Carbon pricing might not be trendy but it’s needed for a low carbon economy

This post is by Hannah Dillon, head of the Zero Carbon Campaign.

There are many things uncertain about post-Brexit Britain, but indecision around how pollution will be priced beyond December could have serious implications, both for the implementation of a green recovery from Covid-19, and the realisation of the UK’s 2050 net zero carbon target.

One of the many things that the UK will have to do on leaving the European Union is introduce a new method of emissions pricing. This will replace the EU Emissions Trading System (EU ETS) that currently covers approximately a third of the UK’s greenhouse gas emissions. In this sense, Brexit is a huge opportunity to align the UK’s approach towards pricing these emissions with our net zero target, designing a system of carbon pricing that covers more of our emissions, and gives incentive to everyone to invest in the transition required to decarbonise our economy. 

Unfortunately, current policy proposals for the future of UK carbon pricing have failed to rise to this challenge. As it stands, we will either replicate the EU ETS with an emissions trading system of our own, or we will implement a ‘carbon emissions tax’, as was proposed in a recent Treasury consultation. Aside from the uncertainty that the government’s indecision is causing, these proposals fail to signal that environmental ambition will be a hallmark of post-Brexit Britain. Instead, what we are seeing is a commitment to the status quo, involving the continued allocation of free pollution permits to heavy emitters to protect their economic competitiveness. 

We should be wary of creating a licence to pollute elsewhere

The theory – perpetuated by the heaviest emitters – goes that, if the level of domestic carbon pricing is too high, operators will save costs by moving their businesses abroad to areas that have less stringent environmental policies. This phenomenon – known as ‘carbon leakage’ – is not only bad from a domestic manufacturing point of view, but it is terrible for environmental progress. It does nothing to account for global emission levels, and it does little to signal to heavy emitters that shifting to low carbon modes of production will make them more competitive in the long run. All it does is remove emissions from the UK’s balance sheet.

The UK is not alone in allocating free pollution permits to overcome concerns about carbon leakage; it is an approach that is taken by every country that has implemented carbon pricing on trade-exposed industries, because those industries will not survive if the same products can be produced much cheaper elsewhere. Unless we can find a way to overcome this, polluters will not be given proper incentives to reduce their emissions, and we will miss the opportunity for industry to lead the ‘green industrial revolution’ that the prime minister – and anyone who relies on industry for their livelihoods – say they want to see . 

There are multiple options on the table for addressing these concerns, notwithstanding the huge amount of upfront capital investment required to support the shift to a low carbon future. As we at Zero Carbon have argued, carbon pricing alone will not be enough to deliver on the UK’s net zero ambition. 

Revising pollution permits should be a first step

As a first step, the European Court of Auditors has proposed that the EU revises its approach to the free allocation of pollution permits, having determined that over-allocation is failing to bring about deep cuts in emissions. Revisions would ensure that free permit allocations are better aligned to the level of trade exposure an industry faces, and the carbon leakage threat. This is an important first step and one the UK should consider implementing, given that both proposals for future carbon pricing systems it is considering are based on the EU’s soon to be outdated methods of free allocation. 

Border Carbon Adjustments (BCA) will also have a role to play, because they ensure importers face the same carbon prices as domestic manufacturers and, as such, pave the way for the implementation of stronger environmental policies.

Product standards – for example on low carbon steel – will also be important, especially if a BCA cannot be negotiated. These are both measures the European Commission is exploring which will also become highly relevant to the UK, once we have officially left the bloc. 

It’s time to increase scrutiny of UK carbon pricing

Overcoming issues of carbon leakage will not be simple, and multiple challenges must be addressed if we want to achieve deep decarbonisation across the UK economy. Carbon pricing might not be the most fashionable aspect of environmental policy, but the ambitions we demonstrate in January will set the tone for what is to come and lay the foundation for the UK’s ability to transition to a net zero carbon economy by 2050.

The Business Energy and Industrial Strategy (BEIS) Committee recognises this, and in the coming months will be holding an inquiry on the Future of UK Carbon Pricing to further explore some of these issues, following our submission to the My BEIS Inquiry process. It is high time for UK carbon pricing to receive this level of scrutiny, and we look forward to the results. 

One comment

  • The real evidence for carbon leakage is thin. It is being used by industry as a card to get out of jail free. All carbon producing industries/sectors in the UK (and elsewhere) should be taxed at a high level, such as €50/t CO2e in 2020 and rising steeply.

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