Policy paper

Carbon Emissions Tax

Published 29 October 2018

Who is likely to be affected

Permit holders of stationary installations currently covered by the EU Emissions Trading System (EU ETS). This includes: power generators; certain large industrial premises and manufacturers, including food processing plants; certain public sector facilities; and those small emitters and hospitals that are subject to simplified reporting arrangements.

General description of the measure

This measure will take effect only if the UK leaves the EU without an agreement. In a ‘no deal’ scenario, the UK would cease to participate in the EU ETS from exit day. This measure would introduce a tax on carbon dioxide emissions (and other greenhouse gas emissions on a carbon equivalent basis) produced by UK stationary installations currently in the EU ETS. The new tax will be introduced from 1 April 2019, with the first tax period ending on 31 December 2019. The tax would be known as Carbon Emissions Tax and collected by HMRC annually, with the first payment due in 2020.

All current participants in the EU ETS who are UK permit holders operating stationary installations currently in the EU ETS would be set an annual emissions allowancefor the purposes of the tax. For permit holders outside the simplified reporting scheme this would be based on the allocation of free EU Allowances (EUAs) that would have been allocated to installations under Phase 3 of the EU ETS.For those in the simplified reporting scheme, agreed emissions targets. Installations would continue to report their activities annually under the existing Monitoring, Reporting and Verification (MRV) scheme and, as at present, this information would establish how many tonnes of greenhouse gases they emit during the reporting period. All emissions that exceed the annual allowance would be taxed on a carbon equivalent basis at a rate for 2019 of £16 per tonne.

A technical document is being be published alongside Budget 2018 setting out more details on how the tax would operate. Consultation would take place during 2019 on the detailed provisions to inform a statutory instrument or instruments that would be laid in early 2020.

Policy objective

The new tax would maintain a stable carbon price for those stationary emitters currently covered by the EU ETS, providing stability for businesses and supporting the UK to meet its legally binding carbon reduction targets, which would be unaffected by leaving the EU. It would also aim to replace the revenue lost from the auctioning of EUAs which would result from the UK leaving the EU ETS.

Background to the measure

This measure was announced at Budget 2018.

The government currently sets a total carbon price, created by the price of allowances from the EU ETS and the Carbon Price Support rate per tonne of carbon dioxide which tops up the EU ETS price for electricity generators. The total carbon price is designed to provide an incentive to invest in low-carbon power generation.

The EU ETS, which was introduced in 2005, is a ‘cap and trade’ scheme designed to set a price for carbon emissions to encourage their reduction. It applies to large emitters of greenhouse gases in the EU and includes rules determining how many free EUAs participants are allocated each year. Currently the EU ETS is in phase 3 which ends in 2020.

The EU ETS requires participants to obtain permits to emit and then to submit a report annually providing details of their activities across the previous calendar year, from which their emissions across the period are calculated. All greenhouse gas emissions are calculated on a carbon equivalent basis. The data will continue to be collected following the UK’s departure from the EU.

The EU ETS also provides for a simplified reporting scheme for small emitters and certain hospitals, who are set annual emissions targets rather than allocated EUAs.

If the UK leaves the EU without a deal in March 2019, it would cease to participate in the EU ETS from exit day. This measure has been prepared to cover that contingency. Both the UK and the EU continue to work hard to seek a positive deal. It is in the interests of both to strike a deal and the government remains confident that a mutually advantageous deal with the EU will be agreed.

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. However, it is the duty of a responsible government to prepare for all eventualities, including ‘no deal’, until the outcome of those negotiations are certain.

In a ‘no deal’ exit from the EU the Carbon Price Support rates would remain in place. As well as the announcement about the Carbon Emissions Tax, Budget 2018 also contains announcements about Carbon Price Support rates.

Detailed proposal

Operative date

The tax will apply to emissions in excess of an installation’s allowance from 1 April 2019 should the UK leave the EU ETS in March 2019.

Current law

The Greenhouse Gas Emissions Trading Scheme Regulations 2012 set out the domestic law relating to free allocation of EUAs and permitting requirements, as well as the simplified reporting arrangements for small emitters and certain hospitals. These regulations implement Directive 2003/87/EC which established a system for greenhouse gas emission allowance trading within the EU and set out the framework for the important features of the system, including requirements to obtain a permit to carry out activities within the scope of the Directive and then to monitor, report and verify emissions in each calendar year.

EU subordinate legislation made under Directive 2003/87/EC includes: Commission Regulation 601/2012, which sets out detailed rules relating to the monitoring and reporting aspects of MRV; and Commission Regulation 600/2012, which sets out the detailed rules for the verification aspects of MRV.

Proposed revisions

Legislation will be introduced in Finance Bill 2018-19 to create a new Carbon Emissions Tax, setting the scope, rate and basic structure of the tax and establishing that it would be payable only on emissions above an emissions allowance set for each installation. The Finance Bill will also provide for a statutory instrument or instruments which would include:

• provision for the level of the emissions allowance
• amending existing emissions reporting requirements to adapt them for the tax
• the payment and tax collection arrangements
• decisions on which the taxpayer would be able to seek a review and against which they would be able to appeal, and
• record-keeping requirements

The Finance Bill legislation for this measure would be brought into effect by statutory instrument and take effect only if the UK leaves the EU without an agreement.

Summary of impacts

Exchequer impact (£m)

2018 to 2019	2019 to 2020	2020 to 2021	2021 to 2022	2022 to 2023	2023 to 2024

In the event of a no deal scenario, the final costing would be subject to scrutiny by the Office for Budget Responsibility and would be set out at a later date.

Economic impact

It is expected that this measure would not have any significant macroeconomic effects.

Impact on individuals, households and families

It is expected that this measure would have no impact on individuals as Carbon Emissions Tax would be a business tax.

It is expected that the measure would have no impact on family formation, stability or breakdown.

Equalities impacts

It is expected that this measure would have no impacts for groups sharing protected characteristics.

Impact on business including civil society organisations

This measure would impact around 1,000 installations that currently participate in the EU ETS (generally electricity generators or manufacturing plants, mostly operated by large businesses).

The tax design would mirror, in broad terms, the acquisition and surrender of EUAs under the EU ETS. Installations’ administrative costs would be expected to mirror what they do at present to monitor, verify and report their activities. For those businesses whose emissions exceeded the allowance there would be an additional requirement to familiarise themselves with this measure and pay a tax bill once a year.

There would be no impact on civil society organisations.

Operational impact (£m) (HMRC or other)

HMRC would incur costs estimated at £2m to provide an IT system to 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 to ensure it could provide the relevant information to HMRC. These costs are still being quantified.

A Justice Impact Test would be considered with the Ministry of Justice in due course to establish whether additional costs would fall on tribunals and so on.

Other impacts

Carbon assessment - it is expected that this measure would maintain carbon emissions at around the same level that would occur if the UK remained in the EU ETS, and maintain carbon pricing at an appropriate level in the UK.

Other impacts have been considered and none have been identified.

Monitoring and evaluation

This measure would be monitored through information collected from tax returns and receipts, and through communication with affected taxpayer groups.

The Department for Business, Energy and Industrial Strategy will continue to monitor carbon emissions post EU exit including via MRV.

Further advice

If you have any questions about this measure, contact Andy Jameson on:

• telephone: 03000 586082
• email: carbon.taxation@hmrc.gsi.gov.uk