This paper intends to examine the cost effectiveness of UK's climate change levy (CCL), its implications on competitiveness of firms and the environmental impact. The paper briefly describes the levy and analyses it under the cannons of a good taxation policy. The economic implications of the levy are discussed with theoretical and empirical perspectives. Change in net exports, investment patterns and productivity and inclusion of compliance cost forms the basis for analysing the effect on competitiveness. It discusses the options available to firms to safeguard their competitiveness if it is adversely affected by the CCL. A description of the current scenario of the levy since its inception is also presented. The paper argues the need for a comprehensive policy involving the use of standards, emission trading as well as energy taxes to achieve emission and energy-use reductions. A focal point of this paper is to elucidate the pros and cons of the CCL (energy tax) with respect to an emission trading scheme.