United kingdom Carbon Dioxide Market Share, Growth & Trends | 2034

The United Kingdom Carbon Dioxide Market Size operates primarily under the UK Emissions Trading Scheme (UK ETS), which was introduced post-Brexit to replace the UK’s participation in the EU Emissions Trading System (EU ETS).

Business Jan 28, 2025 9 Add to Reading List

United kingdom Carbon Dioxide Market Share, Growth & Trends | 2034

Market Overview

The United Kingdom Carbon Dioxide Market Size operates primarily under the UK Emissions Trading Scheme (UK ETS), which was introduced post-Brexit to replace the UK’s participation in the EU Emissions Trading System (EU ETS). The UK ETS is a cap-and-trade system, setting a limit on the total greenhouse gas emissions that can be emitted by certain industries and sectors. Companies operating within these sectors are required to either reduce their emissions or purchase allowances to cover their excess emissions.

As the UK moves toward its net-zero targets, the carbon dioxide market is becoming a crucial tool in regulating emissions and fostering a transition to greener technologies. In 2024, the UK CO2 market reached a volume of 725.80 KMT (thousand metric tons) and is projected to continue growing with a CAGR of 1.50% from 2025 to 2034. By 2034, the market is expected to reach 842.32 KMT.

The United Kingdom (UK) is committed to reducing its carbon emissions to achieve net-zero by 2050, and its carbon dioxide (CO2) market plays an essential role in this transition. This article examines the key driving factors of the UK CO2 market, its current state, trends, growth projections, and the challenges and opportunities on the horizon.

Driving Factors

Several key factors are driving the growth and evolution of the UK carbon dioxide market:

Government Climate Policies: The UK’s ambitious climate goals, particularly the commitment to reaching net-zero emissions by 2050, are a major driver for the carbon dioxide market. Legislation like the Climate Change Act 2008 has set legally binding emission reduction targets, which have created a demand for effective carbon pricing mechanisms such as the UK ETS.
Technological Innovation: The rise of green technologies, particularly carbon capture, utilization, and storage (CCUS), renewable energy, and electric vehicles, is driving demand for carbon allowances. These innovations are crucial in reducing emissions across industries and contribute to the market’s expansion.
Corporate Sustainability Goals: Many businesses are seeking to reduce their carbon footprints to align with sustainability goals and attract environmentally-conscious consumers. This has led to greater participation in the carbon market as companies invest in emissions reduction measures and purchase carbon allowances to meet their targets.
Global Climate Trends: As global awareness of climate change increases, international pressure on governments to take action has escalated. This has pushed the UK to implement stronger policies and a more aggressive carbon pricing framework to meet global climate commitments.

Market Outlook

The UK carbon dioxide market is expected to experience steady growth in the coming years. As the UK tightens its carbon cap, the demand for carbon allowances will rise, driven by increased regulatory pressure and a growing number of industries striving to meet emissions reduction targets. With a projected CAGR of 1.50% from 2025 to 2034, the market is set to grow from a volume of 725.80 KMT in 2024 to 842.32 KMT by 2034.

The market’s long-term outlook depends on various factors, including continued innovation in low-carbon technologies, evolving government policies, and international cooperation on carbon pricing. The integration of the UK ETS with global carbon markets, such as the European Union Emissions Trading System (EU ETS), could further strengthen the market and provide businesses with greater flexibility in managing emissions.

Market Growth

As the UK moves toward its net-zero target, the CO2 market will continue to grow. The market’s growth is supported by:

Tightening of Emission Caps: The UK government has gradually reduced the number of carbon allowances available, creating scarcity and driving up the price of carbon credits. This will continue to incentivize businesses to reduce emissions.
Increased Participation from Various Sectors: While the energy and industrial sectors are the primary participants in the UK ETS, there is potential for more sectors, including transportation and agriculture, to be included. This expansion will drive further growth in the market.
Technological Advancements: As businesses invest in new technologies such as renewable energy and energy-efficient solutions, demand for carbon allowances will increase. Additionally, industries like CCUS will continue to grow as they play a critical role in decarbonizing difficult-to-abate sectors.
Carbon Border Adjustments: Future policies like carbon border adjustments may help shield UK industries from carbon leakage (where companies move operations to countries with looser regulations). This could further stabilize the market and support growth.

Market Trends

Several trends are emerging in the UK carbon dioxide market that indicate the future direction of the market:

Increased Investment in Low-Carbon Technologies: Companies are increasingly investing in technologies such as renewable energy, CCUS, and electric vehicles. This trend is driven by both the need to reduce emissions and the financial incentives offered by the UK ETS.
Market Integration and Global Collaboration: There is growing interest in linking the UK ETS with other carbon markets, such as the EU ETS. This would allow for greater flexibility, efficiency, and liquidity in the market, providing businesses with more opportunities to manage their emissions.
Carbon Offset Mechanisms: With the growing focus on carbon neutrality, businesses are looking at carbon offset programs to mitigate their emissions. The use of carbon credits and offsets is expected to expand, giving companies an additional tool to meet their targets.
Public and Investor Pressure for Sustainability: There is increasing pressure from the public and investors for businesses to prioritize sustainability. As a result, more companies are actively participating in the carbon market to meet their environmental, social, and governance (ESG) goals.

Key Insights into the UK Carbon Dioxide Market

While the UK carbon dioxide market is on an upward trajectory, there are several insights to consider for stakeholders in the market:

Price Volatility: The carbon price can fluctuate due to various factors such as supply-demand imbalances, political decisions, and external economic events. This volatility can present challenges for businesses planning long-term investments.
Carbon Leakage Concerns: As carbon pricing increases, some industries may consider relocating to countries with less stringent carbon regulations, a phenomenon known as carbon leakage. The UK must address this challenge through measures like carbon border adjustments to prevent a shift in industrial activity to lower-regulation countries.
Emissions Allowance Allocation: The method by which allowances are allocated (whether through free allocations or auctions) will have a significant impact on the market. A shift toward greater auctioning could increase market liquidity and allow for a more transparent carbon pricing mechanism.
Cross-Sector Collaboration: The success of the UK carbon market hinges on cooperation between businesses, government, and technology developers. The ability to integrate various sectors and scale innovative solutions will be key to achieving the country’s ambitious climate goals.