Key points The lateral habenula (LHb) has been implicated in regulation of drug‐seeking behaviours through aversion‐mediated learning. In this study, we recorded neuronal activity in the LHb of rats during an operant task before and after ethanol‐induced conditioned taste aversion (CTA) to saccharin. Ethanol‐induced CTA caused significantly higher baseline firing rates in LHb neurons, as well as elevated firing rates in response to cue presentation, lever press and saccharin taste. In a separate cohort of rats, we found that bilateral LHb lesions blocked ethanol‐induced CTA. Our results strongly suggest that excitation of LHb neurons is required for ethanol‐induced CTA, and point towards a mechanism through which LHb firing may regulate voluntary ethanol consumption. Abstract Ethanol, like other drugs of abuse, has both rewarding and aversive properties. Previous work suggests that sensitivity to ethanol's aversive effects negatively modulates voluntary alcohol intake and thus may be important in vulnerability to developing alcohol use disorders. We previously found that rats with lesions of the lateral habenula (LHb), which is implicated in aversion‐mediated learning, show accelerated escalation of voluntary ethanol consumption. To understand neural encoding in the LHb contributing to ethanol‐induced aversion, we recorded neural firing in the LHb of freely behaving, water‐deprived rats before and after an ethanol‐induced (1.5 g kg−1 20% ethanol, i.p.) conditioned taste aversion (CTA) to saccharin taste. Ethanol‐induced CTA strongly decreased motivation for saccharin in an operant task to obtain the tastant. Comparison of LHb neural firing before and after CTA induction revealed four main differences in firing properties. First, baseline firing after CTA induction was significantly higher. Second, firing evoked by cues signalling saccharin availability shifted from a pattern of primarily inhibition before CTA to primarily excitation after CTA induction. Third, CTA induction reduced the magnitude of lever press‐evoked inhibition. Finally, firing rates were significantly higher during consumption of the devalued saccharin solution after CTA induction. Next, we studied sham‐ and LHb‐lesioned rats in our operant CTA paradigm and found that LHb lesion significantly attenuated CTA effects in the operant task. Our data demonstrate the importance of LHb excitation in regulating expression of ethanol‐induced aversion and suggest a mechanism for its role in modulating escalation of voluntary ethanol intake.