Following the end of the transition period, the UK will be required to leave the EU Emissions Trading System (EU ETS), in which event it will consider either:
1. Setting up a UK Emissions Trading System (UK ETS) that could link in with the EU ETS; or
2. Establishing a new UK Carbon Emissions Tax (CET).
Both approaches to UK carbon policy would be designed to ensure that the price of carbon retains stable and that the UK can achieve its legally binding carbon reduction targets, which are unaffected by the UK’s departure from the EU.
The government has today announced that it will legislate in Finance Bill 2020 to:
1. Provide HM Treasury with the statutory powers necessary to establish a UK ETS; and
2. Amend Finance Act 2019 to provide detail around how the CET would take effect should a UK ETS capable of integration with the EU ETS not be possible.
The government has also announced that it will launch a consultation in spring 2020 to obtain consensus on how the CET would operate in practice.
Businesses that are currently required to use the EU ETS, businesses that have energy intensive processes, and ‘stationary installations’ currently required to hold (or could become liable to hold) a greenhouse gas emissions permit or excluded installation emissions permit.
The changes will take effect after the transition period. We expect that detail on the specific approach adopted will emerge as the UK and EU’s negotiations on their future trading relationship progress.
The fact that the government is preparing for both eventualities is not particularly surprising given that negotiations between the UK and EU on the future trading relationship are still at an early stage. However, taxpayers will be keen to understand whether the CET is likely to take effect or not and, if it is, the resulting implications for tax reporting purposes, the likely cost, and systems implications.