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Policy briefing: the future of UK carbon pricing – June 2020

On 1st June 2020, the UK Government published its latest response on ‘The future of UK carbon pricing’ which details the preferred options once the UK exits the European Union on 31st December 2020.

This note summarises the key details, and provides our interpretation of potential considerations and results for the power sector.

Key findings include:

  • The UK Government re-iterated its earlier preference of establishing a UK ETS scheme post-Brexit. The scheme could operate with a direct link to the EU ETS scheme or as a standalone system. Failing this, the Government will implement a Carbon Emission Tax as a fallback option
  • Phase I (2021 – 2030) of the UK ETS scheme will apply to all energy intensive industries including power, industry and aviation. Ambitious decarbonisation goals will guide the price of the UK ETS with policies enacted by January 2024 to set a carbon price in line with the 2050 Net Zero target
  • Due to a rapid decrease in emissions in the recent years, the UK is currently emitting less than its allocated allowances under the EU ETS. Without an external market for exporting excess allowances, the standalone UK ETS scheme could result in a depression in short term carbon prices
  • Relative to Aurora Central, a higher carbon price in line with 2050 Net Zero targets is expected to raise baseload electricity prices by ~£2.1/MWh (or 3.4%) in the 2030s
  • Within the power sector, the effectiveness of the carbon price is expected to diminish when the carbon price exceeds £80/tCO2 as thermal technologies set the price less and less frequently
  • Exemptions of EU ETS/UK ETS payments for small gas peakers below 20 MW thermal will continue at least until the implementation of recommendations from the first review in 2026. These exemptions provide gas recips with an additional 40% in annual gross margins relative to a non-exempted peaker

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