With Britain leaving the European Union, will it remain in the emissions trading system?

Andrew Warren, chairman of the British Energy Efficiency Federation and a regular contributor to EiD, questions what will happen to Britain’s participation in the world’s largest cap-and-trade system for carbon emissions now that it is working out its future relationship with the European Union. This article was first published in the November/December 2017 issue of Energy in Buildings & Industry.


Question marks over the future of EU:ETS

The European Union emissions trading scheme– the EU:ETS – is a wonderfully bold experiment. A tremendous example of twelve years of cross-border co-operation between sovereign states, attempting to combat one of the greatest threats to mankind.

It is the largest cap-and-trade system for carbon emissions in the world. Each year, every one of the 12,000 factory owners, energy utilities and other installations participating in the scheme must surrender one Allowance for each tonne of carbon dioxide (or equivalent) emitted. Allowances are auctioned or allocated between participants. The cap on Allowances is reduced in line with the EU’s agreed ambition.

Even so, everyone knows it needs to be altered dramatically   The UK Government’s seminal Clean Growth Strategy, published last month, devotes very little space to the EU:ETS. One key point: because “a surplus of allowances in the EU:ETS has caused the price to fall” – as has been true for all but the scheme’s initial months – the Government has now concluded unequivocally that “it provides little incentive for low carbon investment.”

Others have been even ruder. The finance house UBS has concluded that the scheme has cost 287 bn. euros already with “almost zero impact upon the overall volume of emissions”. The trade body Eurelectric has dismissed its Allowances as “junk bonds.”

The current third phase of the trading scheme concludes in 2020. But before then, the UK is officially set to leave the European Union. So the big question facing all UK-based participants is: will we remain part of this scheme, either in the short or long term? And, if so, how?

Currently there are 31 countries with companies involved in the EU:ETs. Several are outwith the EU; crucially they are all part of the “single market”. Should the latter be adopted as a serious long-term arrangement, it would be possible for UK-based companies to remain as participants. But the UK would then have negligible influence upon either the overall size of the cap, or any of the other new rules or interventions.

Regardless, the UK Government is promising to “continue to drive for ambitious reform for the next phase”. Under serious consideration post-2020 are ideas like an annual reduction of 2.2% in the cap; of a 12bn euro Innovation Fund; of expansion of the New Entrant Reserve fund; of the very best performing factories receiving allowances for free. Would these be available in non-EU members participating only by arrangement?

Possibly the biggest stumbling block to continued UK involvement is that the scheme comes inevitably under the active jurisdiction of the European Court of Justice. This involvement is far from theoretical. Largely because this is by definition a scheme that is transnational, the ECJ is regularly involved in overseeing compliance. But whether its workload related to the EU:ETS is sufficient to justify setting up a discrete tribunal, sufficiently separate from the ECJ to satisfy the dogmas of arch-Brexiteers, is dubious.

Nobody in the UK Government is yet prepared to tell UK –based businesses, or indeed anybody else, that they definitely intend to quit the EU:ETS. Thus nobody is yet officially considering what would be the fate of the 14% of existing Allowances held by UK-based companies. Could they be sold back into the system? But this would probably deflate trading places still further. Or could they simply be declared to be of no further value, and withdrawn from the system? But this would leave a significant number of UK companies seriously out of pocket.

In the event of no deal being reached on continued UK membership of the EU:ETS, this would be the default outcome.

But that may not be the end of the story. Prior to the creation of the EU:ETS, the UK did briefly create its own experimental emissions trading scheme. It did help establish London as the global emissions trading centre at least initially; it is chastening to see how many fewer traders now operate from the UK than was true a decade ago. But that UK-only scheme had certain serious drawbacks: it did require serious Government funding throughout; the number of companies involved were far fewer; and of these, as the National Audit Office acidly observed subsequently, just three pocketed most of the Government’s pump priming money.

It might be possible to follow the Swiss example, and create a scheme that exactly paralleled the EU:ETS. That would be just as is envisaged happening with energy-using product policy post-Brexit, which will see the UK precisely mirroring European standards in order to avoid trade disputes. Another option is to create a one-way linkage between both schemes,. Under this option UK entities could meet some proportion of their national obligations by surrendering European Allowances,

This is what was planned with Australia. Its Carbon Pricing Mechanism was due to recognise European allowances – and vice versa. However a change of Australian government put paid to that. Possibly one-way linkage could be restricted only to sectors vulnerable to the risk of carbon leakage. Indeed these options could even operate were the UK to place more emphasis on establishing a firm carbon price via taxation, eschewing the trading route.

One thing is certain. Within a few months, the UK Government really will need to clarify what relationship (if any) they intend to have with the EU:ETS. Carry on as before. Or scrap involvement. Or some half way house. Industry does need to know. It is a real dereliction of duty to leave so many major companies still wondering precisely what “Taking Back Control” really means.



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