The future of carbon pricing in the UK

After a long wait the UK government has finally published its plan following a consultation on the direction that carbon pricing in the UK should take following Brexit: it outlines provisions for both a UK Emissions Trading System (ETS) and a carbon tax. Lucy Candlin FIEMA CEnv explores.

In a nutshell, the UK ETS, which is due to commence on 1/1/21, will largely adopt all the MRVA rules that will apply to the EU ETS in Phase 4 which commences on the same date. Along with domestic Aviation, the UK ETS will cover Energy Intensive Industries, the Power Sector; and process sectors such as Refining, Heavy Industry and Manufacturing – again pretty much the same constituency as is currently obligated under the EU ETS.

So no change then? Well there are some adjustments being made for the launch, such as to the emissions cap – this will be set at 5% below the UK’s current notional share of the EU cap, and there will be a further adjustment later in 2020 or 2021 to bring the cap into line with the pathway to net-zero; this will be based on the advice from the Committee on Climate Change for the sixth carbon budget.

Although the initial free allocations for the UK ETS will be based on the data collection process that was done in 2019 for EU ETS Phase 4 benchmarks and allocations, the UK Government has stated that it intends to review this to determine if there should be a change of approach for future phases (which are aligned with both the EU ETS phases and those for the Paris Agreement Global Stock-takes).

Other adjustments include provisions to manage market liquidity, costs, and price variability; as well as an initial ban on the use of international offset credits for compliance. Further reviews will be held to consider the operation of the system in each of its phases; the carbon leakage list that should apply to UK sectors; mechanisms for determining free allocations, and to consider whether the system should be extended to other sectors.

The Government has stated that it would like to link the UK ETS to the EU ETS if both parties can reach agreement that meet their interests – that is still to be determined and we await the outcome of related Brexit negotiations.

So what about the carbon tax? It seems odd that the UK Government is still developing a carbon tax which was originally proposed as an alternate to an ETS. The Treasury is currently consulting on the details but, with the Committee on Climate Change making it clear that a wider range of sectors needs to be brought into decarbonisation/ carbon control regimes; the Government’s expressed intent to look at extending the scope of sectors and activities covered by carbon pricing; and with some activities not being appropriate for an ETS, it is likely that a carbon tax will be applied as part of this scope extension – although it is as yet unclear what the ‘point of regulation’ would be for such a carbon tax and what greenhouse gases it would cover. This means that regardless of whether organisations currently fall under the EU ETS, they would be wise to look at the completeness, quality and robustness of their data accounting for energy and greenhouse gases because they may shortly be subject to a more rigorous requirement than SECR.

Please note: the views expressed in this blog are those of the individual contributing member, and are not necessarily representative of the views of IEMA or any professional institutions with which IEMA is associated