BEIS outlines UK ETS plans, carbon tax questions remain

LONDON (ICIS)–The UK Government has published a detailed plan for a national emissions trading scheme (ETS) that would replace the EU ETS as of January 2021 after the end of the ongoing transition period.

The plan comes after an extensive stakeholder consultation started in May 2019 in which the UK already announced its intention to closely align with EU ETS rules in most regards, and most recently in the 2020 budget.

While the plan includes ambitious reform under net zero alignment, implementation of the system by 2021 would require a trade deal being agreed between the EU and UK.

EU ETS LINK

Under the new scheme, phase I will run from 2021-2030 matching the EU ETS phase IV length.

Participants can also expect a close alignment with the existing EU ETS scheme.

At the same time the document highlights that the UK ETS will be able to work as both an EU ETS-linked mechanism or stand alone, depending on UK-EU trade negotiations.

The scope of the system is expected to remain the same as the EU ETS but perhaps the most significant change is a cap on total emissions that is 5% below UK’s notional share under the current scheme, with a potential to align the cap to a net-zero trajectory by January 2024 at the latest.

What remained unclear however was the prospect of a carbon tax, like the existing carbon price support (CPS). According to the document, a carbon tax is still on the table as an alternative to the UK ETS given the inherent uncertainty surrounding the negotiations.

ICIS analytics previously highlighted the importance CPS will have on power prices and subsequently determining the quantity of domestic thermal generation versus imports amid expanding interconnector capacity.

NET ZERO ALIGNMENT

To ensure the “environmental integrity” of the scheme remains in place, the government has decided to keep the thermal capacity threshold at 20MW for installations that will be obliged to take part.

According to the consultation, current thresholds support the country’s net zero ambitions, ensuring there are ample incentives for installations to abate.

Beyond this a larger alignment with the carbon trajectory of the UK will be implemented which forms the framework for review of the UK ETS.

Any alignment to the net zero trajectory will be implemented no later than January 2024 and dependent on the sixth carbon budget in December 2020. This will apply to 2033, or phase II and beyond.

POTENTIAL OUTCOMES

Any material implantation of the changes and the UK ETS itself depends on trade negotiations presenting three potential outcomes:

– Deal secured: If a deal were to be struck, then the plans laid out in the published document for a linked or standalone UK ETS would be the most likely outcome.

However, even in this case it is not clear that such a system could be established by January 2021, which means an interim Carbon Tax remains a possibility until the UK ETS is established

– Extension to transition period: The UK government is currently insisting that the country would leave regardless of a trade deal, which means that the government would need to change its stance in order to request an extension should talks remain stalled.

If an extension were to be agreed it would mean then UK installations would continue to be covered by the EU ETS (likely for another year), with potential for a linked system afterwards

– No Deal: There are growing concerns that the UK government may be willing to allow a no deal Brexit since the costs and political blowback could be overshadowed by the more extensive economic damage caused by the virus. In case of a no deal Brexit a carbon tax is likely to be implemented.