The consultation reiterates that a linked UK ETS is the preferred carbon pricing option, because it allows:

• access to a larger market
• increased abatement opportunities
• more cost-effective emissions reductions for UK businesses

If that is not possible the government has promised that there would be a new arrangement that “would be at least as ambitious as the current EU Emissions Trading System (EU ETS) and will provide a smooth transition for relevant sectors”. Fall-back options include the UK introducing its own domestic trading system, which would not be linked to the EU ETS or the introduction of a tax on carbon. It also considers  the implications if the UK participates in Phase IV of the EU ETS (as the UK is still in the UK, regulations for this phase have to be transposed into UK law during 2019).

A UK ETS would follow the EU model in auctioning allowances, but with some free allocations which the government said would help stop ‘carbon leakage’ when industries move to countries with no emission limits. Free allocation would not apply to the power sector. The auction would have a reserve price that would take into account recent prices for carbon emissions, which have ranged from £4.70 to £13.70.

Government is also considering a decarbonisation fund and considers whether such a fund should be set up and whether it should be funded from free or auctioned allowances.

An initial review of the new system would take place in 2023.

The consultation does not include detail of the carbon tax option, but it says responses may feed into further work on this alternative. It said if the option went forward, government would explore ways of incentivising installations to reduce emissions, how the rate would be set and how to ensure that businesses would have sufficient visibility of future costs.