New report: The changing face of carbon costs in 2026
Carbon costs for power generators remain an important factor in power price formation across the UK and Europe. Fuel and carbon costs are driven by market influences such as supply and demand. However, where this is driven by global realities for fuels, carbon supply and demand are heavily influenced by policy. A turbulent commodity landscape means carbon allowances are facing policy pressures balanced against climate commitments. Should policies shift, they can have a significant impact on power costs and competitiveness.
Our latest paper explores how carbon costs are changing in 2026, and what recent developments in UK and EU Emissions Trading Schemes (ETSs) could mean for organisations operating in these regions.
Carbon and the cost of power
Power prices are set by short-run marginal power costs, which are calculated based on fuel costs, plant efficiency, and carbon costs. Where emissions are priced, changes to carbon policy can quickly feed through to wholesale electricity prices.
Europe continues to experience relatively high power costs, creating economic and political pressure. Recent geopolitical developments, including conflict in the Middle East, have added further volatility. This has increased scrutiny of how carbon markets work and split European opinion on whether current approaches strike the right balance between decarbonisation and competitiveness.
Unlike fuel prices, carbon costs are shaped by emissions targets, free allowances, and political decisions. That makes them exposed to reform - and sensitive to changing political sentiment.
Policy change on both sides of the Channel
Both the UK and EU Emissions Trading Schemes (ETS) are entering a period of change. In 2025, the UK and EU confirmed their intention to link the two markets, potentially improving liquidity and reducing carbon leakage.
At the same time, rising concern from EU member states about the impact of carbon prices on industry has driven debate around free allowances and market flexibility. These political signals have already influenced carbon prices during 2026.
In the UK, the Government has announced the removal of the Carbon Price Support levy from 2028, reflecting stronger pricing signals within the UK ETS and wider ambitions to align with the EU scheme.
What happens next
Further reform is expected, including an EU ETS review due this week (w/c 13 July 2026) and ongoing discussions around Carbon Border Adjustment Mechanisms and carbon removals.
Together, these developments point to a carbon market that is evolving quickly and playing a significant role in energy costs.
Download the full paper
The full paper explores these changes in more detail, covering recent policy announcements, market reactions, and upcoming milestones.
Download "The changing face of carbon costs in 2026" to read the full analysis.
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