The UK government is currently consulting on the future policy options for the regulation and pricing of carbon emissions once the UK has left the EU.  The government’s preferred option is to establish a UK-only emissions trading scheme (UK ETS) and to secure a formal link with the EU ETS in order to have renewed access to the EU carbon market. Several alternative options have also been tabled by the government in recognition that establishing a UK-EU linked ETS would be politically fraught and could take considerable time. The consultation will be of particular interest to companies, industry bodies and other stakeholders in the industrial, power and aviation sectors, as well as carbon traders.

The impact of Brexit on the UK carbon market has been immediate and highly disruptive for emitters and traders alike. The status quo is that the UK remains in the EU ETS until (and unless!) the UK leaves the EU. However, various pre-emptive measures were introduced by the EU in expectation of the UK leaving the EU on 31 March 2019, part way through a compliance year. Most notably, these measures included the bringing forward of the 2019 EU ETS compliance deadlines for UK operators and the ceasing of any UK auctioning or allocation of EU allowances from the start of 2019. The continued uncertainty around the precise date and mechanism (‘deal’ or ‘no deal’) by which the UK will leave the EU has left the UK market in paralysis and emitters having to speculate in their carbon emissions compliance hedging strategies for 2019 and beyond. The situation was not eased by the UK government announcing earlier this year that if the UK crashed out of the EU in March 2019 with no deal, in the short term the UK would implement a carbon emissions tax in lieu of an EU ETS obligation to surrender allowances, indicating a fundamental shift from a market-based cap-and-trade scheme to a basic flat-rate levy. The carbon emissions tax was due to commence on 15 April 2019, but was postponed in light of the further extension of Article 50 of the Treaty on European Union.

The government is using the Article 50 extension to consult on a wider suite of options for future UK carbon policy. The preferred option of establishing a UK ETS and linking this with the EU ETS has recent precedent in the EU-Swiss ETS linkage. A UK ETS could be established relatively quickly by repurposing the existing UK regulatory framework for the EU ETS and the ‘UK section’ of the EU registry. While there would be much to revisit in terms of how a UK ETS would operate and what the underlying policy ambitions should be, in reality it would need to align very closely with the EU ETS to be eligible to link with it. The consultation includes detailed proposals as to the design and operation of a UK ETS, the rudiments of which would essentially mirror Phase IV of the EU ETS. Securing a link with the EU ETS will be the difficult part – politically at least – and could take several years, as demonstrated by the EU-Swiss ETS linkage (which was agreed in 2017 after seven years of negotiations, but is yet to be ratified).

The alternative options discussed in the consultation include the UK participating in Phase IV of the EU ETS (subject to the timing of the UK’s exit from the EU) and UK-only options, namely a standalone UK ETS or a UK carbon emissions tax (similar to that previously announced).

There is unlikely to be consensus among carbon emitters and market stakeholders as to the best carbon policy option for the UK post-Brexit. The establishment of a linked UK ETS that looks and feels familiar is likely to be a popular choice, but undoubtedly there will be some support for the alternative proposals as well as other options not tabled by the government, such as an extension of the Climate Change Agreements (CCA) framework. Our perception is that the Department for Business, Energy and Industrial Strategy is genuinely listening and is keen to garner a wide spectrum of views through the consultation; the apparent policy shift from a carbon emissions tax back to a market-based scheme is evidence of that. The consultation is open until 12 July 2019.