Policy paper

Changes to tax provisions for Carbon Emissions Tax

Published 11 March 2020

Who is likely to be affected

Stationary installations currently holding (or that become liable to hold):

• a greenhouse gas emissions permit, including power generators; certain large industrial premises and manufacturers, including food processing plants; certain public sector facilities; and
• an excluded installation emissions permit (small emitters and hospitals)

Verifiers of, and advisers to such installations.

A new category of installation, ultra-low emitters, will also be interested.

General description of the measure

This measure announces that the government will maintain the Carbon Emissions Tax as a fallback carbon pricing policy and legislate in Finance Bill 2020 to make changes to the tax provisions set out in Finance Act 2019. A consultation will take place later this spring on how the tax would operate if introduced.

In line with the Withdrawal Agreement, the UK will remain in the EU Emissions Trading System (ETS) until 31 December 2020. As set out in the UK’s Approach to Negotiations, the UK would be open to considering a link between any future UK ETS and the EU ETS if it suited both sides’ interests. In the event that there is no link agreed, the UK would introduce an alternative carbon pricing mechanism. The government is preparing both a standalone emissions trading system and a Carbon Emissions Tax as possible alternative carbon pricing policies. Therefore, at Budget 2020, it was announced that legislation to prepare for a UK ETS will also be included in Finance Bill 2020, for which a separate Tax Information and Impact Note (TIIN) is provided. This note deals with the Carbon Emissions Tax option.

The tax was announced at Budget 2018 as a fallback policy should the UK have left the EU without a deal and thereby have ceased to participate in the EU ETS. It was established in Finance Act 2019 but not commenced.

Stationary installations that hold the relevant permit issued by UK regulators will continue to report their activities each spring under the Monitoring, Reporting and Verification (MRV) scheme to establish how many tonnes of greenhouse gases they emit during a calendar year reporting period. If the Carbon Emissions Tax were introduced, it would tax permitted stationary installations’ emissions of carbon dioxide (and other greenhouse gases on a carbon equivalent basis) above an individually set emission allowance.

The first emissions reporting period under the tax would run from 1 January to 31 December 2021, with activities and emissions reported in spring 2022 and first tax bills issued by HMRC in summer 2022.

Finance Bill 2020 will amend Finance Act 2019 to include provisions relating to penalties, update definitions, and update powers relating to the review and appeal of decisions and the charging of fees by regulators. A consultation will be published in spring 2020 on the operation of the tax to inform secondary legislation that would be laid in late 2020 if the tax were to be introduced.

Policy objective

If introduced, the new tax would contribute to the UK’s ambitious 2050 net zero target by maintaining a stable carbon price for those stationary emitters that were covered by the EU ETS. This would provide stability for businesses and support the UK to meet its legally binding carbon reduction targets, which are unaffected by leaving the EU. It also aims to replace the revenue lost from the auctioning of EU Allowances from the UK’s non-participation in the EU ETS.

Background to the measure

The government sets a total carbon price to provide an incentive to invest in low-carbon electricity generation and technologies. For years up to and including 2020 this comprises the EU ETS price and the Carbon Price Support rate per tonne of carbon dioxide. Electricity generators pay both elements and industrial and other installations covered by the EU ETS pay only the EU ETS price. Budget 2020 also contains announcements about Carbon Price Support rates which remain in place now the UK has left the EU.

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 requires participants to obtain a permit to emit and then to submit a report annually providing information 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 EU ETS applies to large emitters of greenhouse gases in the EU (including electricity generators) and includes rules determining how many free EU Allowances participants are allocated each year. It also provides for a simplified reporting scheme for small emitters and certain hospitals, with annual emissions targets set rather than the system of allocating EU Allowances. From 1 January 2021, the government is legislating to provide that installations that qualify as ultra-low emitters will be able to opt to leave the UK permitting scheme. If they did so, they would not be subject to the tax if introduced.

Currently the EU ETS is in Phase III which ends at the end of 2020. Phase IV will run from 1 January 2021 to 31 December 2030. When the UK ceases to participate in the EU ETS from 31 December 2020 (the end of the Transition Period), the system of permitting installations and emission monitoring and reporting requirements for 2021 and beyond will continue, allowing the UK to monitor progress towards its ambitious 2050 net zero target.

The government is considering long term options for carbon pricing following exit from the EU and undertook a 10-week consultation, which closed on 12 July 2019. A consultation response will be published in due course.

The TIIN on the tax published at Budget 2018 is superseded by this note. If the tax were introduced, the TIIN would be republished alongside the laying of secondary legislation towards the end of 2020.

