UK no deal Brexit CO2 tax will not be backdated

The UK government has confirmed that the carbon tax it plans to introduce in the event of a no-deal Brexit will not be retroactively applied to emissions produced before its planned 4 February 2020 start date.

This means that, if the UK leaves the EU without a deal on 31 January 2020, UK firms' carbon compliance costs will be slashed during January. UK industrial sectors, which do not pay the country's carbon price support (CPS) levy, would not face any costs at all for their emissions that month under such a scenario.

The UK would immediately drop out of the EU carbon market and the government would then introduce a new domestic CO2 emissions tax for power utilities and industrial firms on 4 February 2020.

UK tax department HMRC confirmed to Argus that the UK carbon tax would not be applied retroactively — it would only apply to emissions produced from 4 February next year onwards.

For each tonne of CO2 that they emit, UK power and industrial companies currently pay the EU emissions trading system (ETS) allowance price, which was €23.97/t CO2 at yesterday's prices. In addition, utilities pay the UK's domestic CPS levy, which is fixed at £18/t CO2 (€21.01/t CO2) until 2021. This leaves UK utilities' current total carbon costs at roughly €45/t CO2.

But a no-deal Brexit would mean UK emitters would not face EU ETS compliance obligations for emissions produced during 2020.

This would slash carbon costs for UK firms during January 2020, before the new CO2 tax kicks in. UK utilities would only have to pay the CPS price, while industrial emitters would face no carbon costs at all.

The government has not yet confirmed the rate for the new CO2 tax for 2020, despite calls from UK utilities to provide "much-needed certainty" on the issue. The rate would have been £16/t CO2 (€18.68/t CO2) if the tax had taken effect this year.

The government had planned to confirm the 2020 rate in its autumn budget statement, which had been scheduled for 6 November. But this was postponed when the EU agreed to push back the Brexit deadline to January. And with a UK general election now scheduled for 12 December, the budget will not be unveiled before this date.

There is still a question mark over whether UK emitters would face EU ETS compliance obligations for their 2019 emissions under a no-deal Brexit.

Under this scenario, UK emitters would have been part of the EU ETS for the whole of 2019, but they would exit the carbon market before 30 April 2020, the compliance deadline for firms to surrender their allowances for 2019 emissions.

It is unclear whether UK firms would be required to surrender allowances to cover their 2019 emissions if this were to happen.

The UK's no-deal Brexit carbon tax is intended to be a temporary one. It would probably come to an end in 2021, when the government plans to launch a UK ETS and link it to the EU carbon market.

The government this week clarified that the tax would not apply retroactively, after the delay to the Brexit date had caused confusion among some market observers about when the levy would kick in.

The government pushed back start date to 4 February 2020, after the EU agreed to extend the Brexit deadline. The previous Brexit deadline was 31 October 2019 — if there had been a no-deal Brexit on this date, the UK CO2 tax would have kicked in on 4 November.

The CO2 tax will apply from Tuesday 4 February, rather than 3 February, to give companies time to carry out meter readings before the levy kicks in, especially if the Brexit talks run late on Friday 31 January, HMRC said.

If the UK leaves the EU with a deal, the UK would remain in the carbon market until the end of 2020.

By Kate Abnett