The Department for Business, Energy and Industrial Strategy (BEIS) has issued an update to its technical note for carbon pricing in the UK. It describes a Carbon Emissions Tax that would apply if the UK were to leave the EU without a deal.
The tax would apply to existing participants in the EU Emissions Trading Scheme (EU ETS). The EU ETS prices carbon by capping emissions within high-carbon sectors and permitting the trade of emissions allowances between participants. The Carbon Emissions Tax would be a fixed rate initially set at £16 per tonne. Participants with permits under the EU ETS would continue to receive a tax allowance. They would continue to report their emissions under existing monitoring, reporting and verification (MRV) requirements and pay the tax for emissions beyond those within their allowance. This allowance would be based on the EU ETS Phase III free allocations for the remainder of the phase (ending in December 2020).
Carbon pricing in the UK also includes the Carbon Price Support (CPS) – an additional rate levied on the power generation sector and currently set at £18 per tonne. When combined with the Carbon Emissions Tax, the effective carbon price on the power sector would be £34 per tonne. It is generally considered that an EU ETS carbon price above €30 per tonne incentivises meaningful decarbonisation. While the new tax and the CPS clearly exceed this level in combination, they only impact the power generation sector rather than all sectors subject to carbon pricing.
The new arrangements would continue to make use of several of the EU ETS features, reducing the shock of a transition. However, some key differences should be noted. The EU ETS has covered aviation emissions since 2012, while the new arrangements would not. Aviation accounts for roughly 3% of the EU’s emissions. Furthermore, the Carbon Emissions Tax is a set rate, unlike the floating rate of the market-based EU ETS. Carbon prices under the EU ETS have persisted above €20 per tonne in 2019, with €25 per tonne more typical of recent months. These are well above the Carbon Emissions Tax. However, the fixed rate will eliminate the speculation and uncertainty driving EU ETS prices. A lower carbon price with volatility eliminated may bring a benefit to consumers, since the carbon price has an influence on commodity costs.