Johnson victory means UK could exit EU ETS in October

Author: Christopher Somers

2019/07/24

LONDON (ICIS)--The UK could be set to crash out of the EU emissions trading scheme (ETS) in just over three months, with new prime minister Boris Johnson firmly committed to leaving the union on 31 October with or without a withdrawal agreement.

Johnson, who took over as head of the UK government on Wednesday, has repeatedly said that he intends to lead the country out of the EU “do or die”, raising the real possibility of a no-deal Brexit.

Despite efforts by the UK parliament to prevent a no-deal, it would remain within the government’s power to force the withdrawal through in the absence of a successful no-confidence vote.

Such an exit stands to disrupt the European energy market and would mean that the UK immediately withdrew from the EU ETS, flooding the carbon market with up to 100m allowances .

No-deal would rule out all the options for post-Brexit carbon pricing explored by the UK government in a recent consultation and would mean the introduction of a temporary contingency carbon tax on 1 November.

CONTINGENCY CARBON TAX

In order to maintain financial incentive for reducing carbon emissions, the government has said that it will introduce a contingency emissions tax on day one following a no-deal.

Energy minister Claire Perry said in February that this tax would be initially set at £16/tCO2e in addition to the existing £18/tCO2e carbon price support (CPS).

Were this level to remain unchanged fossil fuel generators in the UK would be relatively better off, with the December ’19 EUA benchmark currently valued around €30(£26.77)/tCO2e.

Given the disparity between the proposed carbon tax level and the current traded carbon price, it is likely that the government would review the contingency tax value ahead of 31 October if a no-deal outcome seems likely.

EU-LINKED SCHEME

The government’s preferred option for post-Brexit carbon pricing, as laid out in the political declaration agreed between the UK and the EU, would be to establish a Europe-linked domestic emissions trading scheme (ETS).

A UK ETS would come into effect at the end of the current phase III of the EU scheme in December 2020.

Although the exact mechanism of linkage has not yet been decided, European trade groups recently said that the UK should seek to align its ETS as closely as possible with Europe in order to limit the impact on wholesale power prices.

This would mean reduced risk of wide bid-offer spreads and higher compliance costs for UK participants by maintaining firm liquidity on the EU market.

STANDALONE ETS

Another option currently being explored by the government is the possibility of a standalone UK ETS independent of the EUA market.

Critics of this option believe that a completely domestic scheme would deprive the UK of a liquid reference price for carbon emissions and could negatively impact cross-border power trading by creating disparity between wholesale markets.