28 January 2021

How post-Brexit Britain can trade its way to net zero

By Alexander Stafford MP

It was launched with little fanfare, but the UK Emissions Trading Scheme [ETS] is of critical importance in meeting our net zero target, and it’s another dividend of Britain’s decision to leave the EU. Having our own standalone UK ETS, separate from Europe’s system, is undoubtedly a great initial step. However, we must not stop there. Firstly, we must align our UK ETS with net zero and, secondly, link our ETS up with other schemes and use these links as a tool to fight climate change.

Now we have left the EU we want to set our own rules. This freedom presents us with the opportunity to align our ETS to net zero. This can be achieved by adjusting the cap on the total amount of greenhouse gasses that can be released and traded by energy intensive industries until we reach that goal. By seizing the initiative we’ll be showcasing Global Britain as an ambitious power which is leading the world in reducing emissions. In the run-up to COP26 in Glasgow, launching a ‘Net Zero UK ETS’ would underscore our commitment to the challenge ahead and set an example for others to follow.

The UK ETS will build on the EU scheme, using existing historical emissions data on which to build a robust net zero pathway. For the business community, the sooner the government aligns the cap with net zero, the more certainty that will exist for planning future operations.    

Importantly, a Net Zero UK ETS would not be subject to political pressures and would eliminate the uncertainty of changes from successive governments. Once the ETS is aligned to net zero, that commitment is absolute. This can only be a good thing in our race to decarbonise our economy and our society. Furthermore, a Net Zero UK ETS would raise a large sum for the Treasury; the available allowances, which would be in line with our net zero target, will be valuable and will bring in considerable revenue for the Government.

Equally important to aligning the UK ETS with net zero is pursuing a linkage between our system and others. If the UK is serious about reaching net zero, the ability to link ETSs to connect carbon storage and renewable opportunities will be strategically important. The advantages of linking over a standalone system are clear in terms of liquidity, price discovery, and the ability to lower costs through attracting abatement from across a much larger market.

Linkage is positive both for companies and governments. It is beneficial for companies because a level playing field vis-à-vis carbon pricing leads to largely aligned cost implications for industry across jurisdictions, benefitting international trade. It is also of benefit to governments, as linkages allow net zero to be reached faster and more cheaply. As was evidenced in the BEIS Select Meeting on Carbon Pricing on 13 October, linkage is the consensus view of both industry and experts. Modelling carried out by the University of Maryland also supports this principle.

A linked Net Zero ETS would be emblematic of our newfound ability, post-Brexit, to create our own framework in accordance with our own net zero priorities. Given the similarities between the UK ETS and EU ETS, linkage should be relatively straightforward. The Swiss-EU agreement can be used as a model to begin discussions that should result in a unique UK-EU ETS agreement. Negotiations must begin as soon as possible to ensure that the 2021 compliance year is covered by a linked UK-EU ETS, providing the EU is willing to be as ambitious in terms of a net zero ETS as we are here. It is worth bearing in mind that the more the UK diverges, the harder linkage will become, so early action is crucial. Any linkage could be formed with the greater goal of achieving a global market as per Article 6 of the Paris Agreement – as mentioned, our presidency of COP26 is a good opportunity to take this symbolic step. 

It is clear that a UK ETS must be aligned to net zero and must be linked to other ETSs to maximise the benefits of having control of our own emissions trading scheme. I have written to the Secretary of State requesting prompt government action on these two policies so that we can stay on track to achieve our net zero target, boost industry and international trade, and mark ourselves out as global leaders in the fight against climate change.

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Alexander Stafford is MP for Rother Valley and a member of the BEIS Select Committee.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.