The government is seeking views on the approach to carbon pricing in the UK after the nation leaves the EU.
The joint consultation between the UK, Scottish and Welsh Governments and the Department of Agriculture, Environment and Rural Affairs in Northern Ireland is proposing establishing a UK national greenhouse gas emissions trading system (UK ETS) linked to the EU ETS.
However, in the unlikely event a linking agreement cannot be secured, alternative carbon pricing options will be considered, including a standalone domestic emissions trading system and a tax on carbon.
The document states: “We are committed to the delivery of a carbon pricing mechanism even in the event that linking to the EU ETS cannot be achieved. The UK Government therefore needs to consider alternative ‘fall-back’ domestic carbon pricing policies. Fall-back options include the UK introducing its own domestic trading system, which would not be linked to the EU ETS; the introduction of a tax on carbon… and participating in Phase IV of the EU ETS.
“Fall-back options do not preclude the opportunity to achieve a linked carbon pricing system in the future.”
A linked UK Emissions Trading System
The UK would develop its emissions trading system (ETS) and when linked with the EU ETS, each system would recognise the allowances of the other and create a single carbon price across both systems.
The document adds: “Linking carbon markets can lead to more efficient emissions reduction, since allowances are tradable across a larger pool of participants. This results in a larger number of cost-effective abatement opportunities, as well as greater market liquidity for trading purposes, ensuring lower transactional costs and minimising the risk of market abuse.
“As well as increasing the efficiency of the system, a link between a UK ETS and EU ETS would ensure a smooth transition for the relevant sectors.”
A standalone UK ETS
The government says a UK ETS could operate independently, including ahead of securing a linking agreement with the EU.
To facilitate a smooth transition for industry and maximise the potential for linking, the consultation is proposing to initially “limit the areas of deviation from the EU ETS to those where the benefits to business of changes outweigh those of alignment”.
Limiting the number of changes in a standalone UK ETS compared to the current EU ETS is expected to provide greater continuity for business during the transition between the two systems.
An initial review is to be carried out in 2023 to ensure the system is operating as intended and aligns with the Paris climate agreement review, with the necessary changes implemented for 2026.
The government and the devolved administrations are currently not consulting in detail on a tax on carbon but if necessary, responses to this consultation may be used to develop work on such an alternative.