The UK’s weak and volatile carbon price is threatening to undermine investment in clean energy, cost the Treasury billions in lost revenue, and could see domestic companies facing hefty tax bills for exporting to the rest of Europe by 2026.
Analysis published today by Energy UK shows the initial impact from a UK carbon price which has tumbled during 2023 and highlights the potential consequences if left unchecked – with the EU set to introduce a carbon border adjustment mechanism (CBAM) next year.
Energy UK analysis shows that over the last 6 months, carbon prices from the UK’s Emissions Trading Scheme (ETS) have raised over £1bn less than if prices had remained at last year’s levels. If low carbon prices persist, the Treasury could lose out on £3 billion in revenue per year and from 2026, UK companies exporting to the continent could end up paying half a billion pounds a year in carbon taxes to the EU as a result of the CBAM.
Energy exported from sources like wind, solar and nuclear will be subject to the tax, despite being carbon-free, deterring investment in UK clean energy – compounding a problem already exacerbated by a weak domestic carbon price at exactly the moment the UK is struggling to keep up with international competition from other key markets.
With much of the problem stemming from the disparity between the carbon price on the UK’s ETS and its EU equivalent, Energy UK is calling on the Government to link the two schemes – as other jurisdictions, such as Switzerland, already do. Such a move would exempt UK companies exporting to Europe from the CBAM, saving them billions in potential tax payments, provide higher revenues for the Treasury, and cut red tape through the removal of complex reporting requirements for companies.
While the Government is committed to giving ‘serious consideration’ to linkage, Energy UK is urging them to press ahead to avoid looming issues resulting from the CBAM’s introduction.
The ETS works by placing an overall cap on emissions and auctioning allowances to companies that produce emissions. Over time, the number of auctioned allowances is reduced, providing a market-based incentive to invest in low-carbon alternatives. The UK was the first country to introduce an ETS in 2002 and having a strong carbon price has been one of the key policies responsible for the UK’s world-leading progress in halving its emissions since 1990. Having participated in the subsequent EU ETS (which was based on the UK version) for 15 years, the UK (re)introduced its own scheme in 2021 following its departure from the EU.
Adam Berman, Energy UK’s Deputy Director, said:
“The UK has led the way internationally on pricing polluting carbon emissions. Carbon pricing has played a critical role in the decarbonisation of the UK and has driven investment in clean energy and low carbon technologies. But a falling and volatile domestic carbon price threatens to deter clean investment at the very moment we need it most and could end up costing British companies billions of pounds simply for trading with their largest export market.
“Linking our carbon pricing regime with the EU’s would exempt UK companies from these costs and remove the problems caused by the disparity between the two schemes. It would also stabilise and strengthen our carbon price, sending a powerful signal to bring forward investments in homegrown clean energy that can cut bills, reduce emissions, and bolster our energy security.
“We strongly believe that both sides would benefit from linkage, so we urge the Government and the EU to get round the table before UK companies start paying the price.”
Notes to editors
- Energy UK is the trade association for the energy industry with over 100 members – from established FTSE 100 companies right through to new, growing suppliers, generators and service providers across energy, transport, heat and technology. Our members deliver nearly 80% of the UK’s power generation and over 95% of the energy supply for 28 million UK homes as well as businesses. The sector invests £13bn annually and delivers nearly £30bn in gross value – on top of the nearly £100bn in economic activity through its supply chain and interaction with other sectors. The energy industry is key to delivering growth and plans to invest £100bn over the course of this decade in new energy sources. The energy sector supports 700,000 jobs in every corner of the country. Energy UK plays a key role in ensuring we attract and retain a diverse workforce. In addition to our Young Energy Professionals Forum, which has over 2,000 members representing over 350 organisations, we are a founding member of TIDE, an industry-wide taskforce to tackle Inclusion and Diversity across energy.