In a messy divorce with Europe, the UK takes its shows with it.
The UK has participated in the Continent Emissions Trading Scheme, the EU-ETS, since 2005, but quit as part of Brexit last December. This week, the country released a final report under the system, and its departure on a positive note. The UK reported a 15% drop in emissions from the previous year, according to Refinitiv Carbon, a subsidiary of the London Stock Exchange.
It’s fashionable. Over the past decade, the UK has succeeded in reducing its emissions by around a thirda milestone last seen in the 1880s while developing its economy. And after years of low prices and stagnant trade, carbon prices in Europe are now reaching record highs: 40 ($ 47) per metric ton. Decision-makers in Brussels say they are engaged to maintain a significant price on carbon in the future to lead to further emission reductions.
UK launches carbon market
The EU-ETS allows large emitters to buy and sell emission permits, thereby setting a carbon price for major industries. The multinational market can claim some success: it helped the bloc reduce its total emissions by 3.8% (1 billion tonnes of CO2) between 2008 and 2016, according to a 2020 study Proceedings of the National Academy of Sciences.
And for now, the UK has nothing concrete to replace it. The country has announced the creation of a UK-ETS, mainly for its 1,000 national power plants and the aviation sector, but auctions do not begin until May. British policymakers have left open the possibility of joining the EU-ETS, as has its arrangement with Switzerland, but nothing is planned.
Everyone is very happy, given all the difficulties with Brexit, the UK will stay with the emissions trading, says Jill Duggan, executive director of the Environmental Defense Fund in Europe. This leaves the door wide open for the UK to join the system in the future. The country must reduce its emissions at least 68% by 2030, and reach net zero by mid-century, based on the 2015 Paris Agreement. Duggan says achieving these goals will be more complex and expensive without EU-ETS.
This is because when it comes to carbon markets, the bigger the better. And the EU-ETS is the the biggest in the world: Of the 10 billion tonnes of carbon permits traded in the world last year, 80% were on the EU-ETS. According to economists, a large, well-designed carbon market optimally reduces the cost of reducing emissions by allowing each major player in the market to either reduce emissions or pay others to do so cheaply. Over time, this theoretically highlights emission reduction options that are cheaper and more acceptable than, say, taxes.
Emissions trading is better with friends
The United Kingdom, formerly representing approximately 11% of total emissions on the EU market, is now autonomous. Fewer emitters means less emissions, less liquidity and potentially higher prices for comparable volumes of emission reductions. This will increase pressure on politicians to over-allocate permits and keep carbon prices low, discouraging investments in reducing emissions.
This the criticism is already raised on the UK-ETS system. Last December, British Prime Minister Boris Johnson said the new program would be more ambitious than the European system it replaces, But initial estimates suggest the UK-ETS is set to over-allocate at least 37 million excess metric tonnes in its first year, with an initial floor price of $ 30 (22) per metric ton. This could lower carbon prices well below those in the EU until 2030.
It is still too early to say whether the UK carbon market can match the EU’s ambition, but the answer will have global ramifications. More … than 80 countries mentioned carbon markets as a tool they can use to meet their commitments under the Paris Agreement, including China, which is rolling out a national cap-and-trade system. The empirical evidence to justify this global spread is mixed at best, warns the PNAS study. If the regulations are strong, Carbon markets can work even when prices are low, but without such political will, low prices will do little to decarbonize regulated economies.
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