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UK clarifies no-deal Brexit EU emissions trading position

Power plant coal fired pollution

UK participants in the EU Emissions Trading System (EU ETS) may have to surrender EU allowances for 2020 without having received their free allocation of allowances for the 2019 trading year in a no deal Brexit scenario, the UK government has suggested.

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 is ratified.

The "relevant processes" that were suspended include the auctioning of allowances, allocation of allowances for free to operators and exchange of international credits for allowances from 1 January 2019.

This news confirms that operators under the EU ETS are likely to have to surrender EU allowances in 2020, without receiving their free allocation of EU allowances for the 2019 trading year.

Signature of the withdrawal agreement has not yet happened, with the prospect that the UK will leave the EU with no such deal in place on 21 January 2020 when the current Brexit extension ends.

The EU ETS team within the UK's Department for Business, Energy and Industrial Strategy (BEIS) told Pinsent Masons, the law firm behind Out-Law, that free allowances for 2019 and any allowances relating to historic scheme years, would not be issued "unless and until" the suspension is lifted by the European Commission.

This means that participants must continue to comply with the scheme's monitoring, reporting and verification (MRV) provisions for 2019 and, more importantly, surrender allowances by April 2020 in the absence of being able to obtain allowances via the "relevant processes" – auctioning, issues of free allowances or use of international credits. This requirement will continue to the end of the implementation period if the withdrawal agreement is ratified.

Environmental law expert Georgie Messent of Pinsent Masons said that the confirmation would have significant negative financial implications for the 11,000 operators covered by the EU ETS, including those in the power sector and others with energy intensive operations.

"This news confirms that operators under the EU ETS are likely to have to surrender EU allowances in 2020, without receiving their free allocation of EU allowances for the 2019 trading year," she said.

"Stating the obvious, operators covered by the EU ETS are already under considerable financial strain and trying to cope with Brexit uncertainty. The substantial financial penalties that could be imposed under the EU ETS for non-compliance are a key boardroom consideration at this difficult time. We will be working with organisations to discuss this with BEIS and see if we can get more clarity for operators," she said.

"We anticipate that operators will challenge the stance taken on the auctioning, free allocation of emissions allowances and exchange of international credits. The government is going to need to work with operators to discuss the financial consequences of the decision that has been taken not to auction allowances, issue free allowances or allow exchange of international credits for the 2019 year, and how they can achieve compliance with the EU ETS in the absence of credits that otherwise would have been available through these routes," she said.

"We aree reviewing the grounds for challenging the basis of suspension of allocation of free allowances, auctioning and swaps of international credits," she said.

As a result of the extension of the Article 50 withdrawal process, the UK continues to be a party to the EU ETS despite the suspension on UK participation on "relevant processes". BEIS told Pinsent Masons that it was "engaging with the European Commission regarding the implications of the extension to Article 50" on UK ETS compliance in a no deal scenario, given that the UK will have been a participating member of the scheme for the whole of 2019.

"We anticipate the Commission will provide confirmation on this in due course," it said.

The EU ETS is a carbon trading scheme which applies to around 11,000 heavy energy users, around 1,000 of which are in the UK. Such users include power stations, oil refineries, offshore platforms and manufacturers of heavy industry. The EU ETS requires these operators to measure and report their carbon emissions over the relevant yearly period, and to surrender allowances in proportion to the emissions from their installations. Participants are typically given some of these allowances, but have to purchase others through auctions.

The UK has previously announced its intention to introduce a unilateral Carbon Emissions Tax in a no-deal Brexit scenario. This tax would apply to all stationary installations currently participating in the EU ETS, but would not apply to aviation.

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