A UK carbon tax is the "best-case scenario" for a carbon pricing regime in the country for next year, given the lack of time remaining in which to implement an EU-linked UK emissions trading system (ETS), environmental think-tank Ember said.
The UK leaves the EU ETS on 31 December at the end of the Brexit transition period. The government has yet to confirm whether it will establish a UK ETS — either linked back to the EU's system or operating as a standalone mechanism — or institute a carbon tax as a replacement.
But with just one month remaining, putting in place a UK ETS linked back to the EU's system is "impossible" by 1 January, Ember said. A carbon tax, therefore, is now the "least worst option".
A tax would be relatively simple to implement and provide price stability during the Brexit process, as well as establish a link between the carbon price of the two systems, Ember said. If enforced in 2021-22, a carbon tax would be based, according to government proposals, on the average price for the EU ETS December 2021 and December 2022 contracts.
A standalone UK ETS, on the other hand, is "risky and highly complex", Ember said, citing concerns that plans to set an allowance supply cap well above actual emissions could lead to permit oversupply and, consequently, inappropriately low carbon prices.
While a proposed price floor of just £15/t of CO2 equivalent (CO2e) — compared with an average closing price of roughly £24/t CO2e for the benchmark front-year EU ETS contract last month — would be an "international embarrassment for the UK's commitment to climate action", it said.
More can be done to shore up current carbon tax plans, such as setting up an independent panel to determine the tax rate and applicable sectors. Its scope could be extended to include areas such as fugitive methane emissions from the production and transport of fossil fuel, and the carbon price exemption for biomass removed.
A carbon border adjustment should also be introduced, Ember said, and concrete plans made to link carbon pricing with the UK's legally binding target to reach net-zero emissions by 2050.
The government should still consider setting up an EU-linked UK ETS in the future, the think-tank said, to provide the advantages of participating in a larger carbon market.
"It is long past time for the government to make a decision and allow businesses and investors to begin to plan for the new carbon pricing system," Ember said.
Business, energy and clean growth minister Kwasi Kwarteng indicated last month that the government is unlikely to clarify its position on plans for a carbon pricing regime in the country until after Brexit trade deal negotiations are concluded.
A number of groups have raised concerns over the feasibility of a standalone UK ETS. European power industry association Eurelectric said earlier this year that the system could face liquidity issues, while UK think-tank Policy Exchange warned of its vulnerability to volatility.
But carbon tax plans have also drawn criticism. The International Emissions Trading Association earlier this year said a carbon tax represents a "big gamble" for the achievement of the UK's climate neutrality target.
