The options are:
1. Stay in the EU ETS. Very unlikely as this means the UK must share some of its free allocation with countries like Poland that are expected to receive extra allowance allocation to help finance the transition away from coal. The UK also wants control over it’s own destiny and has more ambition than the EU currently has – for example the UK already has a legally binding net zero carbon emissions target by 2050.
2. Implement a UK ETS that links fully with the EU ETS. This is the number one choice. It is worth pointing out that it was UK civil servants that wrote many of the rules that implemented the EU ETS so the option to price carbon in this way is popular in UK government. Full linkage is desirable to maximise the size of the market available so as to ensure the UK doesn’t have a runaway carbon cost by going it alone.
3. A standalone UK ETS. Any such system would closely follow EU ETS design. After all, legislators and installations alike are familiar with how the EU ETS works and it works reasonably well. Further, UK installations have already been told that they must continue to measure and verify their emissions after we leave the EU, so the UK seems set on continuing with a market based carbon pricing measure.
4. A UK carbon tax. This is the least favoured option but one that will be pursued if the UK cannot get either option 2 or 3 up and running in time for the start of 2021. As set out above, measurement and verification will continue as normal, carbon emissions will be taxed per tonne and each installation will receive a tax exemption equivalent to the free allocation that would have applied had the UK stayed in the EU ETS. Finally, the tax level is anticipated to be set at a price that reflects the prevailing EUA price at the time the tax is implemented.
If you want to know more, please get in touch with the Redshaw Advisors team.