RWE is among the companies claiming a carbon tax would jeopardise the UK’s climate goals © Frank Augstein/AP

Some of the world’s largest energy companies have called on the UK to adopt a carbon trading system and to reject plans for a tax after the Brexit transition ends, arguing that tradeable credits are the most efficient way to cut pollution.

In a letter to Prime Minister Boris Johnson, companies including RWE and Uniper and prominent energy trading associations argued that a carbon tax would jeopardise the UK’s climate goals.

“The evidence is clear — emissions trading is a tried and tested method for reducing emissions in a market-friendly way,” the letter said.

“Opting for a UK emissions trading system . . . would reaffirm the UK as a climate leader, and show that the UK remains a strong advocate for international carbon markets.”

The issue risks coming to a head as the UK attempts to negotiate its post-Brexit arrangements with the EU before the end of the transition period on December 31, while Mr Johnson has sought to portray the UK as an environmental leader ahead of next year’s UN COP26 climate change conference in Glasgow.

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The UK has been a member of the EU emissions trading system since its inception first put a price on CO2 in 2005, and the rise in the cost of carbon allowances in recent years has played a large role in cutting the UK’s use of coal for power generation close to zero, from 40 per cent in 2012.

Carbon allowances are tradeable securities that dictate how much it costs power stations and industry in Europe to emit a tonne of carbon dioxide. 

But while the government has said it backs plans for a so-called “UK ETS” that could be linked to the existing EU system, allowing the trading of UK carbon allowances in Europe, it has also been consulting on plans for a carbon tax should it end the transition period without an EU trade deal.

In July the UK Treasury said that if “a link cannot be agreed”, the UK would either establish a standalone carbon trading system or a carbon emissions tax from January 1. It has proposed that a carbon tax in its first two years be broadly calculated based on the average EU ETS price in 2021 and 2022.

Royal Dutch Shell said in a statement to the Financial Times that it was “firmly of the belief that carbon pricing will be key to helping the UK achieve net-zero emissions by 2050”, adding that “emissions trading is preferable to emissions taxation to achieve this”.

“A country with a defined carbon budget and a focus on net-zero emissions in the medium term should look to a cap-and-trade system for delivery,” said David Hone, Shell’s chief climate change adviser.

Gordon Bennett, head of utilities at exchange operator ICE, warned that moving to a carbon tax would be a “deeply regrettable step backwards” for the UK.

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The Treasury and the Department for Business, Energy and Industrial Strategy did not respond to requests for comment.

The companies’ letter argued that a carbon tax lacked flexibility and would not “necessarily deliver a particular environmental outcome” or raise more taxes.

The EU ETS price has risen from less than €5 a tonne of carbon dioxide emitted in 2017 to above €27 now.

“We believe that a UK ETS is the most efficient, cost-effective, and transparent mechanism for achieving the UK’s climate goals,” the letter said.

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