Carbon Taxation and The Deliberate Restructuring of the British Economy

The escalating cost of energy in the United Kingdom is not the consequence of market failure, fuel scarcity, or technological limitation. It is the direct result of deliberate policy design. Over the past two decades, successive governments have embedded carbon taxation into every layer of the energy system, fundamentally altering price formation and reshaping industrial viability.

Carbon pricing in the UK operates through multiple overlapping mechanisms: the UK Emissions Trading Scheme (UK ETS), the Carbon Price Support (CPS) levy applied to fossil-fuel generation, and a range of policy-driven charges embedded in electricity pricing structures. Together, these instruments have transformed energy from a production input into a fiscal lever.

According to the Office for Budget Responsibility, environmental levies now represent a substantial and rising component of total energy costs, with carbon pricing alone accounting for a material share of wholesale electricity prices during periods of normal operation[^1]. Analysis by the UK Energy Systems Catapult and the Institute for Fiscal Studies confirms that these policy-driven costs, rather than fuel scarcity, explain much of the divergence between UK and international electricity prices[^2][^3].

This distortion is especially evident in gas-fired power generation. While the underlying commodity cost of gas fluctuates, the total price paid by generators increasingly reflects carbon taxation and compliance costs.

Independent modelling indicates that during recent periods, between 40% and 60% of the marginal cost of gas-fired electricity in the UK derived not from fuel, but from carbon pricing and associated policy charges[^4].

This has profound consequences. Gas remains the marginal price-setter in the UK electricity market, meaning that its artificially inflated cost determines the wholesale price for all generators, including renewables. Wind and solar power therefore appear “cheap” not because they are intrinsically low-cost but because the benchmark against which they are measured has been deliberately inflated.

This dynamic is routinely obscured in official communications. Levelised Cost of Energy (LCOE) metrics, widely cited by government and regulators, exclude system balancing, grid reinforcement, backup capacity, and curtailment costs. All of which rise sharply as intermittent generation expands. Studies by the International Energy Agency and the UK National Audit Office confirm that these system-level costs are material and rising, yet remain absent from headline price comparisons[^5][^6].

The economic consequence is the systematic erosion of Britain’s energy-intensive industrial base. Sectors such as steel, chemicals, fertilisers, cement, and refining depend on stable, competitively priced energy.

When electricity prices rise far above international benchmarks , as they now do in the UK , these industries become unviable.
Data from the International Energy Agency and Eurostat show that UK industrial electricity prices are consistently among the highest in the developed world, often double those in the United States, where energy policy prioritises supply security over carbon pricing[^7]. This disparity has driven the closure or offshoring of major industrial facilities, including steelworks, chemical plants, fertiliser production, and refining capacity.

The economic outcome is not decarbonisation but displacement. Emissions are not eliminated; they are exported. Production shifts to jurisdictions with weaker environmental standards and higher carbon intensity, while the UK records an artificial improvement in territorial emissions. This phenomenon, known as carbon leakage, is widely acknowledged in academic literature and by the European Commission itself as a structural flaw in unilateral climate policy[^8].
The consequences extend beyond economics. The erosion of domestic industrial capacity undermines energy security, weakens supply chains, and increases vulnerability to global shocks. It also undermines the very technologies required for decarbonisation, from steel and cement for infrastructure to chemicals for batteries, insulation, and grid equipment.
In this context, carbon taxation functions not as an environmental safeguard but as an instrument of economic restructuring. It selects winners and losers, privileges financialised and service-based activities over productive industry, and shifts national policy away from resilience toward dependency.

This is not a market outcome.

It is the predictable result of policy design.
Unless carbon pricing is fundamentally re-evaluated , not merely adjusted at the margins , the UK will continue to lose industrial capacity, import emissions rather than reduce them, and weaken its economic sovereignty under the guise of climate leadership.
References:-
Office for Budget Responsibility, Economic and Fiscal Outlook, multiple editions (2019–2024).
UK Energy Systems Catapult, Electricity System Costs and Carbon Pricing Analysis, 2022.
Institute for Fiscal Studies, Energy Prices, Policy Costs and Distributional Impacts, 2023.
National Grid ESO, Balancing Services Use of System Charges and Market Operation Reports, 2021–2024.
International Energy Agency, World Energy Outlook and Electricity Market Report, various years.
National Audit Office, Decarbonising Power: Progress and Challenges, HC 298, 2023.
International Energy Agency, Electricity Prices for Industry, OECD Database, 2023.
European Commission, Carbon Leakage and the EU ETS, Staff Working Document, 2021.