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London — The UK government would take advice from the independent Committee on Climate Change on a domestic emissions trading system or carbon tax policy changes, minister for energy and clean growth Claire Perry said Wednesday.

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"The preferred option -- which has been communicated clearly to industry, in line with the political declaration -- is that we want a linked ETS that delivers as much as possible the benefits that are starting to emerge from the EU carbon price," Perry said at an evidence session before the House of Lords EU energy and environment sub-committee.

"We've been working hard with industry to understand their views. There have also been ongoing challenges around the current allowances scheme and we've been working hard on that, in terms of communications," said Perry.

"We've also taken the opportunity to ask the Climate Change Committee for advice on the level of cap on any future [UK emissions trading] scheme, which is a really important part of ensuring that any scheme will work," she said.

Even if not linked to the EU system, a UK ETS would be liquid enough to function as a standalone market, Perry said.

Should the UK decide to develop a domestic ETS, this would require a consultation and impact assessment, and would involve advice from the Climate Change Committee on the design and operational elements of such a system, Perry said.

The UK will publish an invitation in the week commencing March 11 to tender for the required IT infrastructure to support a domestic ETS, "with a commitment that the service is through beta testing and ready to go live on January 1, 2021," she said.

Another statutory instrument would also be required to establish the scheme in 2020, she said.

As part of planning for the post-Brexit period, the UK government has previously announced a new tax of GBP16/mt on carbon dioxide emissions effective April 1 for sectors currently regulated by the EU Emissions Trading System, under a no-deal Brexit scenario.

This proposed tax could be subject to future changes, particularly if it was deemed insufficient for the UK to continue to meet its series of five-year carbon budgets under the UK Climate Change Act.

"The [carbon] budgets are recommended by our committee on climate change and we choose whether to accept them or not," Perry said.

"If it were to be observed by the committee that these policies were causing a departure from our budgets, then that would be something we would be required to address," said Perry.

"Our constant refrain -- about all elements of the EU departure -- has been that we will seek to ensure that our future approach to the EU ETS, and future regulations, is at least as ambitious as our current situation," she said.

Any no-deal outcome in the Brexit negotiations would see the UK leave the EU Emissions Trading System after March 29, and the new tax from April 1 would seek to replace the EU element of carbon pricing in the UK.

Should the UK and EU reach a withdrawal agreement, the UK is expected to stay in the EU system until the end of the current third trading phase on December 31, 2020. At that stage, a domestic UK ETS could be developed and linked to the EU system.

In a no-deal outcome, the UK's new GBP16/mt carbon tax would combine with the existing Carbon Price Support tax of GBP18/mt to make a combined carbon tax of GBP34/mt applying to UK industries.

The new tax could be subject to future changes, with a view to the UK continuing to meet its domestic five-year carbon budgets, Perry said.

"And of course, given the Climate Change Act, which has enshrined in law our domestic targets, those are higher than our Effort Sharing targets that we contribute to the EU," said Perry.

"So we're in a good place to continue to be ambitious, but we would rely on the Climate Change Committee to help us, if indeed this unlikely event of the tax being applied, had the unlikely effect of causing us to deviate from our budgets," she said.

If implemented, the opportunity to adjust the new carbon tax level would occur on an annual basis at each autumn budget, according to UK Treasury officials.

Industry group Energy UK, which is the largest trade association for the UK energy industry, welcomed minister Perry's comments.

"We were pleased to hear both the minister and the Treasury confirm that they will be seeking to implement a UK ETS linked to the EU ETS as the best long-term carbon pricing mechanism to continue driving decarbonization throughout the UK economy," the group said in a statement Thursday.

"As something we have been consistently calling for, it was also very encouraging to hear that work on this has already started," said Energy UK chief executive Lawrence Slade.

"We look forward to working with and supporting the government to ensure the delivery of a proven system from the start of 2021, which will give much needed clarity and certainty to industry," he said in the statement.

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

-- Edited by Alisdair Bowles, newsdesk@spglobal.com

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