The government has published guidance on the UK’s participation in the EU Emissions Trading System (EU ETS) in the event of a “no-deal” Brexit. In summary, the UK would be excluded from participating in the EU ETS and, therefore, would no longer be required to surrender EU allowances. However, the UK government intends to maintain the monitoring, reporting, and verification elements, for the purposes of continuity.
The EU ETS places a limit on the amount of CO2 that can be emitted by energy-intensive installations across Europe. EU Allowances (EUAs) equal to the CO2 cap are issued each year, the majority of which are sold at auction. At the end of each year, installations must surrender allowances equal to their emissions, thereby maintaining an overall limit on emissions and placing a value on CO2. A higher carbon price encourages investment in low-carbon generation and technologies
The government has already brought forward the EU ETS compliance deadline for the 2018 year, to allow for the possible eventuality of a “no-deal” Brexit on 29th March 2019. Instead, installations will report their emissions and surrender allowances in mid-March.
Under a “no-deal” scenario, carbon pricing will initially be addressed via the tax system from 2019. The UK already has a carbon price floor (CPF) in place that was originally introduced as a top-up to EUAs, the price of which has long been considered too low to bring about meaningful carbon abatement. In the 2017 Budget, the government referred to the “total carbon price” of the CPF combined with the EUA price being set at the right level. However, the price of EAUs has since risen from €6/tCO2 to around €21/tCO2, while the CPF remains set at £18/tCO2. The UK government will publish more details of how it would initially apply a carbon price in a “no deal” scenario in its 2018 Budget on 29th October.
If there is a Brexit deal, expectations are that the UK will remain in the EU ETS until at least 2020. Carbon taxes ultimately feed through to the end consumer, with the level being dependent upon the carbon intensity of generation and production.