UK-only ETS ‘would be worst of all worlds’

A UK-only emissions trading system (ETS) would be the “worst of all worlds” out of the post-Brexit carbon pricing mechanisms on offer, Energy UK’s chief executive has warned.

Emma Pinchbeck, delivering evidence last week to a Business Energy & Industrial Strategy (BEIS) committee one-off hearing into the future of carbon pricing arrangements, said maintaining a link with the EU ETS is the UK’s best option.

The UK is currently part of the EU ETS, which is the world’s largest international emissions trading system, but will have to leave at the end of the Brexit transition period later this year.

The government has said that its preferred option is for a UK ETS, to be linked to the much bigger EU trading system, but has also published plans for how a standalone scheme could work.

A carbon tax, which the Treasury is exploring as a backstop to a continued link with the EU ETS, is preferable to a UK-only trading system, Pinchbeck said: “We would prefer a tax to standalone ETS. It could be difficult to manage, we would be one tenth of the size of current market we are linked to and because we are linked to those markets there would need to be a high degree of alignment. It feels like it would be the worst of all worlds for us.”

Pinchbeck added that the uncertainty surrounding the future of the UK’s emission trading arrangements is already having an impact on the ability of energy companies to forward plan and hedge.

Her concerns about a standalone ETS were backed up by Professor Sam Fankhauser, director of the London School of Economics’ Grantham Institute.

“There is a risk that over time a UK trading system will become quite small and not efficient if it’s not linked,” he said, adding that a carbon tax would be “next best thing” to a continued link with the EU ETS.

However, Adam Berman, EU Policy Director at the International Emissions Trading Association, said a small ETS could be effective, pointing to New Zealand as an example of a country that has successful standalone trading system.

Hedging against future prices would be more difficult for industry if a carbon tax were implemented because the level could be adjusted up and down by the chancellor of the exchequer, he said: “The carbon tax fails to guarantee the one thing it should do best, which is reduce emissions and risks becoming a political football.”

Berman also said that introducing a carbon tax would send a “troubling signal” just months before the UK hosts the COP26 climate conference because it would involve withdrawing from a multilateral arrangement to fight climate change.

But, he said that may be preferable to delay as much as possible the negotiations on the ETS until after the main political talks on the UK’s future relationships with the EU have concluded because of the complications generated by political hot potatoes like fisheries.

Prof Jos Delbeke, former director-general of the European Commission’s DG Climate Action, said the EU ETS’ accounting and reporting arrangements mean a link can be hammered out next year once the main EU-UK future trading relationship negotiations have concluded.

He said it would be easier for the EU to conclude a new link than it had with Switzerland, which took years, because the UK is already an established member of the ETS.