UK polluters face Brexit anxiety over carbon credits

In August 2017, it asked the UK government and the EU to confirm continued participation in the ETS by October 2017.

By September 2017, in the lobby group's third ETS paper, it gave up asking for clarity by a certain date - perhaps because it knew that such a request would fall on deaf ears.

Britsh member of the European Parliament Julie Girling can relate to their dilemma.

She said that if she was running a UK company covered under the EU's carbon credits scheme, she would be "worried".

"There has been a real change in UK politics and I think that some people in industry particularly are thinking that they can no longer predict what is going to happen," Girling told EUobserver in a phone interview.

"I would be thinking: 'Who is in charge of this and do they understand our problem?' I don't think I would be as confident as I would have been two years ago."

Her criticism might be predictable from a member of an opposition party, but Girling is a member of Theresa May's ruling Conservative party.

"If you listen to them [May's cabinet], they all have very different views," she said about her government back in London.

MEP Girling said her views on Brexit have "diverged" from London, and that she was one of the "remoaners" – Brits who voted Remain in the 2016 in/out referendum and are having difficulties accepting the vote for Brexit.

Last week, EU leaders decided that talks can begin about the transitional phase, and to begin thinking about the future relationship between the EU and UK.

The future involvement of the UK in the EU's emission trading system (ETS) is one of many topics that the two divorcing sides will have to decide upon.

Polluting permits

Currently, around 1,000 industrial plants and power stations in the UK are covered by the ETS, which means that the companies that own them are required to hand in polluting permits – or 'allowances' – for every tonne of CO2 they emit.

These permits can be bought through auctions, but some of them are also given to companies for free.

The idea is that companies that reduce their CO2 emissions, for example by switching to clean energy, have a financial incentive to do so because they would have to pay less for polluting, or could sell the permits they do not need.

But since the number of permits that are created each year are set in advance, and the economic downturn earlier this century led to less pollution, a surplus of them have been built up.

When the ETS was set up in the mid-2000s, experts were expecting a carbon price of between €20 to €30. The price of an ETS allowance for the past month hovered between €7 and €8.

Part of the proceeds are used to fund clean energy projects.

Last-minute fix

The system is divided in 'phases': the current phase III is in place until 2020, while phase IV will be from 2021 to 2030. Every year in April, companies have to comply with the ETS by handing in a number of carbon credits equivalent to their greenhouse gas emissions.

Brexit is due to happen on 29 March 2019, two years after the UK triggered the EU treaty's Article 50.

With the compliance date for emissions from the year 2018 – April 2019 – falling after Brexit, the European Commission recently proposed a change in the legislation, which brings forward the 2018 compliance date to 15 March 2019.

"This is just a very short-term emergency measure for 2018," said Pieter-Willem Lemmens, of the environmental lobby group Sandbag.

"Policymakers have to start as soon as possible to come up with a solution for the years 2019 and 2020 as well," he noted, adding that the amendment was adopted "very last minute".

It is unclear if the UK government wants the UK to remain part of phase III during its transitional phase, or even after they have fully left the EU, during phase IV.

"The worst case would be if the UK leaves and no adjustments are made to the system, which would mean that we face the market being flooded by allowances intended for compliance by the UK but that will not be used," said Lemmens.

"It would increase the surplus further," he said.

By contrast, Lemmens said that if the surplus was resolved, the best-case scenario would be the UK continuing to participate in the ETS until at least 2030.

"Either directly, by being an integral part of it, or by setting up its own ETS system, which could then be linked to the ETS," he said.

Conservative MEP Girling also believed that to be the best-case scenario.

Girling has been closely involved in shaping the details of phase IV (2021-2030) as 'rapporteur' on behalf of the EU parliament, which means she directly negotiated with representatives of national governments and the European Commission.

"I believe that in phase IV particularly, with the reforms that we've done, we have a really good chance of getting a decent carbon price that really will drive down emissions, and it would be a great shame if the UK would drop out of that," she said.

The energy lobby group, Energy UK, has said that it preferred the UK to remain part of the EU ETS during phase III and IV.

New 'UK system' would take years

If the UK would leave the EU's ETS, but set up its own system, that is not something that can be done overnight.

"They have the advantage that there is a very strong model with the EU ETS, but I think that if they were not going to be participating in the EU ETS, they would probably be under some pressure to have quite a differentiation from it," said Girling.

That would mean the UK would have to figure out how credits from the EU system translate into those from the UK system.

Girling estimated that "a minimum of two years" was needed for the UK to design its own system, and perhaps five to six years in total.

The UK department for business, energy, and industrial strategy did not wish to comment on the record as to whether preparatory work for a UK system has begun, and when it would decide the UK's future role in the EU ETS.

"I don't think that the UK's civil service is currently looking at drawing up an alternative ETS," said Girling, but she added that she had no influence on what the UK will do.

"I honestly don't know."