EU, UK 'serious' about ETS linkage under trade deal

The EU and UK have formally committed to giving "serious" consideration to linking their emissions trading system. But the full text of the trade and co-operation agreement does not oblige linking of the trading systems nor automatically ratcheting up UK climate and energy goals to meet revised EU targets.

The European Commission and the UK government last week confirmed agreement on their future relationship. The 1,246-page text, which has now been published, foresees the EU and UK co-operating on carbon pricing with "serious" consideration on linking carbon pricing systems in a way that "preserves the integrity of these systems and provides for the possibility to increase their effectiveness".

The agreement also requires the UK to have an "effective" system of carbon pricing as of 1 January 2021 covering greenhouse gas (GHG) emissions from power and heat generation, industry and aviation. The carbon pricing systems should uphold levels of protection reached by the end of 2020.

Renewables and energy efficiency targets already set by the EU and UK for 2030 are confirmed by both parties, but there is an obligation only to keep each other "informed" as to further changes in legislation. The EU is eyeing increased renewables and savings targets in line with a more ambitious GHG cut. But there is no clear formal obligation for the UK to match such increases.

Still, both parties also commit to implementing the 2015 Paris climate agreement. And the commission specifically notes that were the UK or EU to withdraw from the Paris agreement, or via acts or omissions to materially defeat the object and purpose of the climate agreement, the other party would then be entitled to suspend or terminate part or all of the EU-UK agreement.

The EU-UK agreement also allows for flights from the European Economic Area (EEA) to the UK to be excluded from the ETS for two years from 1 January. Additionally, the commission notes that both sides have agreed not to exempt aircraft fuel from taxation.

For energy, the agreement essentially ensures the UK applies similar principles as those laid out for the EU's energy market, including prohibition of market abuse in wholesale electricity and gas markets. Power capacity mechanisms must also be clearly defined, transparent, proportionate and nondiscriminatory. But there is no obligation, either for the EU or UK, to permit participation in any capacity mechanism by generation situated in the other's territory.

The trade agreement prohibits both parties from imposing a higher price, whether by licences or minimum price requirements, for energy and raw material exports to the other party than the domestic market price.

Representatives of EU states will meet today to discuss approving provisional application from 1 January. The European Parliament will have to consent to the agreement, albeit after provisional application. Parliament has previously called for a UK carbon pricing system to be in place ahead of consenting to a deal and for the UK to fully align itself with EU climate policy framework, including revised 2030 and 2040 targets.

UK energy and clean growth minister Kwasi Kwarteng has said that he thinks an ETS would be ready to begin on 1 January. And US-based exchange Ice has now been appointed as the host platform for UK carbon allowance auctions, with sales expected to begin in the second quarter of next year at the latest.

By Dafydd ab Iago