The Future of Carbon Pricing in the UK

           Carbon and Climate

The Committee on Climate Change (CCC), which advises the UK government on climate issues, has given its view on the future of carbon pricing in the UK to the Department for Business, Energy and Industrial Strategy (BEIS). Carbon pricing today mainly exists in two forms: direct carbon taxation or emissions trading. The UK uses both. However, following Brexit, UK participation in the European Union Emissions Trading System (EU ETS) is uncertain. The EU ETS is a major component of carbon pricing in the UK, covering a quarter of its emissions. BEIS has indicated it prefers the UK to continue to participate in the EU ETS, possibly through an EU-linked UK ETS.

The CCC supports continued participation in European emissions trading because access to the wider market supports competition. While the EU ETS was questionably effective during its early years and the economic crisis because of a glut of allowances, it is likely to have significantly reduced emissions in the power and industrial sectors more recently. The CCC has warned, however, that maintaining an ambitious market cap is crucial to its continued success. An effective cap sends both short and long-term signals: contributing to the rapid phase-out of coal in the UK while influencing long-term investment decisions. Sectors in the UK covered by the EU ETS have decarbonised faster than they have in other countries, meaning its excess allowances flow abroad. While a net gain to the UK Treasury, the UK is less effective at fighting climate change in a system that allocates it excess emissions. Future allocations should consider the UK’s upcoming carbon budgets. The EU in 2019 started the Market Stability Reserve to maintain price signalling when supply and demand of allowances are mismatched. A UK ETS would have a similar mechanism but would face unique implementation challenges. While the EU ETS was gradually introduced to sectors that had never faced carbon price signals, a UK ETS would be introduced to sectors accustomed to price signalling for nearly 15 years.

The CCC also stresses that the government should not rely on carbon pricing alone for decarbonisation. Research and innovation require their own policy support and are where much of the work lies in developing carbon capture, a critical technology for meeting the 2050 net-zero target.

Nick Fedson MEng MSc

Nick is an analyst with an interest in energy, climate, and sustainability. Nick maintains both technical and policy interest in these areas, with an undergraduate background in mechanical engineering from the University of Bristol and a recently completed Master’s degree in Global Energy and Climate Policy from SOAS, University of London. He has completed internships in a solar energy consultancy in Brighton, a not-for-profit independent think tank in New Delhi, and in data analysis at a software company in Cambridge.