UK urged to consider CO2 price floor after EU ETS exit

The UK should set a price floor within its future carbon pricing mechanism and expand the scope of such a scheme to sectors not currently covered by the EU emissions trading system (ETS), government climate advisory body the Committee on Climate Change (CCC) said today in a letter to prime minister Boris Johnson.

The UK's membership of the EU ETS — under which the power sector and parts of industry and aviation are obliged to cover their emissions through the purchase of carbon allowances — is due to end on 31 December this year, with the government having indicated that it intends to set up its own carbon pricing mechanism in its place. Its preference is the formation of a national ETS that would then be directly linked back to the EU's scheme, although carbon tax measures may be temporarily enforced if arrangements for a domestic market are not in place on time.

The price of EU ETS allowances came under severe pressure in March and early April as Covid-19 restrictions limited aviation and industrial power demand, pulling the value of allowances to 20-month lows. The UK government should therefore consider the use of a price floor when designing its own future carbon pricing arrangements, to protect against such extreme volatility in the future, the CCC said.

"The UK's future carbon pricing mechanism should be designed to ensure that an appropriate price for carbon is maintained even in times of external shocks, for example through a well-designed floor price," the CCC said in the letter, which advised Johnson on the government's approach to recovering from the Covid-19 crisis.

As part of six recommendations set out in the letter, the CCC also said that the government should consider the extension of carbon pricing to sectors of the UK economy that do not presently fall under such obligations, as well as increasing prices for those that do.

"Changes in tax policy can aid the transition to net-zero emissions. Many sectors of the UK economy do not currently bear the full costs of emitting greenhouse gases. Revenue could be raised by setting or raising carbon prices for these sectors," the CCC said.

The advisory body called on the government to incorporate climate action into its post-coronavirus recovery strategy, echoing recent calls by members of the European Parliament to ensure that the bloc's financial stimulus packages in the wake of Covid-19 are aligned with the EU's climate objectives.

"Reducing greenhouse gas emissions and adapting to climate change should be integral to any recovery package. These remain scientific, economic and social imperatives and will only be delivered if ambitious steps are taken during this parliament," the CCC said.

The body also called on the government only to offer support to carbon-intensive sectors in the context of the crisis on the condition that they commit to climate action, and urged it to ensure that any investments made are climate change-resilient.

The CCC underlined in its advice that climate investments can create jobs and therefore support the country's economic recovery, adding that jobs lost to the coronavirus crisis could be replaced with those generated via climate investment.

It also pointed to the opportunity, following on from the forced changes in behaviour brought about by lockdown measures, to "embed new social norms" that could help to reduce emissions, particularly in the area of transport.

Industry association Energy UK today welcomed the CCC's recommendations. "As the CCC letter makes clear, there is a compelling case for focusing our recovery efforts around creating a zero-carbon economy that will create numerous opportunities for jobs, investment and other economic benefits — in addition to the clear environmental ones," interim chief executive Audrey Gallacher said.

"The energy sector… will be ready to play an integral part as we further expand low-carbon sources of power, develop further alternatives to fossil fuels like hydrogen, make our homes and businesses energy efficient and decarbonise heating and transport."

The CCC said last month that it will incorporate advice on a resilient recovery from the coronavirus pandemic into its annual progress report, which is scheduled to be presented to the UK parliament in June.

By Victoria Hatherick