1063. Carbon pricing is the most cost-efficient way to support transition to net zero on an economy-wide scale. It is an instrument to capture the societal cost of greenhouse gas emissions and tie them to emitters through a price paid for the carbon emitted. This means the burden for carbon emissions is shifted to those who are responsible for emissions, incentivising them to reduce those emissions. As such, carbon pricing does not dictate who should reduce their emissions or how, but instead provides a price signal to emitters to decarbonise or pay for their emissions.756 By placing an adequate price on emissions, businesses are incentivised develop clean technologies, mobilising the financial investments required to stimulate green innovation and fuel low carbon drivers for economic growth.757 The UK Emissions Trading Scheme (ETS) is the UK's principal mechanism putting a price on carbon and functions as a cap-and-trade system where government sets an emissions cap and issues emissions allowances consistent with the cap. These emissions allowances can be bought and traded between participants.
1064. The UK has been a pioneer of emissions trading since 2002, establishing Europe's first emissions trading scheme as a pilot for the EU ETS.758 In 2021, to replace the EU ETS after leaving the EU, the UK ETS was established. The UK ETS currently covers power, heavy industry, and some of the aviation sector; around 25% of UK territorial emissions. For firms covered by the ETS, the carbon price informs decisions by individual businesses about whether it is more cost-effective to invest in decarbonising or to pay to continue emitting. It provides a long-term price signal that, when supported by complementary mechanisms, can deliver a stable investment case for decarbonisation, reduced fossil fuel consumption and optimised energy efficiency, and an incentive to develop the low-emission technologies needed to enable a thriving net zero economy.759 760 The Government recognised the cost effectiveness of carbon pricing in delivering decarbonisation in the 2021 Net Zero Review published by HM Treasury,761 and the UK ETS and the compliance carbon market remains central to achieving Net Zero by 2050.