U.K. Prefers a Carbon Market Over Pollution Tax Post-Brexit

The U.K. government would prefer to implement a cap-and-trade system linked to the European Union one over a carbon tax from Jan. 1.

While trade talks between the two sides continue, with an outcome potentially emerging in the next few days, businesses and traders remain unclear how the U.K. will charge for pollution once it can no longer buy and sell permits in the EU Emissions Trading System. Britain is set to leave its post-Brexit transition arrangements at year-end.

A U.K. ETS linked to the EU “is the preferred option at the moment and that is the one that we are currently hoping we will be able to negotiate for” Kemi Badenoch, Exchequer Secretary to the Treasury, told members of Parliament on Tuesday. She said the ultimate decision is subject to ongoing talks with the EU.

The EU ETS was set up 15 years ago to reduce heat-trapping CO2 at the lowest possible cost. It imposes pollution caps on companies, allowing those who reduce emissions faster to sell unneeded credits for a profit. Prices are set by the market and have driven significant emissions cuts in the power sector.

The Brexit trade deal will probably exclude any explicit agreement on carbon trading, meaning it will likely be left to officials in London to decide. But U.K. departments have been split over how to move forward.

If the U.K. doesn’t strike a deal with the EU for a linked ETS, it’s still up in the air as to whether the country will implement a carbon tax or a domestic emissions trading system, and the government has consulted on and legislated for both.

Badenoch said a decision will be announced “shortly.”

A decision to opt for a market-based system is likely to be welcomed by heavy emitters, such as the U.K. steel industry who argued that a tax would put them at a competitive disadvantage to EU rivals.

©2020 Bloomberg L.P.

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