As the UK and Brussels clash over climate change commitments in a post-Brexit trade deal, the Department for Business, Energy and Industrial Strategy (BEIS) has published the UK's long-term plans for carbon pricing and a new emissions trading scheme (ETS) starting in January 2021, with a UK carbon tax as an alternative. What are the UK government's plans and do they go far enough in its pursuit of reaching net-zero emissions by 2050?  

Overview

BEIS (working jointly with the Scottish Government, Welsh Government and Northern Ireland Executive) has published its response to a public consultation undertaken in May 2019 on options for the UK’s approach to carbon pricing after the Brexit transition period. 

The UK has confirmed that it will establish its own scheme to replace the EU ETS, the first phase of which will run from January 2021 to 2030. This will form part of the UK government's national ambition to reach net-zero emissions by 2050 and drive international action on climate change. 

If it cannot implement its own ETS, the UK is drawing up plans for a carbon emissions tax as an alternative. Industries and businesses likely to be affected need to be prepared for both scenarios.

How does the ETS work?

The ETS works on the 'cap and trade' principle by setting a cap on the total amount of certain greenhouse gases that can be emitted by certain energy-intensive industries (such as power and heat generation, oil refineries and commercial aviation). The cap is reduced over time so that total emissions from each sector fall. Within the cap, companies are able to purchase emission allowances at auction, which they can trade with one another. 

The gradual cap reduction creates scarcity in the market, which sets the 'carbon price'. A high price should encourage companies to transfer to zero-carbon forms of generation or manufacturing. 

Globally, turnover related to emissions trading has risen 34% year-on-year to reach £163bn in 2019. 

WHAT WILL THE 2021 UK SCHEME LOOK LIKE? 

The UK has confirmed that it will establish its own ETS, the first phase of which will run from January 2021 to 2030. This could operate as a standalone or linked scheme with the EU, under which UK operators would retain access to the EU's carbon market. Any such agreement will reflect the outcome of ongoing trade negotiations.

The UK ETS proposals aim to reflect the EU's scheme to ensure a 'seamless transition' for operators. It will cover the same greenhouse gases and sectors, applying to energy-intensive industries and fuel combustion in industries with a total rated thermal input exceeding 20 megawatts. The government has stated that it may expand the ETS to other industries (such as municipal waste incinerators) as part of its first review.

The cap on emissions will initially be set at a level which is 5% below the UK's notional share of the EU ETS cap. This cap will reduce on an annual basis so that it remains 5% below what the UK's share would have been under the EU ETS. 

While the main means of introducing allowances into the UK's market will continue to be the auctioning process, a proportion of allowances will be distributed to operators for free to protect against the competitiveness of certain industries. Any unallocated allowances from the industry cap in previous years and (if needed) allowances from the flexible share will be used to "top up" the industry cap. A temporary minimum auction price of £15 per tonne has been proposed during the first phase which is below the current EU price of €23.

There will be an initial review during the first half of the phase (2021-25) to assess the performance of the UK ETS from 2023. A second review, from 2028 onwards, will assess the whole scheme from 2021-30. BEIS has confirmed that it will mirror the monitoring, reporting and verification (MRV) regime in the EU ETS. 

For airlines, the programme will capture UK domestic flights, flights between the UK and Gibraltar as well as flights from the UK to countries in the EEA. The government is undertaking a review on how a UK ETS could interact with the implementation of the UN's International Civil Aviation Organisation's Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). 

THE ALTERNATIVE: A UK CARBON EMISSIONS TAX

In the Autumn 2018 Budget, the Chancellor announced that in the event of a no-deal Brexit the UK would introduce its own carbon emissions tax. In an ideal world, the UK would have its own ETS linking to the EU one, but as negotiations for trade after the transition period appear to be stalling, high-emitting businesses and industries need to be prepared for a new carbon tax instead. 

The tax would apply to installations currently regulated by the EU ETS and small emitters (which are subject to the excluded installations scheme), calculated on the basis of the installation's CO2 and greenhouse gases emissions above an individually set emission allowance. If implemented, the tax would apply from 1 January 2021.

The emission allowance level would be calculated using the same methodology as that used for calculating the level of free allocation of allowances under a UK ETS. Any installations falling within the scope of the new carbon emissions tax, and exceeding the tax emission allowance for the relevant period, would receive a tax bill. 

While the finer operational details are yet to be finalised, and the tax's existence is tied firmly to a no-deal Brexit, the tax aims to achieve and maintain a stable carbon price for installations, supporting the UK in meeting its legally binding carbon reduction targets.

COMMENT

A UK ETS gives the UK the scope to become a global net-zero carbon leader and drive international action on climate change However, the government's proposals lack ambition. Although the UK's total emissions were 129 million tonnes in 2019, the government has proposed a cap of 156 million tonnes in 2021. In setting a cap which is greater than previously recorded UK emissions output, there exists no real impetus to make changes in order to reduce emissions to ensure the UK does not exceed the 156 million tonne cap. Emissions are expected to fall much further in 2020 through to 2021 as a result of the current COVID-19 pandemic.  

The UK could expand the scope of its scheme to cover more emissions (such as large biomass power generators) or to include carbon prices on shipping or gas for heating. The implementation of the EU Green Deal will expand the EU's aspirations, which the UK will be encouraged to follow.   

The Government will consult further on the trajectory for the UK ETS cap once the Committee on Climate Change has advised on a pathway to net zero (which it is expected to do by the end of 2020). It is envisaged that any changes to the UK ETS cap to align it with a net zero trajectory will be implemented by 2024.

As 2050 draws nearer, a UK ETS will hopefully be seen as playing an important role in cross-governmental efforts to deliver the net zero target. 

Key Contacts

Jack Harris

Jack Harris

Associate, Infrastructure Projects & Energy
Leeds

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Richard Goodfellow

Richard Goodfellow

Partner, Head of Infrastructure, Projects & Energy Group
United Kingdom

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Paul Dight

Paul Dight

Partner, Energy and Utilities
United Kingdom

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