GENEVA, 6 December - Next week the UK Parliament will vote on the draft Withdrawal Agreement and the political declaration on the country’s future relationship with the European Union.
This decision has massive implications for British and European climate policy, since a rejection of the draft agreement could lead to the UK effectively leaving the EU ETS at the end of this year.
Such a move could plunge the European carbon market into uncertainty and lead to a significant carbon price decrease, as UK installations liquidate their holdings of un-needed EU Allowances.
IETA and our members strongly believe that the UK should either continue to participate in the EU ETS as it currently does, or create its own, linkable domestic UK carbon market. IETA notes that several non-EU countries currently participate in the EU ETS.
IETA believes cap-and-trade is the best method of implementing a carbon price because it meets two key requirements for any government policy: it is capable of delivering its environmental objective and it is highly cost-efficient.
"Linking a UK carbon market to the EU’s system would boost liquidity and widen the scope for emissions reductions available to UK industry," said Simon Henry, IETA's EU Policy Director. "A fully-linked market would also ensure a common price for carbon, thereby ensuring a level playing field for industry in a competitive environment."
IETA and its members believe the UK’s 2019 EU Allowances auctions and free allocation to industry should be postponed if there is is still uncertainty at the start of 2019 over the UK's participation in the market.
Under current EU regulations, if there is no deal on the terms of the UK’s withdrawal before the end of this year, any allowances issued by the UK in 2019 will be marked so that they can subsequently be invalidated.
"The solution is to postpone UK auctions and free allocation, not to mark EUAs," Simon Henry said. "Marking UK allowances would merely create a two-tiered market, as companies in other EU member states would avoid buying UK-issued EUAs."
IETA members would be very concerned by such a development, as this would create price distortions. UK-issued allowances would likely trade at a significant discount on the secondary market, and there may be a high risk of UK auctions failing as stakeholders choose not to participate in them.
IETA's position paper on Brexit and the EU ETS can be found here.