UK to legislate on domestic carbon market March 19

The UK government is set to introduce legislation on a domestic carbon market and carbon taxation policy March 19, according to government documents.

The UK will stay in the EU Emissions Trading System until the end of 2020, with the government wanting a domestic carbon market in place by January 1, 2021.

The UK's spring budget of March 11 set out the government's plan to legislate for a UK ETS and carbon tax policy to be included in its Finance Bill 2020.

This bill will be introduced March 19, according to UK parliament documents.

A source close to the UK Treasury confirmed Thursday that the March 19 Finance Bill would include the legislation on a domestic carbon market and carbon tax policy, as outlined in the budget.

"The UK will continue to apply an ambitious carbon price from January 1, 2021, to support progress towards reaching net zero [emissions]," the Treasury said in budget documents March 11.

"The government will legislate at Finance Bill 2020 to prepare for a UK Emissions Trading System (ETS), which could be linked to the EU ETS. The government will also legislate for a carbon emissions tax as an alternative carbon pricing policy and consult on the design of a tax in spring 2020," it said.

The UK government consulted on the future of UK carbon pricing from May to July 2019. Following that consultation, the government identified three options: a UK ETS linked to the EU ETS, a standalone UK ETS and a carbon emissions tax.

A domestic UK ETS has a precedent. The UK operated its own domestic carbon market to prepare UK-based businesses for the launch of the EU ETS in 2005.

A UK scheme fully linked with the EU ETS would likely see a harmonization of UK and EU carbon prices, while a standalone UK system would have its own supply and demand dynamics, creating a potential price differential with the EU's system.

The UK ETS would cover all installations currently covered by the EU ETS, which includes power generators, large industrial plants, certain public sector facilities and others, according to HM Revenue and Customs documents dated March 11.

The UK's post-EU ETS carbon pricing policy is "intended to maintain a carbon price signal for emitters currently covered by the EU ETS, encouraging decarbonisation and therefore helping to meet our legally binding Net Zero target," HMRC said.

The UK would be open to considering a link between the UK system and the EU ETS "if it suited both sides' interests," it said.

Cost containment, auction reserve price

If there is no link between the UK and EU systems, the UK will introduce an alternative carbon pricing mechanism, and the government is therefore preparing for both eventualities, it said.

The proposed legislation would give the power to the Treasury to establish either a standalone or a linked UK ETS. It also means allowances could be auctioned in a UK ETS and that additional market stability mechanisms can be implemented in a standalone UK ETS, to be defined in regulations, HMRC said.

Those mechanisms could include a "Cost Containment Mechanism" to respond to any significant short-term price spikes and an "Auction Reserve Price," it said.

If implemented, the auction reserve price would set a minimum price for which UK carbon allowances can be sold at auction to provide a minimum carbon price signal, it said.

The UK government currently sets a total carbon price to provide an incentive to invest in low-carbon electricity generation and technologies.

This currently comprises the EU ETS price and the Carbon Price Support – a tax on CO2 emissions which will continue at GBP18/mt of CO2 in fiscal year 2021-2022, the Treasury said in budget documents.

Electricity generators pay both the CPS and EU ETS price, while industrial installations pay only the EU ETS price.

"A consultation response will be published over the coming months confirming the details of a UK ETS," HMRC said in the documents.