UK-EU ETS link vital for Paris treaty aims: Ieta

The UK should work to link any domestic carbon pricing mechanism to the EU emissions trading system (ETS) post-Brexit to contribute effectively to the aims of the Paris climate agreement, international emissions trading association Ieta said today.

The UK's membership of the EU ETS is due to end on 31 December at the end of the Brexit transition period, and the government last week reaffirmed its commitment to setting up a domestic ETS in its place. This would either be linked to the EU ETS or function as a standalone system, with the same scope as the EU's scheme and an emissions cap that would be adjusted in the coming years to the country's legally-binding commitment to reach net-zero emissions by 2050, the government said.

Ieta today described the UK's ETS plans as a "bold step in the right direction" in a letter addressed to UK business, energy and industrial strategy minister Alok Sharma, adding that it "applauded" plans to ensure the scheme's cap is in line with carbon neutrality goals.

But carbon pricing systems can only contribute to the aims of the Paris climate agreement if they are compatible with, or linked to, other systems, Ieta warned. It therefore urged the UK government and EU to link their respective systems as soon as possible.

Linking the two systems would have additional benefits for the new UK scheme, Ieta said, such as ensuring liquidity, guarding against volatility, and protecting the competitiveness of UK installations by maintaining the same carbon price as the EU's.

European power industry association Eurelectric warned last week that a standalone UK ETS could face liquidity issues due to its small size. While carbon consultancy Redshaw advisors said that hedging by utilities could cause prices in a standalone system to spike .

Whether or not the two systems will be linked is yet to be determined, subject to Brexit negotiations. The UK government said it remains open to a link "if it suited both sides' interests", but given the limited amount of time remaining for negotiations to be completed for 1 January 2021 implementation, it appears likely that a UK ETS may at least initially work as a standalone market. The EU said last week that the link is a complicated process that could take years to implement.

A UK-EU ETS link would be the second of its kind, following on from the coupling of the Swiss ETS to the EU's system earlier this year. The agreement shows that such a connection can be achieved, Ieta said today, adding that the linkage could be used as a template for a UK-EU link. The Swiss-EU ETS linkage came into force on 1 January, after nearly a decade of negotiations.

By Victoria Hatherick

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