Introduction
The EU Emissions Trading System (EU ETS) is considered the cornerstone of the EU’s efforts to fight climate change and is a key mechanism for delivering on the EU’s 2020 and 2030 emissions reduction targets. The EU ETS is a form of carbon pricing known as a ‘cap and trade’ scheme, in which a limit on emissions is set and divided up into ‘allowances’, each equal to one tonne of carbon dioxide (CO2). These allowances are distributed to businesses and industries that generate CO2, have a monetary value, and can be traded between other participants to the scheme. Each year, a business must surrender sufficient allowances to match their emissions, with large fines imposed on those who do not. The EU ETS is mandatory for power, industrial and aviation sectors and covers around 1,000 installations in the UK. The EU ETS has played a significant role in the UK’s own actions on climate change, but continued participation after Brexit is unlikely. This blog discusses the range of alternative arrangements available to the UK post-Brexit, and the positions of the UK and Scottish Governments. The EU ETS itself is discussed in greater detail in the accompanying blog and policy briefing (‘The EU Emissions Trading System’).
There is a range of options available to replace the EU ETS and these broadly fall into four categories, as outlined below. Variations on the options described are also possible and are discussed in greater detail in analysis conducted by the climate think-tank Sandbag and the Emissions Trading Group.
Remaining in the EU ETS
Although it would be subject to approval by the EU, the UK could in principle continue to participate in the EU ETS after Brexit. While this would be the most administratively straightforward option, the UK would have significantly diminished influence over the future design of the scheme, as the EU would continue to be responsible for developing legislation without the need for input from the UK. This option would be similar to the arrangement that currently exists between the EEA countries (Norway, Liechtenstein and Iceland) and the EU, in which allowances are issued under an agreement. The key distinction in this case however, is that the EEA states are all part of the single market. Given the UK Government’s expressed policy of leaving the single market after Brexit, the UK would be considered an external country and it is uncertain if the EU would be willing to extend this arrangement outwith the EEA.
Establishing a UK ETS linked to the EU ETS
After Brexit, the UK Government and devolved administrations could establish a new UK-wide ETS and link it to the EU ETS. There is some precedent for this, as Switzerland has recently agreed to link it’s ETS to the EU ETS. Under this model, Switzerland will retain its own system, while enabling the mutual recognition of Swiss and EU allowances. It should also be noted that the Swiss linkage was negotiated between 2010 and 2016, and is unlikely to come into operation until 2020. Any UK – EU linkage post-Brexit may therefore take years to establish.
In principle, a linked UK ETS could afford more design flexibility, but any divergences would have to be balanced against continued compatibility with the EU scheme. There would also be significant costs associated with establishing a UK ETS, and it is likely that it would take a long time to set up. However, the UK has previously had its own ETS (2002-2006), so it is possible that this experience may accelerate the process.
Establishing an Unlinked UK ETS
The UK could decide to establish a standalone UK ETS with no links to the EU scheme. This could be an opportunity to develop a single carbon pricing strategy to replace the diverse range of climate policies currently in operation in the UK. As with the previous option, this would take time to establish and it is likely that a hiatus in allowance trading would occur as a result. As a much smaller scheme, a UK ETS would not benefit from the economies of scale associated with the EU ETS, and some stakeholders have expressed concerns that it would not be cost-effective in reducing greenhouse gas emissions.
A Broader Carbon Tax
The UK currently applies a carbon tax to the power sector, called the Carbon Price Support (CPS). At £18 per tonne of CO2, the CPS is applied in addition to the price of EU ETS allowances to create a minimum price for carbon dioxide emissions, known as the Carbon Price Floor (CPF). In principle, the CPS could be extended to cover all industry post-Brexit, but this would require substantial changes to the regulatory framework. Furthermore, this may result in a loss of competitiveness for UK companies if the price of carbon emissions diverges from those faced by counterparts in the EU.
UK and Scottish Government Policy
Current UK Government Policy is set out in the Political Declaration, which describes a UK ETS linked to the EU ETS. This has since been reaffirmed by the Minister of State for Energy and Clean Growth, Claire Perry.
In the event the UK has no deal in place by the date of exit from the EU, the UK Government will institute a Carbon Emissions Tax. Set at £16 per tonne of CO2, this is intended to simulate the cost of carbon emissions under the EU ETS to provide continuity until an alternative is established.
The Scottish Government has expressed a desire to remain in the EU ETS after Brexit. However, they have said that they will support a linked UK ETS on the condition that equivalent funding is available to replace that lost through programmes such as the Innovation Fund, which is financed through the EU ETS.
John Ferrier, Researcher (NERC PhD Intern), Brexit, Environment and Rural Affairs