UK leans towards carbon tax after virus prompts ETS fluctuations

The government is taking a fresh look at the introduction of a carbon tax as its key mechanism for pricing emissions when the UK leaves the EU’s emission trading system later this year.

The UK is due to give up its membership of the EU ETS emission trading system (ETS), which is the government’s key tool for pricing emissions, at the end of December when the Brexit transitional period ends.

The government has consulted on replacement arrangements – with retaining a close relationship with the EU ETS and introducing a carbon tax identified as the two main options.

Georgie Messent, head of environment at solicitors Pinsent Masons, told a Westminster Forum conference this morning (12 May) that until “very recently”, the government was “very pro” retaining an ETS with a close link to the EU system.

However, she hinted that the performance of the EU ETS during the coronavirus pandemic had prompted fresh thinking on the issue.

“The government are still talking to academics and others about whether a carbon tax is better than a carbon trading scheme given the changes there have been during Covid.

“The carbon price has fallen, along with other commodities, on the EU ETS but only down to 19 euros compared to the high 20s before.”

Pointing to a recent London School of Economics report, which advocated the “clarity and simplicity” of a carbon tax, she said: “A UK ETS will need to be adjusted quite a lot if the price is fluctuating constantly to make sure it drives the behaviour change that is needed.”

Messent said the government is still consulting with academics but has yet to outline its preferred option.

Nick Molho, executive director of the Aldersgate Group, called for accelerated hikes to carbon pricing following the recent fall in the price of oil.

He said: “The case for having a higher but also a much more predictable carbon price escalation is very strong now because of the very low oil price. You can introduce a higher and clearer trajectory at a time when you have much less downward impact on people because of the low oil price.”

Molho also said the rapid rundown of coal in the generation mix is dramatically reducing the influence of the carbon price on the level of electricity bills.

He said: “If you look at power sector, coal stations will soon be completely off-line. That is going to more than halve the impact that the carbon price has on electricity.”

And Molho said the case for investment in low carbon projects in ex-industrial areas had increased as a result of the uneven impact of the of the Covid-19 downturn on different regions.

He said the threat of growing unemployment meant there must be more focus on skills provision.