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Out-Law Analysis 2 min. read

UK to resume EU emissions trading for implementation period

Factory pollution emissions

The EU has lifted its temporary suspension of UK processes under the EU emissions trading system (ETS) following the UK's negotiated withdrawal from the EU on 31 January 2020.

Many UK operators in the EU ETS have been waiting to find out if they would receive their free allocation of 2020 allowances and now have some certainty.

The announcement, which was confirmed in a communication to operators from the Department of Business, Energy and Industrial Strategy (BEIS), will affect around 11,000 operators covered by the EU ETS, including those in the power sector and others with energy intensive operations.

The most important practical messages set out in the announcement are:

  • UK operators can from this point exchange international credits for EU ETS allowances;
  • the UK is able to start the processes of issuing the 2019 free allocation and, with appropriate market notification, resume auctioning;
  • the UK intends to commence auctioning as soon as possible and will auction allowances for 2019 and 2020; and
  • UK participants entitled to 2020 free allocation can expect to receive these allowances before 28 February.

As the temporary suspension has been lifted from 3 February 2020, UK installations will remain in the EU ETS until the end of the implementation period, on 31 December 2020.

All operators will need to review their predicted emissions for the 2020 trading year and their trading strategies.

Furthermore, it has been confirmed that the no deal carbon emissions tax (CET), which would have replaced the EU ETS in a no deal scenario, will not commence in 2020. The government has not indicated that it will introduce a CET after the end of the implementation period.

We will be helping businesses across a range of sectors to consider the implications of the latest announcement and to plan their carbon trading in this last year of Phase III in the UK and the last year in which UK participants will remain part of the EU ETS.  All operators will need to review their predicted emissions for the 2020 trading year and their trading strategies.

Those operators who've been borrowing from future years' allocation of EU allowances to surrender allowances will have a chance to do so again in 2020, but this will not be possible for the next surrender of allowances, in 2021.

There is also considerable uncertainty on what will come next in terms of regulation of emissions and we will continue to push the government on that.

Suspension lifted

The EU suspended "relevant processes" associated with UK participation in the EU ETS as of 1 January 2019, with the intention of lifting the suspension once the withdrawal agreement between the UK and EU was ratified. These included the auctioning of allowances, allocation of allowances for free to operators and exchange of international credits for allowances from 1 January 2019.

As mentioned above, the UK has confirmed that it intends to commence auctioning as soon as possible and will auction allowances for 2019 and 2020. It intends to hold the first auction of general allowances on 4 March.

There will also be auctioning of aviation allowances across two auctions, the first of which will run from 25 March through 2020. The final auction calendar will be agreed with the European Commission and published, once agreed, by the UK's auction platform, ICE Futures.

UK regulators will enforce compliance obligations for the 2019 and 2020 scheme years. The UK will have the obligation and retain the ability to enforce the EU ETS 2020 allowance surrender obligation on 30 April 2021.

UK operators will be able to access their accounts and any allowances they contain in the Union Registry for the purposes of 2020 compliance. Surrender will be by 30 April 2021.

Trading of CERs and ERUs

The UK will continue to have access to its Kyoto Protocol National Registry in the Consolidated System of EU Registries (CSEUR) until the end of the implementation period. Account holders who hold and trade certified emission reductions (CERs) and emission reduction units (ERUs) will continue to be able to access their accounts within the UK's Kyoto Protocol National Registry until the end of the implementation period.

The UK government is procuring a new system which it expects to be operational in 2021.

Clean Development Mechanism (CDM) project developers can continue to approach the UK's designated national authority for new letters of approval.

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