By Susanna Twidale
LONDON (Reuters) - Britain is likely to leave the European Union's Emissions Trading System (ETS) after Brexit and set up its own equivalent system, UK government documents published late Wednesday show.
That would mean Britain sticking to its international obligations to cut carbon emissions and would avoid UK firms gaining a competitive advantage, but could hit the price of EU carbon permits as Britain is currently such a big buyer.
London and Brussels agreed on Wednesday a draft deal over the terms of Britain leaving the bloc on March 29. That included a transitional period until Dec. 31, 2020, meaning Britain would likely remain in the ETS until then.
The documents showed Britain would, after Brexit, continue to take the necessary measures to meet its commitments under the international Paris Climate Agreement.
These include implementing a system of carbon pricing at least as effective as that currently in place under EU law, “establishing a scheme for greenhouse gas emission allowance trading within the Community,” the documents said.
Britain is the second-largest emitter of greenhouse gases in Europe and its utilities and industry are among the largest buyers of permits in the ETS, which charges power plants and factories for every tonne of carbon dioxide (CO2) they emit.
As Britain is such a big buyer of ETS permits, analysts have said Britain's exit from the scheme would likely hit the price of permits. On Thursday, the benchmark European carbon contract was down more than 5 percent at 18.68 euros/tonne.
Britain's carbon price is currently made up of two levies, a domestic carbon tax set at 18 pounds ($23) per tonne, paid by electricity generators on top of obligations under the ETS, which forces companies to surrender one carbon permit for every tonne of CO2 they emit.
In a separate document, on Britain’s future relationship with the EU, London said it would consider "cooperation on carbon pricing by linking a United Kingdom national greenhouse gas emissions trading system with the Union’s Emissions Trading System."
Industry group the International Emissions Trading Association (IETA) welcomed Britain's intention to use a trading scheme for carbon pricing rather than a tax.
"A market would bring the benefits of being able to guarantee the delivery of internationally agreed climate targets at lowest cost," said IETA EU Policy Director Simon Henry.
Prime Minister Theresa May faces a battle to get the draft Brexit deal approved by British lawmakers, and it could yet fail after two senior ministers quit over the deal's terms.
Without a Brexit deal, Britain would automatically leave the ETS and replace its costs with a carbon tax set at 16 pounds a tonne.
($1 = 0.7815 pounds)
(Reporting by Susanna Twidale; Editing by Mark Potter)