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The UK has published its plans for the UK ETS starting in 2021. In this article we unpick the details of the UK’s plan, outlining who will be covered, how it will work compared to the existing EU ETS and setting out some high-level thoughts on how well the UK ETS will align with both its EU counterpart scheme and the UK’s climate policy ambitions.

Authors: Nicholas Rock Peter Zaman Adam Hedley Matthew R. Yeo Oliver Rieche

Following a public consultation last year, on 1 June 2020 the UK’s Department for Business, Energy and Industrial Strategy (BEIS) published its plans to implement a UK ETS starting in 2021 (The future of UK carbon pricing). In the UK, this will replace the EU ETS, which the UK is set to leave at the end 2020 with the termination of the Brexit transition period. This is part of the UK government’s plan to drive domestic and international action on climate change and, as such, to deliver on its net-zero carbon target by 2050.

Linking the UK ETS with the EU ETS

As to future relations with the EU ETS, the clear ambition is for the UK to negotiate a linking agreement with the EU ETS to allow UK operators to maintain access to the world’s largest carbon market (and avoid the potential vagaries of a UK-only carbon pricing mechanism). Whether and when that happens – any linkage could take several years to agree – will depend on how the ongoing trade negotiations between the UK and the EU turn out.

If such negotiations fail, the UK could turn to other carbon markets, such as California or New Zealand. Should this also fail, business groups fear that a resulting stand-alone UK market would lack the necessary liquidity, which could in turn lead to volatile prices and additional costs for covered entities.

Should the UK not be able to implement a UK ETS in time for the end of the transition period, the UK will likely fall back on a carbon tax as an alternative (which was announced last year as the default interim measure for the UK pending a long-term alternative scheme). A separate consultation on this is in the pipeline. However, much of the legal and governance framework for a UK ETS is already in place through the UK’s participation in the EU ETS, so the UK government should be able to realise its ambitions for dovetailing the UK scheme with its exit from the EU ETS.