UK businesses stand to benefit from closer alignment between the UK and EU Emissions Trading Schemes, argues BEEF’s Andrew Warren.

This article was first published in Business Green on 22 July 2024.

The election of a new government offers an opportunity for UK industry to effectively rejoin the world’s largest climate change abatement programme, the European Union Emissions Trading Scheme (EU ETS).

Three years ago,  1,400 companies that had participated in the EU ETS for more than 15 years left that scheme overnight to join the UK’s version, the UK Emissions Trading Scheme (UK ETS).

This upheaval had long been in the works. Back in 2018, two years after the Brexit vote, Parliament voted to give the Treasury permission to replace the EU ETS with a new domestic carbon tax. But this tax was never taken forward. That tax concept was later superseded by a decision by former Prime Minister Boris Johnson’s government to set up a clone system, the UK ETS.

Why the reticence to the carbon tax? Largely because it was to be set at a maximum of £16 per tonne of carbon emitted from power stations and industrial sites. And the EU ETS carbon price has been steadily climbing, rising to above €100 a tonne, before settling at between €70 a tonne and €80 a tonne currently.

Carbon trading prices have increased since 2018, as the EU has tightened rules to make the system more onerous for polluters. Carbon is now set at a price at which all participating companies have started looking more seriously at investing in more expensive consumption reduction technologies.

So how did the UK ETS come about? After Johnson’s decision to press ahead with the scheme, an initial set of informal consultations about the possible UK scheme was held by the government’s official climate advisors, the Climate Change Committee.

And in June 2020, the Department Business, Energy and Industrial Strategy issued its first formal document setting out the concept for a UK Emissions Trading Scheme (UK ETS). The report noted that the UK ETS would “ensure a smooth switchover for businesses, and a more ambitious limit on carbon emissions on our road to net zero by 2050.” Its frontispiece expressed an ambition of “reducing the current [emissions] cap by five per cent”.

It was made clear even then that the issues formally under discussion concerned solely the detail of how the separate system might possibly operate. Nobody was allowed to question whether setting up an independent system would ever be more effective, either in environmental or economic terms.

At a plenary meeting held by the British Energy Efficiency Federation with the relevant government officials, trade associations warned that creating a pseudo-separate scheme would be a waste of time and resources. I recall they were invariably met with the deadbeat response from officials that the UK-only scheme was “what the Prime Minister wants”.

That October, MPs on the Business Select Committee held a series of oral sessions specifically based around the operation of a new UK ETS. The MPs noted with approval the UK-only system largely retained a common framework with its original parent. Certain key parts, like verification of data, were to be retained wholesale. Methods of reporting were altered a bit. But broadly it remained very similar.

Consequently, the committee subsequently recommended that there should be the “possibility and consideration of a link” between the two systems, if it suited both side’s interests. After all, everybody concerned had been very aware of how the previously independent Swiss ETS was becoming merged with the EU scheme.

The UK made it plain that its own climate policy would be more ambitious than those adopted by all other European countries. And under the terms of the Brexit agreement, it agreed not to diverge from EU policies that might provide a significant trading distortion advantage.

Through its Carbon Border Adjustment Mechanism (CBAM), the EU is gearing up to introduce penalties for imported goods from certain sectors coming from countries without any comparable additions to reflect carbon emission externalities. Several major industrial sectors – beginning with iron and steel- have warned about the detrimental impact this could have on business in the UK, which currently has no equivalent mechanism.

With the CBAM due to begin in full next year, even the outgoing Conservative government was starting to acknowledge that the UK will eventually have to endorse a similar scheme.

Whether the UK ETS will expand as swiftly into other energy using areas already earmarked within the EU scheme – for instance, maritime, non-European aviation, surface transport, even buildings – is not yet clear. But recent history does suggest this will indeed occur, albeit in all probability later and less effectively.

It would be more sensible for the UK to follow the example of another non-EU country, Switzerland, and fully align its mechanism with the approach taken by the 31 countries covered by the EU ETS. Better still, why not take a leaf out of the Norwegian playbook and simply wholly integrate the entire UK ETS scheme entirely into the EU ETS? After all, the EU continues to remain easily the most important and valuable trading sector for the UK.

Andrew Warren is chair of the British Energy Efficiency Federation.

Views expressed in this piece and all guest blogs are the views of the author and not necessarily of IEEP UK.

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