International Emissions Trading Association writes to government to warn of business risk that would be triggered by withdrawal from EU carbon market post-Brexit
The government is facing mounting pressure to clarify its plans for the EU’s Emission Trading Scheme (ETS) after Brexit, after the International Emissions Trading Association (IETA) wrote to Climate Change Minister Nick Hurd this week to warn businesses in the UK and EU will be put at risk by delaying a decision on the future of the scheme.
The UK’s continued participation in the carbon market – the largest in the world – was thrown into flux by the referendum result last year. Under any Brexit deal the UK must decide whether to emulate Norway and continue as a member of the ETS, withdraw from the scheme and establish a parallel domestic carbon trading mechanism, or quit the market altogether.
A natural break point for the UK to leave the ETS comes in 2020, when the current trading period is set to end. However, with Brexit set for March 2019, IETA is concerned about “potential market disruption” over the timing mismatch, warning it does not leave enough time to build a parallel system for UK operators to join instead.
A decision on the issue must be made as soon as possible in order to provide certainty to businesses, which purchase carbon credits years in advance to hedge their compliance costs, IETA argued.
“Contracts worth tens of millions of pounds and many carbon market jobs in London and across the country would be put at risk, because EU ETS operators trade in advance of the next compliance year,” the letter stresses. “This is why we strongly encourage the UK to stay in the EU ETS throughout Phase 3 and to seek an early agreement in the EU negotiations on this matter.”
Beyond 2020, IETA strongly recommends the UK “closely aligns” its overall climate policies with those of the EU, including any future parallel carbon trading arrangements.
The calls chime with demands made last month by the European Parliament, which issued a resolution stating any future trading deal between the UK and the EU depends on the UK’s “continued adherence” to the bloc’s environment and climate change policies.
At a select committee hearing earlier this month Hurd said the UK is carefully considering the issue of the EU ETS post-Brexit.
“As you would expect, there are good reasons to try to align ourselves with the status quo,” he said. “But it is also our responsibility to look exhaustively at the options, just to check that what we are doing is in the national interest and, without being too pretentious about it, whether the choices we take are the right ones in terms of the global negotiations and global common good, which is what the climate negotiations are about.”
Many economists argue carbon trading is the most effective way to decarbonise economies at least cost. However, since the 2008 financial crisis the EU ETS has consistently battled with low carbon prices caused by a glut of emissions allowances in the market.
Reforms to address the over-supply in the next trading period after 2020 are currently making their way through the EU’s legislative channels. However, critics maintain proposals to limit the supply of allowances do not go far enough and will fail to push the carbon price up to the level required to mobilise large scale investment in low carbon infrastructure.
