Carbon market industry group the International Emissions Trading Association has urged the UK to stay in the EU Emissions Trading System after it leaves the EU in 2019.
Geneva and Brussels-based IETA wrote to UK business and energy minister Nick Hurd urging the UK to remain part of the EU ETS following the two-year Brexit process that was triggered in March.
"IETA takes very seriously the implications of Brexit on climate policy and emissions trading, as there are many risks to UK businesses and their European counterparts if the UK were to no longer participate in the EU ETS," the group said in the letter dated April 24.
The fourth trading phase of Europe's emissions cap-and-trade system begins in January 2021, but the UK is expected to have left the EU almost two years ahead of that date.
"As the Brexit negotiations will likely require the UK to leave the EU by March 2019, we are concerned about potential market disruption from the timing mismatch," the group warned in the letter, which it released late Tuesday.
"IETA strongly recommends that the UK continue its participation in the EU ETS, particularly through the current phase ending in 2020," it said.
Any UK pull-out of the EU ETS has implications for the operators of UK-based power-generating facilities, airlines and other emissions-intensive sectors including metals, refining, chemicals, cement, glass, bricks and ceramics, among others. Non-membership of the EU does not necessarily require a pull-out from the EU ETS, with non-EU members Norway, Iceland and Liechtenstein already participating in the 31-nation system.
Any pull-out from the EU ETS would not necessarily reduce the cost of emitting CO2 for UK-based industries.
Power generators in the UK already pay a tax of GBP18.00/mt for their CO2 emissions from fossil fuel combustion in addition to the cost of EU CO2 allowances -- currently trading at around Eur4.50/mt -- which together make up the UK's Carbon Price Floor.
"Many companies in the UK and Europe purchase [CO2 allowances] up to two to three years in advance to hedge compliance costs. Therefore, we urge that the UK and the EU agree early in their deliberations on a transitional phase for the UK's participation during the remainder of phase 3 of the EU ETS [2013-2020]," IETA said.
"We believe that an early agreement between the UK and the EU on maintaining the UK's participation in Phase 3 of the EU ETS is critical in order to prevent serious negative impacts to meeting the UK's carbon budget, to UK operators' financial performance, and to the overall environmental objective of the carbon market," it said.
IETA "strongly recommended" that the UK closely align its overall climate policies with the EU, including rules governing the fourth trading phase that will be finalized at the culmination of the Brexit negotiations.
"Carbon trading is an important instrument for enabling energy and industrial firms in the UK and Europe to meet their climate targets at least possible cost, ensuring environmental performance while reducing concerns about industrial competitiveness," it said.
Access to emissions registry accounts, meeting existing emissions trade contracts with EU counterparts and setting open trades would all be put at risk if the UK no longer maintained its participation in the EU ETS, the group said.
IETA said it is developing a list of elements of EU ETS implementing legislation that will need to be addressed by the UK in the form of statutes for phases three and four, and offered to share this work with the UK's Department of Business, Energy and Industrial Strategy.
IETA's 130 members come from a broad cross-section of industry, including companies whose CO2 emissions are regulated under the EU ETS as well as non-emitting sectors such as finance, brokering and trading, legal and consulting.
