EU Emissions Trading Scheme and Brexit : Recent developments and what they mean

• United Kingdom

• Brexit

09-11-2017

The UK is due to exit the European Union on 29 March 2019 and focus is currently on the terms of that exit. The debate includes whether it will be a “hard Brexit” with no formal agreement or a “softer Brexit” which will include a transitional period of “business as usual”. This briefing concerns a recent EU ETS related amendment which shows that the EU is contingency planning for a hard Brexit, as well as a consultation just opened by the UK Government which appears to address the EU’s concern.

In September 2017, the European Parliament voted on a bill dealing with aviation emissions and how they are dealt with in the EU ETS scheme.

An important last minute amendment was proposed aimed at protecting the EU ETS system should the UK leave the EU with no deal in place. In the event of a hard Brexit, the amendment is designed to prevent current UK EU ETS participants from selling EUAs which would not be required and therefore flooding the market and causing a reduction in prices.

The effect of the amendment is that that if no deal is agreed between the UK Government and the EU, all EUAs allocated or sold by the UK from 1 January 2018 will not be valid for EU ETS compliance. Allowances issued by the UK will be marked to identify them and changes will be made to the EU ETS registry to show the year of allocation and the country of origin. The amendment could mean that the UK’s participation in EU ETS would cease in practice on 1 May 2018, once UK companies have satisfied their EU ETS obligations in respect of their 2017 emissions. There are wider concerns from the carbon market about who is holding what EUAs, the value of the EUAs and what changes will be required to futures contracts to reflect the change in law

The UK Government published a short consultation on 6 November 2017, along with draft amendment legislation. The Government is proposing to bring forward the compliance deadlines for the 2018 compliance year to before the date of the EU exit on 29 March 2019. This would ensure that obligations for 2018 would not lapse and UK EUAs would not need to be marked.

Issues to consider include:

• Operators should consider engaging in the consultation process. The deadline for responding to the consultation is 24 November 2017;
• The amendment to the EU ETS on which the European Parliament voted in September 2017 has raised alarm bells with industry and UK operators have been considering the implications. The EU’s proposal places UK business at a disadvantage compared with EU counterparts. UK companies would not be able to use their 2018 free allocation of EUAs to satisfy their 2017 compliance obligation. By contrast, all options would still be open to EU companies. To counter this, UK operators would need to ensure that any UK EUAs are bought before the end of 2017. The UK Government consultation aims to address this disadvantage; and
• The UK Government consultation does not address what happens post Brexit. This will require separate consideration as part of any transitional arrangements with the EU, and in the context of the UK Government’s wider deliberations on emissions trading in the longer term.

Next Steps

The EU amendment is currently progressing through the legislative procedure, with a vote in Europe expected on 30 November 2017.It would likely come into force by the end of the year, but this may be thrown into doubt by the UK consultation.

UK operators should monitor these fast-moving developments, and their possible impact on them, including their EU ETS compliance strategy. As noted above, responses to the UK consultation must be made by 24 November 2017.