The government has launched a consultation on its approach to carbon pricing once the UK leaves the European Union. The preferred option is a UK Emissions Trading System (ETS) that is linked to the EU ETS and closely mirrors it. BEIS further demonstrated its commitment to emission trading by also issuing a tender to design, build, test, and maintain a UK Emissions Trading Registry.
The UK has been part of the EU ETS since its inception in 2005. The scheme 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.
The design of the EU ETS has resulted in there being an excess of allowances in the market, particularly during periods of reduced economic output. This has meant that for many years carbon traded at levels too low to be a significant driver of emission reductions across Europe. In 2013, the UK introduced the Carbon Price Floor, which means that energy-intensive industries are required to pay a tax as a top-up to EUA prices and so encourage carbon abatement. This has stimulated a move away from coal generation within the power sector.
In 2017, front-year EUAs traded as low as €4.40/tCO2 but firmed from 2018, in part due to EU ETS reforms that will remove excess allowances from the system. The front year is currently trading around €25/tCO2.
The government consultation on the future of carbon pricing includes alternative proposals to make sure that a price on carbon is in place even in the event of a “no-deal” Brexit. The other options include a standalone UK ETS, a direct tax on carbon, and remaining in the EU ETS for Phase IV of the scheme. In a letter to the Committee on Climate Change, BEIS and the devolved administrations have requested advice on design elements of a UK ETS to include market stability, a methodology to mitigate the risk of carbon leakage, and the possibility of supporting innovations such as low-carbon hydrogen. If the UK ETS goes ahead, it is expected to be in operation from January 2021.
