At the end of July, on the same day that it reported on the Government granting over 100 new North Sea oil and gas licences, Carbon Brief Daily reported on the Financial Times front page article titled..”Britain makes it cheaper to pollute by watering down carbon market scheme”…….Whitehall recently quietly announced changes to the UK’s carbon-trading scheme, including offering more allowances than expected to polluting industries. The move has pushed carbon prices to trade at a steep discount compared with those in Europe, sparking warnings from industry that it will undermine green investments and increase fossil fuel use.” It adds: “Since the announcement, the UK ETS has fallen to trade at a near-40% discount to its EU counterpart, at £47 a tonne compared with €88.50 (£75.86). The two schemes previously traded near parity; a discount first emerged this spring as traders grew nervous over the UK government’s commitment to matching the climate ambitions of the EU. The gap has widened this month.” 

The carbon-trading scheme referred to is the Emissions Trading System (ETS) which puts a price on emissions released by fossil fuel users at the point of emission. A gas extraction company will not pay it, a company making electricity from gas will, it covers about 40% of UK emissions. When it was considering pricing GHG emissions the EU agreed on ETS (2005) as it was easier to impose on 27 separate countries than a direct carbon tax which would have been the preferred option.

The carbon price is dependent on market forces and for many years wasn’t that effective an incentive to decarbonise. In 2021 the UK left the EU ETS and claimed that its new scheme would be stronger, having removed some flaws and introduced a carbon price floor. As reported above the release of more rather than less free allowances to carbon intensive companies this year has completely undermined the carbon price and the incentive to decarbonise!

Yesterday the EU initiated the first phase of the Carbon Border Adjustment Mechanism (CBAM) system to impose carbon emissions tariffs on imported cement, iron and steel, aluminium, fertilisers, and electricity. This tariff is designed to prevent ‘carbon leakage’ – manufacturers deciding to move production to countries with lower carbon pricing. The fear of carbon leakage has been one of the main arguments against carbon pricing. The UK government had considered imposing CBAM in 2021 but for some reason the idea lost favour and it was presumed that the UK could easily remain a world leader in green technology.

The EU is also planning an ETS II including transport and buildings emissions. The planned UK extension only now covers domestic maritime and waste incineration as a wider extension to inland transport and buildings was scrapped. The EU is allowing member countries to choose either a national carbon tax or ETS II. So far Austria has established the Klimabonus, a tax on carbon which returns the revenue as a dividend to the householder, aka carbon fee and dividend or Climate Income.

Ironically the effect of weakening the UK ETS will lead to a higher bill on UK imports to the EU, the Financial Times reported yesterday in an article titled “UK exporters face hefty EU carbon tax bill after Sunak weakens climate policies”. The article, quoted in Carbon Brief Daily, explains that the collapse of UK ETS prices means that hundreds of millions of pounds will go to paying the CBAM rather than to the UK Treasury ….The lower emissions price also means that the UK Treasury will generate less revenue from carbon pricing; in effect the changes will divert a portion of companies’ carbon bills from Westminster to Brussels.”

Not only did the Government not seize the opportunity when leaving the EU ETS to become a world leader in carbon pricing reform with Climate Income and CBAM; but it has further weakened UK carbon pricing so that it will have to pay the price when the EU introduces CBAM.