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No deal Brexit would slash UK carbon costs

viernes, 02 de agosto de 2019 | Trading

Under a no deal Brexit, UK industrial companies would see their CO2 costs cut by 38pc from current levels, while the country's power utilities will face a 23pc drop in carbon costs.

If the UK exits the EU without a deal on 31 October — a scenario that prime minister Boris Johnson has refused to rule out — the UK's participation in the EU emissions trading system (ETS) will end on that date.

The UK government then plans to introduce a new carbon tax from 4 November, initially set at £16/t of CO2. All stationary installations that were in the EU ETS will pay the new tax.

The tax is nearly £10/t lower than the current EU carbon price, and would mean UK emitters face significantly lower CO2 costs than their European competitors under a no deal Brexit.

The government plans to introduce the tax as an interim measure while it sets up a long-term carbon pricing policy. It is not clear how long the CO2 tax would be in place for, but it could be as long as until January 2021. The government's preferred long-term plan, to have a UK ETS linked to the EU's, would be likely to take effect then, to synchronise with the start of the EU carbon market's next trading phase.

Industry

An industrial facility in the UK currently faces a carbon cost of £25.88/t of CO2 equivalent (CO2e) (€28.43/t) — the front-year EU ETS allowance price at yesterday's close.

But under a no deal Brexit, a UK industrial emitter would instead pay the new £16/t CO2 tax, making it 38pc cheaper to pollute, compared with an installation paying the current EU ETS price.

EU carbon prices have rallied to 13-year highs this month, meaning that the gap has widened between the EU ETS price and the carbon cost in the UK's no deal Brexit plan.

When the UK government first announced the tax, in late October, EU ETS allowance prices were below £15/t CO2e. But EU carbon prices have not fallen below £16/t CO2e since November last year, and market participants remain bullish on prices in the near term, as the market faces its lowest auction supply since 2016 next month. Auction volumes are halved every August, in anticipation of lower demand during the holiday season — a policy that has helped EU ETS prices increase in every August since 2013.

The actual difference in cost will depend on the EU ETS price in November, when the UK will leave the carbon market if there is a no deal Brexit. The government has not confirmed what the CO2 tax rate will be in 2020, but has said that the level will be reviewed and possibly altered at future budget announcements.

The planned CO2 tax is designed to give UK companies the benefit of "free allocation". The EU gives industrial firms free allowances to protect them from carbon leakage, which occurs when companies relocate operations to countries with lower CO2 costs. To replicate this, the UK tax will only apply to emissions above an installation's EU ETS free allocation.

This means that, under a no deal Brexit, a UK industrial emitter will be allowed to produce the same amount of emissions for free, as it would be allowed to produce under the EU ETS. For any additional emissions, a UK firm will pay 38pc less than an EU company, based on current EU ETS costs.

Power sector

The situation is different for power sector firms. Under a no deal Brexit, UK utilities would see their carbon costs fall by 23pc from current levels in November.

At yesterday's EU ETS prices, the total carbon cost for UK utilities was £43.88/t CO2e. This is because utilities in the UK pay a national "carbon price support" (CPS) levy, which is set at £18/t CO2, on top of their EU ETS obligations.

Under a no deal Brexit, power sector companies would continue to pay the CPS. And they would pay the UK's new CO2 tax, instead of the EU ETS cost.

This would result in a total carbon cost of £34/t CO2e.

Aviation

Under a no deal Brexit, emissions from flights to and from the UK would no longer be covered by the EU ETS. The aviation sector would not be subject to the UK's new CO2 tax.