Yes. There are pros and cons to the UK leaving the EU ETS. It is certainly true that it is better for companies to be inside a large emissions trading system than inside a small one because the opportunity to buy and sell permits is greater inside a large system and you are more likely to have a stable price over that period.
If the UK leaves the ETS, there will be significant costs associated with extracting itself. No doubt those costs will have to be passed on to consumers. There will then be the cost of setting up whatever replaces the ETS. On the whole, leaving the ETS is less of a good idea than staying in. If we leave, it may be an opportunity to design something that functions better than the EU ETS, which has been hampered in recent years by a structural flaw that means that it has rules for dealing with cases where the price has spiked, but not where it has dropped. Hence we have had this extended period of very low carbon prices, which has undermined future investment in low-carbon alternatives.
The Westminster Government attempted to address that through the carbon price support rate, which added £18 a tonne on top, but it then immediately undid much of the good of that support rate by freezing it instead of continuing to increase it.
The UK will have options and trade-offs around whether it wants an emissions trading system that has some sort of relationship with the EU ETS. The advantage of an emissions trading system is that it sets a cap—you know the level to which you are going to reduce emissions—but you do not know what the price of carbon will be. Equally, if you set a carbon tax, you know what the carbon price will be, but you do not know what emissions reduction you will get as a result. In general, economists think that emissions trading systems tend to push towards the most efficient savings of emissions, because the trading system allows us, for instance, to go to the parts of the system where reductions in emissions are cheaper; on the other hand, carbon taxes can be administratively easier to implement.
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If we go down the route of extracting ourselves from the ETS, we will need to look at what makes the biggest sense for our current system. It is worth remembering that the traded sector covered by the emissions trading system accounts for only 40 per cent, roughly, of the UK’s emissions. In an ideal world, we would want a strong uniform carbon price right across the economy to give the most cost-effective emissions reductions.