon Markets in 2026: Prices, Policy, and the Road to Net Zero

Key Takeaways

• UK ETS allowance prices have stabilised in the £40–£55 range through 2026, significantly below EU ETS prices of €65–€75, reflecting a smaller, less liquid market
• The UK ETS Authority’s net zero consistent cap pathway will reduce the overall emissions cap by approximately 45% between 2024 and 2030, progressively tightening allowance supply
• The Market Stability Mechanism (MSM), which replaced the Cost Containment Mechanism in 2024, provides a rules-based approach to managing allowance oversupply and price volatility
• The voluntary carbon market is being reshaped by ICVCM’s Core Carbon Principles and VCMI’s Claims Code, raising quality standards and changing how companies use carbon credits
• Internal carbon pricing is increasingly adopted by UK companies as a strategic tool, even where not required by regulation

UK ETS Price Trends: 2024–2026

Since the UK ETS launched in January 2021, allowance prices have experienced significant volatility. After a turbulent first two years, prices have settled into a more stable pattern:

• 2024: Prices ranged from £32 to £48, with the new Market Stability Mechanism beginning to address the inherited surplus of allowances from the EU ETS transition
• 2025: Prices firmed to £38–£52 as the net zero consistent cap came into effect and sector expansions (aviation phase-out of free allocation, maritime MRV) were confirmed
• 2026: Prices have stabilised in the £40–£55 range, supported by tightening supply, maritime sector inclusion, and waste incineration expansion

The persistent price gap with the EU ETS (€65–€75, equivalent to approximately £55–£64) reflects fundamental differences: the UK market is approximately one-tenth the size of the EU ETS, with lower liquidity, fewer financial participants, and a different mix of covered sectors.

The Net Zero Consistent Cap

The UK ETS Authority (comprising DESNZ, the Scottish Government, Welsh Government, and DAERA) published the net zero consistent cap pathway in 2023, setting the trajectory for total allowance supply through 2030. Key features:

• The cap reduces from approximately 150 MtCO₂e in 2024 to approximately 83 MtCO₂e in 2030 — a reduction of approximately 45%
• Annual reductions are linear, providing predictability for investment planning
• Free allocation is being phased down in parallel, with the overall proportion of free allowances declining from approximately 40% to approximately 25% by 2030
• Sector-specific free allocation benchmarks are tightened to reflect best-available technology performance

The cap trajectory implies progressively higher allowance prices as supply tightens. Most market analysts project UK ETS prices of £60–£90 by 2030, assuming the cap is maintained without relaxation.

Market Stability Mechanism

The MSM replaced the ad hoc Cost Containment Mechanism (CCM) in 2024, providing a rules-based framework for managing market conditions:

• Supply adjustment: If the Total Number of Allowances in Circulation (TNAC) exceeds defined thresholds, auction volumes are automatically reduced, withdrawing surplus allowances from the market
• Price floor and ceiling: The MSM includes indicative price corridors (not hard floors/ceilings) that trigger consultation on market intervention if breached
• Transparency: TNAC data and MSM parameters are published annually, giving market participants visibility of supply adjustments

The MSM is designed to prevent the extreme oversupply that plagued the EU ETS in its early years and to ensure UK ETS prices remain consistent with the net zero trajectory.

Voluntary Carbon Markets: Quality and Credibility

The voluntary carbon market (VCM) is undergoing a credibility transformation, driven by two key initiatives:

ICVCM Core Carbon Principles (CCPs)

The Integrity Council for the Voluntary Carbon Market published its Core Carbon Principles and Assessment Framework, establishing a quality benchmark for carbon credits. CCP-eligible credits must demonstrate:

• Additionality: The emission reduction or removal would not have occurred without carbon credit revenue
• Permanence: For removal credits, the carbon must be stored for at least 40 years with monitoring and risk mitigation
• Robust quantification: Conservative baseline setting and credible measurement methodology
• No double counting: Credits must not be claimed by both the buyer and the host country under Paris Agreement Article 6

VCMI Claims Code

The Voluntary Carbon Markets Integrity Initiative published its Claims Code, defining how companies can credibly use carbon credits in their climate claims. The three-tier system (Silver, Gold, Platinum) requires companies to:

• Have validated near-term SBTi targets and be on track to meet them
• Use carbon credits to complement, not replace, internal emission reductions
• Disclose credit purchases, types, and volumes transparently

Article 6: Paris Agreement Carbon Markets

The UK government has been actively pursuing bilateral agreements under Article 6.2 of the Paris Agreement, which allows countries to trade emission reduction outcomes (Internationally Transferred Mitigation Outcomes, or ITMOs). The UK’s approach:

• Focus on high-integrity bilateral agreements with developing countries
• Corresponding adjustments to ensure no double counting between the seller’s NDC and the UK’s climate targets
• Potential use of Article 6 credits for compliance purposes in future UK ETS reviews, though this is not currently permitted

Internal Carbon Pricing

Beyond compliance and voluntary markets, internal carbon pricing (ICP) is increasingly used by UK companies as a strategic decision-making tool:

• Shadow pricing: Applying a hypothetical carbon cost to investment appraisals to test the climate resilience of capital expenditure decisions
• Internal carbon fees: Charging business units an internal carbon fee based on their emissions, with revenue ring-fenced for decarbonisation projects
• Scenario pricing: Using multiple carbon price scenarios (aligned with different temperature pathways) to stress-test business plans

Companies using ICP should align their internal price with UK ETS price projections and net zero pathways. A shadow price of £60–£100 per tonne is typical for 2030 investment appraisals.

Implications for Corporate Carbon Strategy

• Budget for rising compliance costs: UK ETS prices will rise as the cap tightens. Build this into long-term financial planning and capital allocation
• Prioritise internal abatement: At £40–£55 per tonne, many energy efficiency and fuel-switching measures are already cheaper than buying allowances. As prices rise, more abatement options become economically viable
• Be selective about voluntary credits: Only purchase CCP-eligible credits from reputable registries, and ensure your claims comply with the VCMI Claims Code
• Adopt internal carbon pricing: Even if not required by regulation, ICP helps embed climate costs in business decisions and prepares the organisation for higher future carbon prices
• Monitor Article 6 developments: If the UK permits Article 6 credits for ETS compliance in future, this could create new opportunities (and complexities)

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