Warning over ‘dysfunctional’ model for UK ETS

Government plans to set up a standalone UK emissions trading system (ETS) are likely to lead to “highly volatile” carbon prices, Labour has warned.

As part of the UK’s preparations for leaving the EU, energy minister Kwasi Kwarteng yesterday (8 September) tabled a draft order in the House of Commons for establishing a UK-only ETS.

The proposed UK-only trading system is designed to replace the EU ETS, which the government is due to leave at the end of this year at the end of the Brexit transition period.

Like the EU scheme, it will cover energy-intensive industries, the electricity generation sector and aviation.

However, the cap on emissions would be five per cent below the level for the UK’s notional share of the EU ETS had it remained a member.

The framework of the government’s proposed ETS was outlined in a policy paper, published by the Department for Business, Energy & Industrial Strategy (BEIS) in June. This also maintained the option of a link between the UK and EU ETS schemes.

Matthew Pennycook, shadow minister for climate change, warned that a standalone UK ETS would be a “sub-optimal” solution compared to a continued link with the EU’s much bigger trading system.

He said: “The management of a standalone UK ETS will require a significant amount of government intervention on the part of his department, and even then risks being dysfunctional, with a highly volatile price plagued by low levels of liquidity and high levels of speculation.”

Pennycook said the government’s other potential fallback option to a linked ETS – a carbon emissions tax – may be less cost-effective for business and more open to political interventions that risk undermining price stability.

Replying, Kwarteng said the government’s “primary objective” is to secure a link with the EU scheme but that provisions must be made if such an agreement cannot be forged as part of wider trade deal negotiations, which are currently in a stalemate.

At a separate event yesterday, a former chief secretary to the Treasury said the absence of a post-Brexit strategy for carbon pricing is the “missing piece” in the government’s plans for zero carbon”.

Liam Byrne, who was number two at the Treasury at the end of the last Labour government, said: “At the moment we are wedded to the EU ETS but there is no clarity to carbon pricing beyond 2021.

Byrne, who is Labour’s candidate in next year’s election for metro mayor of the West Midlands, called for greater devolution of capital budgets to regional leaders in order to accelerate his region’s progress on meeting net zero.

He told the online event on the upcoming comprehensive spending review, organised by Field Consulting, that local bodies were better at spending capital budgets than Whitehall departments.

And the Birmingham MP said that the West Midlands currently lacks the capital resources to make the investments in retrofit and renewable energy which are required to deliver his pledge to make it the UK’s first net-zero region if he wins next year’s mayoral election.

“Money is available in the Whitehall potentially to make a significant impact on that.”