Extending the UK Emissions Trading Scheme to heating and road transport fuels what role can it play in decarbonising the UK economy?

The UK Emissions Trading Scheme (ETS) entered into operation on 1 January 2021, following the country’s departure from the European Union’s ETS. It is the primary policy to directly reflect the cost of emissions and is integral to achieving the UK’s net zero target. This report focuses on the potential role the UK ETS could have alongside existing policies were it to be expanded to cover the domestic heating and road transport sectors, two sectors that are hard to decarbonise. The report aims to inform government criteria for assessing UK ETS expansion, including practicality, suitability and distributional impacts across different income groups. The authors have modelled the impact of extending the UK ETS to heating, road transport, and to a combination of both sectors, using illustrative carbon prices of £40/tCO2 (low) and £80/tCO2 (high), to show how different carbon prices may affect emissions from domestic heating and road transport, economic growth, inflation and household consumption. The model also considers an option in which revenues raised from the UK ETS extension are redistributed to households and firms in order to at least partially offset disproportionally greater effects on lower income households.