Brexit and the EU ETS: an unprecedented intervention

Posted in Energy

Greg Clark, the Secretary of State for Business, Energy and Industrial Strategy, delivered a statement to Parliament on 1 May 2019 explaining the Government’s intervention to assist British Steel in meeting its obligations under the EU Emissions Trading Scheme (EU ETS)1. Under the EU ETS, installations have to obtain and surrender allowances equal to their level of carbon emissions on an annual basis. The deadline for compliance with the 2018 obligation period was 30 April 2019. Mr Clark explained that the Government intervened in an unprecedented manner to assist British Steel, which would have faced financial strain had it failed to comply with its EU ETS obligations.

By way of background, in order to maintain the integrity of the EU ETS in the event of a no deal Brexit, on 19 December 2018, the European Commission, in co-ordination with other Member States, decided to suspend temporarily the acceptance by the Union Registry of all processes for the UK relating to free allocation, auctioning and the exchange of international credits2.

However, as noted above, UK installations and aircraft operators were still under an obligation to surrender allowances to comply with their 2018 EU ETS obligations by 30 April 2019. British Steel was relying on 2019 free allocations to do so and so faced a shortfall in allowances, exposing them to significant fines under EU law.

Mr Clark explained that, if British Steel had failed comply with its 2018 obligation by the deadline, it would have attracted an immediate and unremovable fine of half a billion pounds, on top of the continuing liability of around £120 million. The Government therefore intervened to provide a short term bridge facility valued at around £120 million under Section 7 of the Industrial Development Act 1982 at an interest rate of LIBOR plus 7%. The Government has now purchased the necessary allowances to enable British Steel to comply with its EU ETS obligation and, under a deed of forfeiture, ownership of the British Steel’s 2019 allowances will now be transferred to the Government once they are released.

The risk to the tax-payer however arises in the event that 2019 allowances are never released. In the event of withdrawal from the EU without a deal, on exit day, UK installations will be excluded from participating in the EU ETS. Instead, under plans unveiled in the Autumn Statement 2018, the Government plans to end the requirement to surrender allowances from exit day and will introduce a tax on greenhouse gas emissions, the Carbon Emissions Tax, which will be applicable to all stationary installations currently participating in the EU ETS. The tax will be introduced through the Finance Act 2019. It is unclear from Mr Clark’s statement what agreement has been struck to recover the funds in these circumstances, Mr Clark stating only that “should an agreement not be reached, the government is able to implement a domestic scheme that provides the security against the loss of the EU derived allowances”.

Uncertainty around the price of carbon going forward (tax or emissions allowances) is one of the difficulties facing UK installations, forcing them to make hedging decisions based on guesswork. It is not ideal that the date of the UK’s withdrawal from the EU is likely to be before the end of the current obligation period under the EU ETS, potentially necessitating adjustments for the periods pre- and post- exit day to take account of the different regimes.

The Political Declaration on the future relationship between the UK and the EU envisages that after Brexit the UK would not participate in the EU ETS, but would retain a domestic cap and trade regime, linking to the EU ETS. Considering that both the EU and the UK would be starting from a position of complete compliance, such linking should be straightforward, although it remains to be seen whether this remains the UK Government’s longer-term policy objective.



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