Brexit fallout: When Britain leaves the European emissions trading scheme, the proposed new tax could make a mockery to the country’s claim to be a world leader against climate change

Andrew Warren, in his September column to Energy in Buildings & Industry, discusses the planned new tax to replace Britain being in the European emissions trading scheme.


Why this new tax could increase emissions

All UK companies are almost certain shortly to cease participating in the European emissions trading scheme (EU:ETS). Should no formal Brexit deal be agreed by October 31, this departure could well occur overnight early in November, precipitating serious upward pressure on greenhouse gas emissions. Even if a more orderly arrangement is agreed, it seems increasingly likely that all UK participation will cease by the end of 2020.

For most of the past two years, most of those managing the 1400 UK installations participating in the EU:ETS have been working on the basis that they would be involved with the Europe-wide scheme through to New Year 2021.  That marks the end of the current phase of the EU:ETS. Wherever possible, many of the former UK allowances are effectively been held by other branches of the company based elsewhere in the European Union.

It was widely assumed that companies unable to undertake such internal transfers would be given a period during which to seek to sell these permits to participants based in any of the other 32 participating European countries. Across Europe there were fears expressed that this would lead in all probability to a considerable drop in the subsequent trading price for carbon across Europe.

At present, there are 1400 UK installations participating in the EU:ETS. It is still unclear whether any remaining allowances held by these entities will simply be cancelled upon the UK’s departure from the scheme. In May the UK, Scottish and Welsh governments appointed the Committee on Climate Change (CCC) to recommend what domestic scheme, linked to the existing EU:ETS, might be created. The Committee was reminded to “ensure our future approach is at least as ambitious as the current scheme.”

Crucially the CCC were also instructed to ensure that the new UK-only scheme “provides a smooth transition for the relevant sectors.” The work the CCC undertook during the summer was very much predicated upon the assumption that there would be a managed departure from the EU, enabling the putative linked scheme paralleling the EU:ETS to start operating from 2021.

But if there is neither a formal exit deal agreement nor any further delay agreed to the departure date, then at the end of October all UK involvement with the EU:ETS will terminate.

The UK government plans to introduce a domestic Carbon Emissions tax of £16 per tonne of CO2 emitted from power stations and industrial sites from 4 November. The tax is deemed officially to replace the EU emissions trading system.

Crucially permit prices across Europe have soared close to €30/t – and are forecast to continue climbing. Together with a falling pound, it raises the prospect of a significantly lower carbon price in Britain than on the continent.

This rate of £16/t price was first suggested by the UK government in its 2018 budget, when the EU carbon price was fluctuating between €17 and €20/t – and when the pound sterling was stronger against the euro. According to the Treasury technical notice issued at the time, “the new tax would maintain the carbon price for those stationary emitters currently covered by the EU:ETS.” Clearly that objective is unlikely to be met if the Treasury sticks to its declared rate of just £16 per tonne.

When first mooted, the Scottish and Welsh governments objected to the proposal on the basis it handed too much rate-setting power to the centralised UK Treasury.

So power generators would continue to be subject to an £18/t surcharge on top of the tax, a rate significantly lower than they pay at present. This would reduce the total carbon price for utilities by about £10/t. That would cut the running costs of a 49% efficient gas-fired plant by £3.75/MWh and the costs of a 34% efficient coal-fired plant by £9.74/MWh.

It is feared that such tax alterations could well end up boosting coal-fired electricity output – effectively operating directly contrary to official policy. The move would  see an increase in coal generation in the UK next year, with the possibility of coal-fired power plants coming back online, At the same time, it should be noted that the UK aviation sector would not be subject to the new Carbon Emissions tax.

Lowering the carbon price paid by such a significant part of the UK economy risks slowing down progress towards meeting the Government’s legal commitment to decarbonise the economy entirely over the next thirty years.

Next year the UK is seeking to host a key UK Conference of the Parties meeting on climate change. It will include leaders from practically every country. Assuming the UK’s bid is successful, the former climate change minister Clare Perry will preside over it.

To have deliberately replaced the EU flagship policy on climate change, the EU:ETS, with a tax initiative likely to exacerbate rather than reduce emissions, will not impress any other Government as to the veracity of the UK’s incessant claims about world leadership on climate change . We have to walk the walk. Not just talk the talk.

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