U.K. Chancellor Rishi Sunak’s Treasury is locked in a battle with Alok Sharma’s Business Department over how to ensure polluters pay for their emissions after Brexit.
The Treasury is pushing to replace the European Union’s cap-and-trade system with an economy-wide carbon tax, which would come into effect after Britain exits the bloc in January. The Department for Business, Energy and Industrial Strategy is drawing up a new emissions-trading system to start in January similar to the EU program that the U.K. currently participates in.
One person familiar with the debate predicted that an ETS was a likely option, and a hybrid is also being considered. A decision is expected soon. It is likely to be announced by Dec. 12, when Prime Minister Boris Johnson will co-host a United Nations meeting on climate action, where he is expected to reveal a new 2030 climate pledge and encourage other countries to set their own goals to bring net emissions to zero.
But with just a little over two months to go before the U.K. leaves the EU and no deal agreed, businesses and traders are becoming increasingly concerned over the lack of certainty for how they’ll be charged for their pollution and whether the U.K system will be linked to the EU’s ETS.
“We’re really running tight on time if they want to implement an ETS,” said Jahn Olsen, analyst for BloombergNEF. “A tax has a lot of obvious disadvantages.”
The U.K. is still negotiating to find a way that could tie a U.K. cap-and-trade system to the EU ETS — if it does opt for that system. But if no deal can be struck, BEIS officials say a standalone U.K. ETS would be just as effective. The EU ETS is the world’s biggest carbon market.
Some of the U.K.’s biggest emitters are lobbying against a carbon tax, saying it would put them at a competitive disadvantage to EU rivals. They’re more comfortable with an ETS, since they’ve had to deal with the EU system since 2005. Olsen said a standalone U.K. ETS would probably initially deliver a lower carbon price than a tax because there would be an oversupply of allowances at first since the economy is in recession and the number of certificates issued in the system would probably be set for more normal times.
An oversupplied ETS in the U.K. may mean companies could buy carbon allowances around 15 pounds ($19.60) a ton, Olsen said. That’s lower than the average of 24 euros ($28) a ton in the EU system over the past year.
“The proposed carbon emissions tax is much less flexible than an Emission Trading Scheme and will lead to an unnecessarily higher tax burden for British steel companies,” said Frank Aaskov, energy and climate change policy manager for the U.K. Steel industry group.
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Under the terms of the Withdrawal Agreement, the U.K. will remain in the EU ETS until the end of the transition period at the end of this year, and U.K. participants must fulfill their obligations to surrender allowances by 30 April 2021.
Another option being considered by government is a hybrid model which would see the U.K. adopt both new economy-wide carbon taxes and an ETS, according to the people. That idea is being advocated by Ben Caldecott, who is advising the government on climate finance ahead of the next round of global climate talks, known as COP26, which are due to be held in Glasgow in November 2021.
“The choice is not between one or the other — carbon taxes or carbon markets,” Caldecott said. “We need to ambitiously reform both. We should deliver carbon pricing reform, not simply carbon tax reform. In our enthusiasm to introduce new carbon taxes, we mustn’t throw the baby out with the bath water.”
Dieter Helm, an academic who conducted the cost of energy review for the government in 2017, said the government should initially adopt a standalone ETS and then gradually roll out a carbon tax after a couple of years, in order to make it easier for companies to transition.
“Although that would not be perfect, it will be a massive improvement on taking over an EU ETS over which we had no influence or control in the future,” he said on his podcast.
European traders meanwhile have urged the U.K. government to have an ETS linked to the EU’s. That would be the most cost effective route to the U.K. meeting its 2050 target to zero out greenhouse gas emissions, they said.
“A U.K. ETS closely linked to the EU ETS enables U.K. installations to continue to benefit from the wider, liquid market in EU allowances and to better manage their business risks,” the European Federation of Energy Traders said in a statement.
(Updates with analyst and trader comments from 13th paragraph)
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