The UK Government has officially acknowledged the initiation of Phase II of the UK Emissions Trading Scheme (UK ETS), which will span from 2031 to 2040. This announcement follows the Authority’s consultation response on extending the ETS cap beyond 2030 and its review of the Future Markets Policy.
The Authority stated, “A 10-year phase will ensure that market signals remain consistent, facilitating strategic planning and long-term investments necessary for decarbonization efforts in the future.” Furthermore, the UK is expected to advance its potential connections with the EU ETS. With the extension of the Auction, the Government will continue to implement the new policy measures announced in September, designed to enhance inflation protection and align with price stability measures, thereby reinforcing the credibility of the carbon price signal.
Beginning in 2026, the Auction Reserve Price will rise from £22 to £28, with annual increases thereafter in line with inflation to maintain the price’s real value. The Cost Containment Mechanism will remain unchanged, as the Authority has determined that existing protection measures are adequate.
Proposals for a quantity-based Supply Adjustment Mechanism have been rejected, as policymakers concluded that introducing additional structural instruments at this time would be inappropriate given ongoing discussions on the linkage between the UK and EU emissions trading systems. Tim Atkinson, Head of Carbon at CFP Energy, remarked that “These proposals… do not change the current view of the demand-supply balances,” indicating that there will be no alterations to the market’s operations.
These decisions have been made with careful consideration of the prevailing political and economic landscape. The UK and EU commenced collaborative efforts on their jointly structured emissions trading initiatives in May 2025, which necessitated the UK adopting EU free-allocation benchmarks by 2028 and aligning certain market design elements.
The Authority emphasized that the current reforms “reflect policy… proportionate to make at this stage to support an effective standalone market while negotiations to link the UK and EU ETS are ongoing.” As the UK ETS enters its next phase, there will be a sustained focus on how domestic changes and potential future linkages will influence long-term competitiveness, market stability, and the decarbonization of the UK economy.