The Committee on Climate Change (CCC) has given its support to the government’s plans to create a new carbon market in the UK following Brexit linked to the EU Emissions Trading System (ETS).
In a letter to business and energy minister Kwasi Kwarteng, the climate watchdog said the cap on allowances issued as part of the scheme should be based on the most cost-effective path to meeting the UK’s newly-adopted net-zero target.
“We agree with the government’s preference for a linked UK-EU ETS in the case of EU exit,” wrote CCC chair Lord Deben.
“This maintains key benefits of membership of the EU system, most notably access to a wider market and addressing competitiveness issues within a level playing field across the EU.
“Should a linked scheme prove not to be possible, we will offer further recommendations.”
He continued: “We recommend that the cap of the linked UK ETS be set based on the cost-effective path to the UK’s new net-zero target. We will provide that trajectory in our advice on the sixth carbon budget (covering 2033-2037), which is due in 2020.
“Following this advice, the level of the cap should be adjusted as soon as possible to align to the carbon budgets.”
The letter noted that the UK’s emissions are currently lower than its share of EU ETS allowances owing to its success in decarbonising the power sector, adding: “If this remains the case during the 2020s, this risks other EU countries buying UK allowances to continue polluting rather than reducing overall EU emissions.
“That would provide a net gain to UK Treasury, as the UK sells excess permits to non-UK participants, but reduce the impact of UK actions in tackling climate change as the quantity of emissions assigned to the UK would exceed expected UK emissions.”
It said a lower cap during the 2020s would avoid this issue and would be more in with expected emissions during the fourth and fifth carbon budgets.
Lord Deben said the scheme must provide a “strong and rising carbon price” in order to incentivise “genuine reductions in emissions”. He drew attention to the chronic oversupply of allowances that dogged the EU ETS for many years and kept price low.
He said past experience show that “cap-and-trade schemes require a stabilisation mechanism” such as the Market Stability Reserve created by the EU to soak up excess allowances.
“The government’s plan for a UK adjustment mechanism reflects this and in a linked system will need to co-ordinate with the EU’s Market Stability Reserve,” he added.
Lord Deben also stressed that the government should not rely on carbon pricing alone to net-zero target: “Whilst carbon pricing is essential it needs to be used as part of a suite of policy instruments, as confirmed by real-world experience internationally.
He said supplementary policies will also be needed to address overcome barriers unrelated to pricing, as well as deal with “myopia and price uncertainty”.