UK Carbon Pricing Options Post-Brexit: What Lies Ahead?
With the end of the transition period on December 31, 2020, the future of carbon pricing in the UK hangs in the balance. Several options are being considered:
Remaining in the EU Emissions Trading System (ETS): This option seems unlikely as it would require the UK to share its free allocation with other member states, including those like Poland that are expected to receive extra allowances for transitioning away from coal. Moreover, the UK seeks greater control over its destiny and has set more ambitious targets, such as a legally binding net zero carbon emissions goal by 2050.
Implementing a UK ETS fully linked with the EU ETS: This is the preferred choice and aligns with the expertise of UK civil servants who contributed to shaping the EU ETS. Full linkage would maximize the market size, ensuring the UK doesn't face exorbitant carbon costs by going alone.
Establishing a standalone UK ETS: This option would closely resemble the design of the EU ETS, leveraging the familiarity of legislators and installations with its functioning. Given the UK's commitment to continue measuring and verifying emissions, a market-based carbon pricing mechanism seems likely.
Introducing a UK carbon tax: This is the least favoured option but may be pursued if options 2 or 3 are not implemented in time for 2021. Under this approach, emissions would be taxed per tonne, installations would receive a tax exemption equivalent to the previous free allocation under the EU ETS, and the tax rate would reflect the prevailing EUA price at the time of implementation.
For more detailed information, it is recommended to reach out to the Redshaw Advisors team.
