UK government urged to clarify CO2 pricing plans

The UK parliament's Business Energy and Industrial Strategy (BEIS) select committee has asked the government to clarify its plans for carbon pricing post-Brexit, as uncertainty persists over the replacement for participation in the EU emissions trading system (ETS).

The UK leaves the EU ETS on 31 December at the end of the Brexit transition period. London has previously indicated that its preference is to replace participation in the scheme with a UK ETS, which could either link back to the EU system or function as a standalone mechanism, with a carbon tax presented as a back-up option.

But "rumours that the Treasury want to implement a new carbon tax, as opposed to an EU linked emissions trading scheme, [are] making it harder for businesses to prepare for a deal/no-deal Brexit", according to select committee chairman Darren Jones.

Describing the lack of clarity as "concerning" and "surprising" in a letter to business, energy and clean growth minister Kwasi Kwarteng, Jones called for the government to specify before the end of this month when it will make a decision on which option to implement.

He also requested details on the timeline for announcing legislative and tax provisions to parliament, and the key milestones for implementation of the chosen system.

And he urged the government to set out a timetable, if relevant, for reaching an agreement for a link between a UK and EU ETS, and to address any concerns about how the link would function.

"The current uncertainty about the new carbon pricing regime is preventing manufacturers and energy companies from being able to act on the prime minister's recent instruction to prepare for a ‘no-deal' scenario on 1 January," Jones wrote.

"It is hindering businesses in their abilities to hedge against the risks of price fluctuations and plan for future liabilities, and it is undermining the case for new investments."

The UK government indicated earlier this month that a no-deal Brexit is increasingly likely, following the lack of progress in talks with the EU.

Panellists at a BEIS committee meeting on 15 October agreed that a UK ETS linked back to the EU scheme is the preferred option, with some participants saying there is still time to establish such a link.

But views were mixed on what would be the best back-up option if a link is not possible. A carbon tax could be at risk of politicisation, the committee heard, while a standalone UK ETS could suffer from limited liquidity and price volatility.

By Victoria Hatherick