Consultation on Carbon Reduction Tax

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HMRC and the Treasury have opened a consultation on Carbon Emissions Tax.

This consultation sets out how the Carbon Emissions Tax would operate if it was introduced from 1 January 2021 in the UK, and proposes how the tax might be developed. The deadline for responses is 29 September 2020.

What should I be aware of?  

Some requirements are existing for the EU ETS 

  • The annual tonnage figure of CO2eq should be calculated in the same manner as for EU ETS purposes
  • For at least the first two years of the tax, the Government the tax emission allowance will equate to the allocation of free allowances or targets applied under the EU ETS.
  • From 2021, the mechanism for monitoring, reporting and verifying CO2eq emissions, including annual activity level reports at sub-installation level, continues unchanged, with the reporting period remaining the same from 1 January to 31 December each year.

Some requirements may be different if the UK implements its own tax:

  • From 2021, the activity level reporting will be revised only for main scheme installations wishing to apply for a tax emissions allowance

How will this impact you? 

If you are a main scheme installation, you will have a new obligation to submit to the Regulator an annual activity level report by 31 March 2021 to qualify for tax emissions allowance. 

  • The first annual activity level report will be due in March 2021 and relate to 2019 and 2020 activity levels 
  • The second annual activity level report will be due by 31 March 2022, relating to 2021 activity levels.
  • No requirements to register for the tax with HMRC who will already have the data.
  • HMRC will send out a Carbon Tax bill once a year in August, starting in 2022, and revise accordingly to reflect any changes in emissions or allowances. 
  • HMRC would be responsible for enforcement and compliance with tax matters and Regulators for enforcement and compliance with emissions and activity level monitoring and reporting.
  • NB: A Northern Ireland electricity generator whose electricity emissions continued to be reported under the EU ETS, would not become liable under the UK Carbon Emissions Tax after 1 January 2021

What’s new and subject to consultation?

  • A  NEW process for setting a UK tax emission allowance. The UK will be annually setting, adjusting and confirming allowance levels for all permitted installations, starting in Autumn 2021. The confirmed tax allowance figure for 2021 would be published in Autumn 2021 and the confirmed figure for 2022 would be published in Autumn 2022. 
  • A NEW mechanism to reward decarbonisation for main scheme installations. The Government proposes to introduce a financial incentive (payments) that would reward operators that reduced their emissions beneath their tax emissions allowances. 
    • payments to reward decarbonisation to start after 2023
    • Proposal for a deadline for installations to submit the data for 2021 and 2022 of 31st March 2024.
  • Proposal that the indicative tax emission allowance rates for 2021 and 2022 are set using EU ETS price data in late 2020 and adjusted downward. 
  • Future changes to the Carbon Emissions Tax: the Government is seeking views on how the tax may be adapted to ensure that it is continuously supporting decarbonisation. 
    • in the year after 2021, other sectors could be subject to the Carbon Emissions Tax, such as shipping and aviation
    • potential tax incentives to support negative emissions technologies, such as direct air capture or bioenergy with carbon capture and storage. Expect a call for evidence on negative emissions technologies and carbon pricing later this year. 

Are you concerned about the impact this could have on your business, or would you like to learn more? 

We want to keep you in the loop and well-informed about any developments with the Carbon Emissions Tax.

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