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UK to replace EU emissions scheme with similar carbon tax in no-deal Brexit

The U.K. government would raise a £16-per-tonne carbon tax to replace the European Union's emissions trading system in the event of a no-deal Brexit, it said Oct. 29. The announcement, as part of the Treasury's annual budget, provided some clarity on one of the biggest uncertainties for the power sector in the face of Brexit and means that British power generators and other large emitters would continue to pay close to the current price for emissions under national and EU schemes.

It also assuaged previous concerns that the U.K. would target a lower total carbon tax if it does not reach a deal on its exit from the EU in March 2019, thus prolonging the economic case for keeping coal power plants in the country operating. The government had admitted in a contingency paper released in October that a no-deal Brexit would mean its exclusion from the emissions trading system, or ETS.

The carbon tax shows the U.K. government "is essentially seeking to mirror EU ETS in the event of a no-deal Brexit," said Alex Jones, a policy and strategy consultant at energy consultancy Ecuity. "It’s reassuring to know that the proposed carbon tax ... is high enough to deter power plants and factories currently covered by the EU ETS scheme from using coal."

However, analysts said it was still unclear what would happen to carbon prices in the long run.

The government's plan is to introduce the replacement tax for the ETS alongside the country's existing carbon price support of £18 per tonne of CO2. That tax, known as the carbon price floor, has previously applied alongside the ETS in the U.K. and both combined have been key to driving coal off the grid in favor of gas and other cleaner alternatives.

Britain's existing carbon price support will now be frozen by an extra year until the end of 2021, independent of the outcome of Brexit negotiations. The government would also seek to reduce the floor price after 2021 if the combined total carbon price, including the EU ETS, "remains high," according to the budget.

Prices under the ETS have risen significantly in recent months ahead of the removal of a large number of emissions allowances from the market into a stability reserve in 2019.

"Many questions remain about the proposed carbon emissions tax, and how the government will steadily increase carbon prices in the future," said Phil MacDonald, managing director at climate policy think tank Sandbag, which had previously calculated that a lower carbon price would lead to significantly higher coal burn in the country.

"Many analysts think the EU carbon price will rise steeply over the coming years [and] the government needs to set out how the U.K. price will rise to at least match it. If not, the U.K. could become Europe's high-carbon dumping ground," MacDonald said.

The government said that the new tax would apply to all stationary installations currently participating in the ETS from April 2019, with £16 charged per tonne of carbon dioxide emitted above the free allowances allocated to each emitter under the ETS.

The government said it was also legislating to "prepare for a range of long-term carbon pricing options," but did not provide details indicating that the replacement tax could be an interim solution.

Even if there is a deal, the U.K.'s future participation in the ETS is unclear. U.K. Energy Minister Claire Perry has only said that the government intends to stay part of the ETS until the end of the current trading phase in 2020. A separate document released alongside the budget proposal listed a range of options for long-term carbon pricing that the government is exploring, which also included establishing a cap-and-trade system in the U.K. that is either linked to the EU ETS or standalone.

Power producer Drax Group PLC, which is in the midst of converting the U.K.'s largest power plant from burning coal to wood pellets, welcomed the government's proposal for a no-deal scenario.

"It provides investors with certainty and is a critical factor in ensuring an end to the use of coal in the power system," Drax CEO Will Gardiner said in a statement.

Gardiner added that the carbon price should be set high enough to prevent a coal resurgence before 2025, which is when the government is targeting to phase out any coal plants that do not use carbon-capture technology.