Europe Needs to Save Its Carbon-Market Marriage
Now the UK and EU say they want to get their carbon markets back together, as part of a broader 'reset' in relations. It's a great opportunity to demonstrate that, despite Brexit, common sense in climate and trade policy can prevail.
Launched in 2005, the EU's emissions trading system stands out as the world's largest and most successful. Participants must comply with ever-decreasing limits on greenhouse-gas output: Those that reduce more can sell their allowances to others, establishing a market price per ton of carbon and an incentive to cut further. As of last year, covered power-generation and industrial enterprises in the 27 current EU member states had slashed their emissions by almost half.
Brexit has hindered this progress. All else equal, well-regulated carbon markets work better when they cover more area. A greater variety of buyers and sellers affords more opportunity to reduce emissions quickly and profitably: Companies in places where it's relatively easy to switch away from fossil fuels, for example, can sell to those where it isn't. More participants means smoother trading and more stable prices.
The split also presents a more pressing issue. From next year, the EU will start imposing a tax on certain importers, aiming to align their carbon price with local competitors. The UK will do the same in 2027. Although justified on the merits, these bureaucratically complex 'border adjustments' could undermine trade — unless a reunion of emissions markets and prices renders them unnecessary. The carbon intensity of electricity, for example, would have to be calculated using industrywide averages that would put renewable-energy exports at a disadvantage — at a time when Europe should be integrating its electricity markets.
From a technical perspective, relinking should be easy. The UK mostly copied the EU's rules, so the two need only address some marginal divergences — for example, in scope (the UK, for example, doesn't include maritime transport), schedules for eliminating free emission allowances, and mechanisms for maintaining market stability. There's no good reason for the preparations to take nearly a decade, as in the case of the EU's 2020 linkage with Switzerland.
Politics are the problem. As in all its post-Brexit dealings with the EU, the UK faces the prospect of complying with mutual rules while having less influence over them than it did as a member state. Britain should recognize that it has the most to gain from relinking with the EU's carbon market, which is more than 10 times larger. EU officials, for their part, must get past the desire to punish the UK and focus instead on common interests — particularly at a time when the US is upending global trade and climate policy. They should also maintain the bloc's own climate ambition — for example, by strictly limiting the proposed role of international carbon credits, which have a poor reliability record, in meeting emissions goals.
The clock is ticking. The EU's border adjustment will start to bite gradually, thanks to an effective phase-in. The longer the two sides delay, the more their inaction will skew long-term investment decisions, particularly in renewable energy. Conversely, if they reach a timely agreement, they'll achieve a rare victory for climate and trade — and potentially a model for cooperation in the post-Brexit world.
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