The European Union (EU) Energy and Environment Sub-Committee met at the UK Houses of Parliament to discuss post-Brexit carbon pricing on 13 February. The 12-person committee heard evidence from industry experts on the implications of Brexit on carbon pricing as the UK’s expected departure date of 29 March 2019 looms.
The first of two sessions was held with chief economist of the committee on climate change Adrian Gault and acting managing director at climate think tank Sandbag Phil MacDonald. The second session with Energy UK chief executive Lawrence Slade and EEF head of climate, energy and environment at the Manufacturers Association (formerly the Engineering Employers’ Federation), Roz Bulleid, focused further on industry.
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A “clean break”?
The committee discussed the UK’s future role in the EU emissions trading scheme (ETS), which is currently in phase III and due to finish in December 2020. The options for the UK include remaining in the EU ETS through phase IV, or ending with a “clean break” for both parties at the end of phase III and creating an internal UK ETS market.
Gault noted that that the UK market forms 10% of the EU ETS, so a UK ETS market would have far more limited trading potential. The possibility of having a domestic ETS trading system by the end of 2020 would also be on “an incredibly tight timetable.”
Gault and MacDonald argued that the best option for both the UK and the EU would be for a “clean break” at the end of phase III, or to stay in the EU ETS until the end of phase IV. Being in the EU ETS through just part of phase IV would lead to a complex exit, unfavourable to both the UK and EU and the possibility of such an exit could mean that the UK would have less influence on decision making.
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By GlobalDataAnother point raised by the committee was the prohibition on ETS by the EU on 1 January this year, which has had a major impact on companies, according to Bulleid. UK companies can trade amongst themselves but cannot have international auctions or exchange international credits. Slade argued that an extension on Article 50 would lead to further uncertainty as the auctions would be suspended for an even lengthier period of time, and could lead to the system unravelling.
A Swiss-style link or an independent domestic market?
The possibility of an arrangement similar to that which Switzerland signed with the EU in late 2017 was also discussed. The link between the EU and Switzerland allows both to trade emissions freely, in a first of its kind agreement. However, it was noted that the agreement took seven years to complete and the Swiss have to conform to EU standards, leaving them with little influence.
The question of the level of carbon pricing and taxes was raised consistently throughout both sessions. It is currently set at £16 per tonne of CO2, but this was seen as unrealistic in the long term as it is currently trading at above €20 (£17.50) a tonne in the EU market.
It was estimated that revenue from ETS stood at €600m (£525m) in 2017 and between €1-2 billion in 2018. The government told the EU Commission it spent the revenue on “climate and energy” but did not give a detailed breakdown on where it was spent.
Devolved nations need clarity
There was a lack of clarity on the role of the devolved nations of the UK post-Brexit, especially Northern Ireland. As a market, it is too small to sustain a domestic system and therefore would either have to either connect with the UK system somehow or become part of the Republic of Ireland’s system, which would make it part of the EU trading scheme.
The meeting highlighted a lack of clarity in a number of areas ahead of Brexit, with the UK’s involvement in either the EU ETS or the creation of a domestic system, whether independent or linked with the EU, still to be decided. The evidence gathered at today’s committee will be presented to minister of state for energy and clean growth Claire Perry MP in two weeks’ time.
