A carbon tax is a charge designed to put a financial cost on greenhouse gas emissions. It usually works by taxing fossil fuels or activities according to the amount of carbon dioxide or other greenhouse gases they produce.
The purpose of a carbon tax is to encourage businesses and other energy users to reduce emissions by making higher-carbon activities more expensive. This can create a financial incentive to use less energy, improve energy efficiency, switch to lower-carbon fuels or invest in cleaner technologies.
The UK does not currently have a single economy-wide tax officially called a carbon tax. Instead, several policies place a cost on carbon or carbon-intensive energy.
For example, many businesses pay the Climate Change Levy on electricity, gas and certain fuels. The UK Emissions Trading Scheme (UK ETS) also places a price on greenhouse gas emissions from covered sectors, although it operates as a cap-and-trade scheme rather than a carbon tax.
Carbon Price Support currently places an additional tax on fossil fuels used for electricity generation in Great Britain. However, the government has confirmed that it will be removed from April 2028 as the UK ETS has become the principal carbon-pricing mechanism for electricity generation.
From 1 January 2027, the UK’s Carbon Border Adjustment Mechanism (CBAM) will also introduce a tax on the embodied emissions of specified carbon-intensive goods imported into the UK.
Carbon taxes and other carbon-pricing mechanisms therefore use the cost of emissions as a way of encouraging businesses and industries to move towards lower-carbon activities.
