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Britain faces race to avoid $1 Billion in EU Carbon Tax Costs

Market experts say that Britain will have a difficult time linking its carbon market with the EU's within the next seven months to avoid UK companies being charged the carbon border tariff by the EU and facing annual bills of around 800 million pounds ($1.08billion) for the UK.

As part of the "reset" after Britain's exit from the European Union in 2016, the two sides announced that they would link their carbon emission trading systems last month.

The two sides have not set a deadline or described the steps that need to be taken before the European carbon border tax takes effect in January.

It will probably take several years for the linkage to become effective. Ben Lee, senior emission analyst at Energy Aspects, said that the earliest date is 2028. However, it's likely to be 2030 or 2029.

The UK government stated that a major benefit of joining the EU carbon market (or emissions trading system, ETS) is the ability to avoid being charged by the EU carbon border tariff, which will be implemented next year. This fee will be imposed on CO2 emissions associated to imports of goods such as steel, cement, and others. The UK government claimed that avoiding these costs could save them 800 million pounds a year.

EU officials claim that in order to be exempt from the border tax on carbon, Britain must link its carbon market with the EU.

Yan Qin, ClearBlue's carbon analyst, said that a full linkage would take several years due to the technical complexity of the process. He added that if the scenario is "optimistic", the link could be formed in 2027.

A British government spokesperson said that the British government will try to reach an agreement on a carbon market connection as soon as possible. They said that they would not be providing a constant commentary on the negotiations.

A spokesperson for the Commission said that the EU executive will "follow up quickly" on the agreement and propose to EU countries a negotiating mandat to start talks with Britain about the carbon market connection.

TECHNICAL HURDLES

For the UK to make this link, it must adjust its national rules on carbon trading permits. It also needs to bring its emission permit auctions into line with EU regulations and change the national cap for how much carbon can be emitted by companies that are covered by the market.

Not only that. EU and UK schemes have not aligned yet on the number of free CO2 permits that they offer industries. The EU carbon market also has a "reserve", which can add or remove permits to the market in order to stabilize prices.

The EU scheme lacks the "reserve" that Britain has, but it does have a mechanism to control costs and set a price ceiling.

Ingvild Sörhus, senior analyst at Veyt, said that resolving the issue of an adjustment mechanism for supply will be one of many technical calibrations needed before the two systems are linked.

Many businesses claim that these problems are easily resolved.

Alistair McGirr is the Head of Policy and Advocacy for British energy company SSE. He said that with the right political will an ETS linking accord between the EU and UK can be signed in 6 months and operational by the year 2028.

Energy UK, an industry group, said that linkage negotiations might be concluded within a year. However the UK should request a waiver from the EU border carbon tax until the link has been sealed in the event the talks drag on into 2026.

"It's not a matter of major political roadblocks but rather of technical processes," said Adam Berman, Energy UK Policy Director. Adam Berman, Energy UK's Policy Director, said that the problems were not small, but not insurmountable.

The UK is planning to introduce its own carbon-border tariff in 2027, a year after the UK.

Brussels might be less in a hurry. Britain's carbon markets are less than one tenth the size of those in the EU, so any link would give British businesses access to a more liquid market.

Although EU officials claim that the EU wants to extend carbon pricing to as many countries as is possible, in order to ensure they all put a price tag on greenhouse gas emission. The companies also claim that the move will reduce costs and avoid competitive distortions for EU and UK consumers.

Pascal Canfin is a French member of the European Parliament who said that the benefits for Britain are more evident than those for the EU.

Canfin said that the EU was motivated by a "political move". "The UK used to be part of [the EU] ETS." It's not a big deal. $1 = 0.7387 lbs. (Reporting and editing by David Evans, Susanna Twiddale, Kate Abnett)

(source: Reuters)