U.K. Chancellor Rishi Sunak’s Treasury is locked in a battle with Alok Sharma’s Business Department over how to ensure polluters pay for their emissions after Brexit.
The Treasury is pushing to replace the European Union’s cap-and-trade system with an economy-wide carbon tax, which would come into effect after Britain exits the bloc in January. The Department for Business, Energy and Industrial Strategy is drawing up a new emissions-trading system to start in January similar to the EU program that the U.K. currently participates in.
One person familiar with the debate predicted that an ETS was a likely option, and a hybrid is also being considered. A decision is expected soon. It is likely to be announced by Dec. 12, when Prime Minister Boris Johnson will co-host a United Nations meeting on climate action, where he is expected to reveal a new 2030 climate pledge and encourage other countries to set their own goals to bring net emissions to zero.
But with just a little over two months to go before the U.K. leaves the EU and no deal agreed, businesses and traders are becoming increasingly concerned over the lack of certainty for how they’ll be charged for their pollution and whether the U.K system will be linked to the EU’s ETS.
“We’re really running tight on time if they want to implement an ETS,” said Jahn Olsen, analyst for BloombergNEF. “A tax has a lot of obvious disadvantages.”
The U.K. is still negotiating to find a way that could tie a U.K. cap-and-trade system to the EU ETS — if it does opt for that system. But if no deal can be struck, BEIS officials say a standalone U.K. ETS would be just as effective. The EU ETS is the world’s biggest carbon market.
Some of the U.K.’s biggest emitters are lobbying against a carbon tax, saying it would put them at a competitive disadvantage to EU rivals. They’re more comfortable with an ETS, since they’ve had to deal with the EU system since 2005. Olsen said a standalone U.K. ETS would probably initially deliver a lower carbon price than a tax because there would be an oversupply of allowances at first since the economy is in recession and the number of certificates issued in the system would probably be set for more normal times.
An oversupplied ETS in the U.K. may mean companies could buy carbon allowances around 15 pounds ($19.60) a ton, Olsen said. That’s lower than the average of 24 euros ($28) a ton in the EU system over the past year.
“The proposed carbon emissions tax is much less flexible than an Emission Trading Scheme and will lead to an unnecessarily higher tax burden for British steel companies,” said Frank Aaskov, energy and climate change policy manager for the U.K. Steel industry group.
READ MORE: Why Pricing Carbon Is Still More Theory Than Reality
Under the terms of the Withdrawal Agreement, the U.K. will remain in the EU