Detailed proposal

Operative date

The tax would apply to emissions in excess of an installation’s tax emission allowance from 1 January 2021. The primary legislation relating to the tax would be commenced by regulations made by HMRC towards the end of 2020.

Current law

Finance Act 2019 established the Carbon Emissions Tax, setting the scope, rate and basic structure of the tax and providing that for any given tax reporting period it will be payable only on emissions above a tax emission allowance set for each installation. The Act also provided for the tax to be brought into effect by statutory instrument; and for a further statutory instrument or instruments to be laid on the detailed operation of the tax.

Proposed revisions

Finance Bill 2020 will amend Finance Act 2019 to:

• set a penalty for failure to make payment of tax on time
• clarify and expand the power to make regulations in relation to reviews and appeals
• allow regulations to impose penalties for a failure to comply with an obligation imposed by regulations
• clarify the power to make regulations that confer functions on various Government entities such as the Secretary of State and HMRC
• allow regulations to be made by reference to events occurring in the past to enable HMRC to consider data from before the tax is introduced when adjusting tax emission allowances
• allow regulations to set an emission allowance for a reporting period at any point up to the end of that reporting period
• allow regulations to modify secondary legislation dealing with monitoring, reporting, verification of emissions to ensure the legislation operates effectively for the purposes of the tax
• update the references to legislation that has been updated and replaced since the Finance Act 2019 was introduced to Parliament
• allow HM Treasury to exclude regulated installations of a specified description from the charge to tax

Exchequer impact

2019 to 2020	2020 to 2021	2021 to 2022	2022 to 2023	2023 to 2024	2024 to 2025

If the tax were introduced, 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 not expected that this measure would have any significant macroeconomic impacts.

Impact on individuals, households and families

It is expected that this measure would not have an impact on individuals as Carbon Emissions Tax would be a business tax. This measure is not expected to impact on family formation, stability or breakdown.

Equalities impact

It is not anticipated that this measure would have impacts for those in groups sharing protected characteristics.

Impact on business including civil society organisations

This measure would have an impact on around 1,000 UK stationary installations participating in the EU ETS (generally electricity generators or manufacturing plants, mostly operated by large businesses).

The coverage of the tax would be broadly the same as the current EU ETS population, except that the aviation sector and installations that fall under a new category of ultra-low emitters would not be liable to the tax. Installations’ emissions obligations are expected to be similar to those for monitoring, reporting and verifying emissions under the EU ETS.

Installations with lower emissions than their tax emission allowance would face no tax liability. For installations whose emissions exceed their tax emission allowance there would be an additional one-off requirement to familiarise themselves with this measure and an ongoing cost of paying a tax bill once a year, starting in 2022, both of which would carry negligible costs.

As this would be a new tax with which taxpayers have not previously had to engage, we expect there would be some impact on customer experience as affected businesses would need to familiarise themselves with the tax. Other aspects of customer experience could see an improvement as installations would no longer have to comply with the EU ETS by acquiring and surrendering allowances. This would be time saving for some businesses. Other aspects of customer experience would be expected to remain the same as installations would continue to report their activities each spring under the Monitoring, Reporting and Verification scheme.

The measure would have no impact on civil society organisations.

Operational impact (HMRC or other)

HMRC would incur costs to build IT systems to support this new tax. This would cover obtaining the information from regulators’ IT system that would be needed to bill installations, and to provide an IT system to enable bills to be generated and tax to be accounted for accurately. These costs are provisionally estimated at £2.75 million. HMRC would also incur staff costs, initially estimated at £620,000. All costs would be reviewed once tax and system designs were final.

There would also be costs to the Environment Agency, provisionally estimated at less than £100,000, from adding functionality to ensure the regulators’ IT system could provide relevant information to HMRC. Any such changes would be made alongside changes needed to reflect leaving the EU ETS and, where possible, would be done in a way that would enable them to be used for any long-term carbon pricing solution.

A Justice Impact Test has been completed with the Ministry of Justice considering whether additional burdens would fall on Courts and tribunals. This concluded that the risks of creating additional burdens on the tribunal system was small.

Other impacts

Carbon assessment – at present the government has not set a rate of tax. However, it is intended that the rate of tax would provide an incentive for electricity generators and energy intensive industries to reduce their emissions.

Other impacts have been considered and none have been identified.

Monitoring and evaluation

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

BEIS would continue to monitor carbon emissions via the system for monitoring, reporting and verifying emissions.

Further advice

If you have any questions about this measure, please contact Andy Jameson on Telephone: 03000 586082 or email: carbon.taxation@hmrc.gov.uk