Covid-19 could change UK ETS plans
15 May 2020 | Trading
The UK government is now considering whether the use of a domestic carbon tax would be a preferable option to the formation of a national emissions trading system (ETS) beyond the country's exit from the EU ETS, following the price impact that the Covid-19 viral pandemic has had in the European carbon market, delegates at a virtual conference on the UK's net zero policy heard today.
The UK is due to drop out of the EU ETS at the end of this year, and the government intends to set up its own carbon pricing mechanism in its place. It has indicated previously that its preference would be a national ETS that would then be directly linked back to the EU scheme.
But the government is now talking to academics about whether a domestic carbon tax would be a better option in light of the coronavirus crisis, Georgie Messent, head of environment at international law firm Pinsent Masons told delegates at the Westminster Energy, Environment and Transport Forum policy conference on achieving net-zero emissions by 2050 today.
EU ETS allowance prices dropped to 20-month lows in March as restrictions put in place to stem the spread of the coronavirus pandemic significantly limited aviation and industrial power demand. But even before this, market price movement under the European carbon market has been extremely volatile over a continuing period going back to the start of 2018, during which the price of front-year delivery permits under this scheme has ranged from as low as €7.50/t of CO2 equivalent (CO2e) to nearly €30/t CO2e.
A set carbon tax is likely to provide greater market certainty, Messent said, adding that were the UK to introduce an ETS it would potentially need to be adjusted frequently if prices proved volatile "to drive the behavioural changes needed" to meet climate targets. The results of the discussions are expected in the summer, she said.
Other speakers at today's event said that a clear carbon price trajectory would be needed by UK businesses to provide a more stable market for investment. The falling share of coal in the UK's generation mix would otherwise weaken the carbon price signal in the country over the coming years, executive director of sustainable business alliance the Aldersgate Group, Nick Molho said.
A clear carbon price signal will be vital to support the changes necessary to achieve the UK's legally binding target to reach net-zero emissions by 2050 and to encourage sustainable investment engagement, director of the climate law and governance centre at King's College London, Megan Bowman said.
Protection against market price volatility has frequently been highlighted as a key benefit of a carbon tax over use of a national ETS by think-tanks including Policy Exchange, while the UK would have more flexibility to expand its carbon pricing measures to sectors beyond those covered by the EU ETS if it were to opt for an independent scheme that is not linked to the European carbon market.
Use of a carbon tax is said to be the most likely route for the UK's future carbon pricing mechanism if the country is unable to agree a linkage for a domestic ETS with the EU, with the government having been strongly urged not to press ahead with any stand-alone national ETS that could struggle with low levels of market liquidity. But carbon tax proposals have faced criticism in the past, as such mechanisms do not allow power sector utilities to hedge their carbon risk exposure for future years.