UPDATE: UK prepares provisionary carbon tax for a ‘no-deal Brexit’ scenario

On 12 October 2018, the UK Department for Business, Energy and Industrial Strategy (BEIS), the government department responsible for energy and climate change policy, released an official statement regarding the implications for carbon pricing mechanisms and emissions trading in the UK should no deal be reached between the EU and the UK by 29 March 2019 – the scheduled date of the UK’s departure from the EU.

Although the no-deal scenario is unlikely, the BEIS statement outlines the eventualities that would follow for the estimated 1,000 UK installations and 140 UK-administered aircraft operators that participate in the EU ETS. Under a no-deal scenario, UK installations will no longer have to comply with the EU ETS and surrender allowances for their emissions. Those installations are, however, still required to meet their obligations for 2018, as the compliance deadline was brought forward ahead of the Brexit deadline to 15 March 2019. Furthermore, according to the BEIS statement, the UK intends to maintain the current EU Monitoring, Reporting and Verification arrangements beyond the Brexit date in order to ensure continuity and ongoing transparency of emissions reporting.

In preparation for a ‘no-deal Brexit’ and in order to safeguard the environmental integrity of the EU ETS, the European Commission amended the Registry Regulation to void allowances being issued from any country leaving the EU as of 1 January 2018. Starting next year, UK-issued allowances will be demarcated with a country code making them only valid for surrender in the UK context. Any UK allowances issued in 2019 would not be valid for UK operators to meet their 2018 compliance obligations. The UK government will maintain financial penalty rules regarding any failure to comply with 2018 obligations.

The statement further sets out that, in case of a no-deal scenario, the UK will uphold its carbon pricing commitments by introducing a Carbon Emissions Tax on all stationary installations currently under the EU ETS. The tax would ultimately be a provisionary measure as in the long term the UK is seeking further carbon pricing alternatives. Specifics on how this tax would be applied were announced on 29 October 2018 in the 2018-2019 Finance Bill and Carbon Tax Policy Paper. It details that a rate of GBP 16/tCO₂ would apply to emissions emitted above an installation’s emissions allowance starting from 1 April 2019. An installation’s emissions allowance would be set based on the level of free allowances they would otherwise have received under the EU ETS.

The budget bill also clarified that the currently in place Carbon Price Support (CPS), more commonly known as the UK Carbon Price Floor which tops up the EU ETS price for UK electricity generators, would remain frozen at GBP 18/ton through until the 2020-2021 period. Thereafter, the CPS will be reassessed and adjusted accordingly.

While it is necessary to prepare for a no-deal Brexit, both the BEIS statement and the 2018-2019 Finance Bill make it clear that the UK government still hopes to reach an agreement with the EU. If a deal is reached on the UK’s proposed implementation period (until the end of 2020) to facilitate an orderly exit from the EU, the UK would remain in the EU ETS until the end of phase three. This would align with previous statements from the UK government, stressing its commitment to continued participation in the EU ETS during this timeframe. The UK government is also considering four long-term carbon pricing options: staying in the EU ETS, establishing a national ETS (standalone or linked to the EU ETS) or implementing a carbon tax.