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Budget 2018: ‘Carbon Emissions Tax’ to replace EU ETS in event of ‘no-deal’ Brexit

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Plans for a Carbon Emissions Tax (CET) to take effect in the event of a ‘no-deal’ Brexit were set out in Budget 2018.

HM Treasury said the aim is to maintain a stable carbon price, provide stability for businesses and replace the revenue lost from auctioning allowances if the UK left the EU ETS. Initial legislation for the CET will be in the form of a statutory instrument in the finance bill. In a ‘no deal’ exit from the EU the Carbon Price Support rates would also remain in place, HM Treasury said.

The CET plan leaves uncertain the status of allowances that arise between 31 December, the end of the reporting year for the EU ETS, and the exit date of 29 March. Currently companies have to decide for themselves (and take their own legal advice) to decide whether to dispose of allowances they incur during this period, or assume a Brexit deal will be agreed. In a normal year €300-500 millon worth of ETS allowances accumulate in the UK system, according to evidence given to the Lords EU Energy and Environment Sub-Committeein October.

In the event of ‘no deal’, the CET would tax carbon dioxide emissions (and other greenhouse gas emissions) produced by around 1000 UK installations currently in the EU ETS. The new tax would be introduced from 1 April 2019, with the first tax period ending on 31 December 2019. It would be collected by HM Revenue and Customs (HMRC) annually, with the first payment due in 2020. Following tax periods would cover 12 month periods from January.

The CET design would mirror, in broad terms, the acquisition and surrender of EUAs under the EU ETS.  All current participants in the EU ETS would be set an annual emissions allowance based on their allocation under Phase 3 of the EU ETS and they would be would be taxed in 2019 at a rate of £16/t.

The costs of administering the CET would include £2 million for an IT system so that HMRC can obtain information from the Environment Agency’s ETSWAP system. Other costs to HMRC are estimated at £620,000. There would also be costs to the Environment Agency in adding IT functionality to the ETSWAP system.

A technical document has been published by HMRC with some details on how the tax would operate. Although the main structure of the tax, including the rate, would be set in Finance Bill 2018/19, a consultation would take place during 2019 on the detailed provisions to inform a statutory instrument or instruments that would be laid in early 2020.

HM Treasury added that if the UK secures an implementation period, it would remain a member of the EU ETS during that period. The government is continuing to develop options for long-term carbon pricing, including remaining in the EU ETS; establishing a UK ETS (linked to the EU ETS or standalone) or a carbon tax.