UK government updates plans for no-deal Brexit carbon tax

Revised government guidance confirms that the EU's carbon cap and trade scheme, the EU Emissions Trading Scheme (ETS), will no longer apply to UK industry under a 'no deal' scenario; and provides updated deadlines for current participants. .

The deadline for EU ETS operators to surrender 2018 allowances has been pushed back to 10.59pm on 12 April 2019, based on the UK's current EU exit date of 12 April 2019. The compliance deadline will be pushed back to 30 April 2019 or immediately before exit, whichever is sooner, should the UK's departure from the EU be delayed again, according to the new guidance.

The EU suspended "relevant processes" associated with UK participation in the EU ETS as of 1 January 2019. This suspension will only be lifted if the withdrawal agreement between the UK and EU is ratified, allowing firms to comply with the rules as they do currently until the end of the implementation period.

The Commission's website states: "[F]rom 1 January 2019 onwards the UK will not be able to auction allowances, allocate allowances for free to operators or exchange international credits for as long as this suspension remains in place".

The UK government therefore does not intend to issue any 2019 allowances unless and until this suspension is lifted, according to the guidance.

The EU ETS is a carbon trading scheme which applies to around 11,000 heavy energy users, around 1,000 of which are in the UK. Such users include power stations, oil refineries, offshore platforms and manufacturers of heavy industry. The EU ETS requires operators of these installations to measure and report their carbon emissions over the relevant yearly period, and to surrender allowances in proportion to the emissions from their installations. EU ETS participants are typically given some of these allowances, but have to purchase others through auctions.

The UK will no longer be able to participate in the EU ETS from exit day onwards in a 'no deal' Brexit scenario. The UK does, however, intend to retain the current monitoring, reporting and verification requirements for operations, in order to maintain continuity and aid in its transition to a long-term UK-specific carbon pricing approach.

At the 2018 Budget, the UK government announced its intention to introduce a Carbon Emissions Tax in a no-deal Brexit scenario. This tax would apply to all stationary installations currently participating in the EU ETS, but would not apply to aviation. The tax would initially be set at £16 per tonne of carbon dioxide emitted over and above an installation's emissions allowances, based on the installation's free allowance allocation under the EU ETS.

The tax will come into force on 15 April 2019, based on a withdrawal date of 12 April 2019, according to the revised guidance. The tax will not be retrospective, and the UK government does not intend to introduce any additional domestic policy measures to cover the period running from the suspension of the EU ETS on 1 January 2019 up to exit day.

Environmental law expert Georgie Messent of Pinsent Masons, the law firm behind Out-Law.com, said that operators currently subject to the EU ETS faced considerable uncertainty until the UK's final Brexit position becomes clear.

"As early as 12 April 2019, or whenever the impact of Brexit hits and we either come out of the EU or stay in, UK industry will find themselves either remaining in the EU ETS or subject to the new carbon tax," she said. "At the moment, we understand that UK heavy industry has to surrender about £1 billion worth of carbon allowances each year, so we are talking about substantial costs for industry associated with this potential change in approach to carbon regulation."