Carbon Taxation and Climate Policy in the United Kingdom: The Coverage Problem in UK Net-Zero Policy Architecture (Published)
The United Kingdom has committed to achieving net-zero greenhouse gas emissions by 2050, with carbon pricing positioned as a central policy instrument. However, recent emissions outcomes reveal a pronounced asymmetry: sectors covered by emissions trading have achieved substantial reductions, while non-ETS sectors accounting for around 75% of territorial emissions have shown limited progress. Using verified UK ETS emissions data (2021–2024) and territorial greenhouse gas statistics, this paper shows that the effectiveness of carbon pricing is closely constrained by features of policy architecture, including limited sectoral coverage (around 25% of emissions), fragmented fiscal incentives, and structural inconsistencies in energy taxation. We identify an ‘electrification penalty’ embedded in the Climate Change Levy, whereby electricity faces higher effective carbon taxation than fossil fuels despite its lower carbon intensity. To characterise this distortion, we introduce the Electrification Penalty Index (EPI), which illustrates how the UK tax system inadvertently discourages electrification. The analysis shows that, despite high nominal carbon prices (£50–60/tCO₂), the UK’s policy architecture generates sharply divergent incentive regimes: investment-grade price signals in ETS sectors alongside near-zero effective carbon prices in transport, buildings, and small businesses. This coverage asymmetry represents one of the central constraints on UK decarbonisation. We conclude that achieving net-zero will require systematic reform of policy architecture, including extending ETS coverage, harmonising effective carbon prices through Climate Change Levy reform, implementing border carbon adjustments, and deploying targeted complementary measures where pricing alone proves insufficient.
Keywords: Carbon taxation, UK ETS, climate policy, coverage asymmetry, effective carbon prices, electrification penalty, net-zero transition, policy architecture, policy design