• Alessandro Vitelli

The UK's political choice between an ETS and a CO2 tax

There are just four months left until the UK and EU need to reach an agreement on a future trade deal before the transition period comes to an end and the various apparatus of the EU (as it pertains to Britain) vanishes in a puff of smoke.

As we know, the UK has announced plans to implement either a national emissions trading system or a carbon tax to go into effect on January 1, 2021, depending on the outcome of the negotiations as well as its own preparedness to implement an ETS in such a short period of time.

When the government revealed these options back in 2018, there was rather more optimism that the outcome would be an ETS that would eventually link to the EU market, but as time has passed and progress in the wider talks has slowed to a crawl, there appears to be a growing sense that we should not necessarily anticipate a UK ETS in the near future, let alone a linked one.

To be sure, any linkage between UK and EU ETS requires a wider trading agreement to be achieved, and as things stand the best anyone appears to be hoping for is a bare-bones deal. (For anyone who wishes to follow the ins and outs of the UK-EU talks, not to mention the entire self-mutilation of Brexit, I can do no more than recommend Chris Grey’s superb blog.)

And based on what has been coming out of the talks and on the various public statements, it seems rather optimistic to expect any serious discussion of a linkage for some time.

So the next question becomes whether the UK will opt to start 2021 with an ETS or a tax, and I think this is a more political issue than is generally acknowledged. You and I might think it’s simply a matter of which is the more efficient and satisfactory way of ensuring that emitting greenhouse gases comes at a cost but if that were the case, then the UK’s choice of an ETS back in the early 2000s should have been pretty conclusive.

I emphasise that simply to point out that the UK was in many ways a leader in the development of the EU ETS. The intervening years have done little to nothing to reduce the attraction of emissions trading as California, the northeastern US, New Zealand, China and others have shown.

Consequently, if the UK fails to implement an ETS in 2021, it won’t be because emissions trading doesn’t work.

Clearly Britain will need to build a new set of rules and infrastructure to administer and operate a UK emissions market. The government has said it will present legislation to establish a UK system (stand-alone or linked), and has already hired a supplier to create a registry. So the technical and legal work has begun, but everything is being overshadowed by political considerations.

The current state of the talks on a future relationship make it clear that the whole issue of cooperation with Europe is in the balance. It’s finally become clear to the hard-line Brexit “Ultras” that cooperation requires some small concession of sovereignty, and it is this truism that has befuddled and infuriated them. After all, Brexit was sold in part on the idea of “taking back control”, and control is not always complete in international trade.

And given the nationalist sentiment that currently characterises political debate in Westminster, having a UK ETS, let alone a linked one, might be perceived as “smelling of Europe” and would therefore be something to avoid. (The irony is of course that the UK will still need to administer the EU ETS for power plants in Northern Ireland that participate in the island’s single electricity market.)

Conversely, a carbon tax has the dubious merits of being home-grown, does not rely on any other country, imposes a price on carbon emissions and can be linked to the Climate Change Act, which sets national carbon budgets.

All of this is to acknowledge that whether the UK establishes an ETS or a carbon tax is not simply a question of which is the better option. Britain is currently going through a period when science and expertise are regularly called into question, if not ignored. Indeed the experience with Covid-19 can best be summed up in the words of government minister Michael Gove, during the Brexit referendum campaign:

“I think that the people of Great Britain have had enough of experts with organisations from acronyms … saying that they know what is best … because these people … are the same ones who got [it] consistently wrong.”

One final thought does occur to me: among the general repudiation of all things EU that seems to be the the name of the game in Westminster, it might transpire that when the UK eventually does establish its ETS, the government may choose to link it to another market rather than the EU – both to make the political point that Britain stands separate from the EU, but also to broadcast more widely the “Global Britain” brand that has become, along with “world-class”, the slogan for these times.