No-deal Brexit could cut UK's CO₂ revenues by GBP555 million/year

London — A no-deal Brexit could cut the UK government's carbon revenues by an estimated GBP555 million per year, based on average EU carbon prices in the second quarter of 2019.

The government has said it plans to impose a carbon emissions tax of GBP16/mt on emissions from sectors regulated by the EU Emissions Trading System, effective November 4, if the UK leaves the EU without a deal October 31.

"At the time the GBP16/mt carbon tax was first proposed last year, it was intended to keep UK carbon costs broadly unchanged from where they were," S&P Global Platts Analytics said Thursday.

"But the gains in EUAs since then mean the GBP16/mt carbon tax combined with the GBP18/mt carbon price support translate into a GBP10/mt fall in UK carbon costs vs current levels," it said.

This had implications for the relative profitability of UK power versus Continental power, at a time when the spread between UK and EU forward power prices has narrowed significantly in recent weeks, Platts Analytics said.

UNINTENDED WINDFALL

Currently, UK-based CO₂ emitters pay more to emit carbon than most of their continental European counterparts, because the total cost of carbon in the UK is higher than the EU carbon price. This higher cost has enabled the UK to achieve a rapid phase-out of coal from power generation.

In the UK, CO₂ emitters must pay the Carbon Price Support, which is a tax of GBP18.00/mt in addition to the EU carbon price, which averaged Eur25.53/mt (GBP22.58/mt) in Q2 2019, making a combined CPS/EU ETS carbon cost of GBP40.58/mt.

If the UK leaves the EU without a deal, and a GBP16/mt tax imposed, the combined carbon cost would fall to around GBP34.00/mt, all else being equal. Based on average EU carbon prices in Q2 2019, this gives an estimated net carbon cost reduction of GBP6.58/mt as a result of a no-deal Brexit.

The UK government has said the new carbon tax would only apply to a company's CO₂ emissions that are in excess of the level of free allocation of EU carbon allowances it would have received had it remained in the EU ETS.

The UK's verified CO₂ emissions under the EU ETS in 2018 stood at 141.7 million mt, while total free allocation was 57.4 million mt, according to European Commission figures.

That leaves a total of 84.3 million mt of CO₂ not covered by free allocation. This gives an approximate guideline for the volume of CO2 that would carry a liability under the UK's new carbon tax, cutting the revenue generated by UK carbon taxes by GBP555 million per year.

This also represents the potential savings made by UK-based CO₂-emitting companies as a result of the lower carbon tax bill under a no-deal Brexit.

ECONOMIC IMPACTS OF NO-DEAL BREXIT

Any savings for UK-based companies are likely to be overshadowed by the economic impacts of leaving the EU without a deal.

UK independent financial watchdog, the Office for Budget Responsibility, said in a report July 17 that a no-deal Brexit could cause a recession in the UK, slowing economic growth by 2% in 2020 and causing a GBP30 billion hit to the UK economy.

Under a no-deal Brexit, any net savings among UK companies from lower total carbon costs in 2020 would depend on the final level of CO₂ tax implemented relative to the EU carbon price at the time, which could be significantly lower as a result of a no-deal outcome, reducing any net saving for UK-based companies.

The UK government is expected to review the new carbon emissions tax in each autumn budget, and any future changes to the tax remain uncertain for now.

Longer term, the UK government has said its preferred option for post-Brexit carbon pricing is the introduction of a domestic UK Emissions Trading System linked to the EU ETS, and this could be timed to coincide with the start of the EU carbon market's fourth trading phase in January 2021.

UK CO2 costs

-- Frank Watson, frank.watson@spglobal.com

-- Edited by James Leech, james.leech@spglobal.com