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UTILITY WEEK | 10TH - 16TH MARCH 2017 | 19 Policy & Regulation Analysis W e all now know that Brexit means Brexit. However, one of the many things not yet clear is what it means for the carbon price and the UK's participa tion in the EU Emissions Trading System (EU ETS). With the government set to trigger Article 50 later this month, Utility Week has been told there are no obvious answers to the conundrum. Broadly speaking, there are three options for the UK. First, it could remain a full member of the scheme, carrying on as if nothing had changed. Alternatively, it could choose a halfway house; creating its own emissions trad ing scheme and then linking it into the EU scheme. Lastly, it could separate itself entirely from the mechanism; perhaps by introduc ing a direct carbon tax. Managing director of environmental thinktank Sandbag, Rachel Solomon Williams, says staying in would be the "easy" option. "Administratively we wouldn't have to change anything. We wouldn't have to set up a new mechanism. The industry understands it." Because the UK has been "one of the most ambitious voices" on tackling emissions, "staying at the table" would help to keep up pressure on cutting emissions. On the other hand, Solomon Williams wonders whether continued participation would be politically acceptable. "If the ambi tion is that the UK is going it alone indus trially, being in an EU trading mechanism doesn't seem completely consistent with that." Staying part of the EU ETS would mean being subject to rulings by the European Court of Justice, something that prime minis ter Theresa May has indicated is a no go. "Any option in which we remain in the EU ETS but lose our vote on how it is designed would be completely unpalatable to every body," Solomon Williams adds. She also questions whether it is really worth staying in given the chronic over supply that has plagued the mechanism ever since the financial crisis, and has le the European carbon price in the single dig its. Just last week, member states voted in favour of proposals that would help to mop up this surplus and boost the carbon price, but Sandbag's view is that it will make "no difference at all": "If the UK government wants to stay in the EU ETS, they would need to be funda mental reform for that to be worth doing," she says. So what about the linked trading scheme? This would enable allowances issued under one system to be meet the regulatory obliga tions under another. "There's a number of ways in which link ing can happen," explains Martin Nesbit, senior fellow and head of the climate and environmental governance programme at the Institute for European Environmental Policy. "It can either happen unilaterally – so the UK could decide that allowances from the EU ETS could be used to meet domestic UK obli gations but without securing the right for UK issued allowances to be used in the EU – or you could have a fully linked system where the allowances are traded both ways." Nesbit says this should in theory allow the UK to retain involvement in the EU ETS while offering some flexibility to decision makers. In practice, however, this flexibility "wouldn't be very attractive to exercise". If, for example, ministers wanted to make faster progress on climate change and set more demanding caps, "the price impact of that would be immediately diluted by the EU ETS". Nesbit, says it also unlikely the EU would allow the UK to do the reverse – increasing the caps to slow progress. "As with so many issues related to Brexit, the UK's influence over the rest of the EU 27 would be relatively marginal." The final option would be creating a mechanism that is completely independent from the EU ETS. This could mean creating a domestic cap and trade scheme without link ing to the European mechanism, although a straight carbon tax seems the more likely option. A carbon tax would offer independence from the EU and would allow ministers to give longterm certainty over the carbon price, if they so wished. SolomonWilliams says going it alone could be attractive bear ing in mind the failure of the EU ETS to provide a sufficient carbon price to drive investment decisions. It was this issue that drove the govern ment to place levies on fossil fuels, ensuring that UK emitters paid a minimum price – the carbon price floor – and later introduce a cap on the topup payments when they became too big. In terms of its practical implications, introducing a carbon tax would not be all that different to what the UK has already. The downside would be relinquishing any influence beyond persuasion over the Euro pean carbon price and emissions. Both SolomonWilliams and Nesbit say there is no clear right answer for the UK. "It depends a lot on what the UK's vision is for decarbonisation," says Nesbit. Given the way things are going, he believes the UK will eventually end up leav ing the EU ETS. "Although both sides might want continued UK participation in the EU ETS, I find it difficult to see how you get a deal on that in place in time, delinked from the rest of the Article 50 fiasco." Whatever route the UK follows, a difficult path lays ahead. Brexit and the EU ETS It may make practical sense for the UK to remain an active player in the EU's emissions trading programme, but the politics of Brexit could make it an unacceptable option, says Tom Grimwood. Key points The UK could continue in the EU ETS as if nothing has happened, choose a half-way house, or go it alone. Leaving the EU ETS would mean the UK relinquishing any influence over Europe- wide efforts to reduce emissions. Continued participation may be politically unacceptable. The EU ETS has anyway been hit by chronic oversupply of allowances. The UK could run its own system.