BREXIT and the EU Emissions Trading Scheme (ETS)

August 29, 2018

As the Brexit deadline rapidly approaches, the Department for Exiting the EU is beginning to publish a series of papers (known as Technical Notices) on potential outcomes if the UK finds itself in the much discussed, and increasingly likely, ‘no deal’ scenario. In addition to these documents, various departments are producing briefings on how key policy areas interact with Brexit. One primary concern in the field of energy is the impact of the UK’s potential departure from the Emissions Trading Scheme (ETS). Recognizing these anxieties, the Government are expected to publish a highly anticipated technical notice focused on the EU ETS by the end of this month, which will set out a plan and provide advice in the case that Britain leaves the bloc with no deal in 2019.

What is the EU ETS?

Established in 2005, in order to equip EU countries with the ability to adhere to Kyoto targets and reduce anthropogenic emissions, the EU ETS covers 11,000 power stations, factories and other installations which produce heat across 31 countries. Each participating installation is provided with a maximum amount of emissions it is allowed to produce (a cap). Following the purchase or allocation of allowances for emissions, participants are able to trade (buy and sell) with others. Consequently, there is a financial benefit to not using ones entire emission allowance as any surplus can be sold off for profit.

So how will a post Brexit UK interact with the world’s largest carbon trading scheme?

Anticipating Brexit uncertainty, the annual deadline for reporting emissions is earlier than it has been in previous years (11th March 2019) in order to ensure UK compliance. The business implication of this is that operators (and their verifiers) will need to plan their compliance timetables in advance.

If the UK were to leave the EU ETS in 2019, we could see a fall in carbon prices as operators hasten to sell allowances. The European Commission has discussed various measures to safeguard the ETS against a no deal Brexit which would stop potential sell offs of permits if UK businesses are ejected from the market. One proposed safeguarding rule would invalidate UK carbon allowances issued from 1 January 2018, worth around €1bn to government and industry.

Nevertheless, despite these concerns BEIS Minister Claire Perry has sought to assure industry that the UK will remain in the ETS until 2021 (the end of Phase Three), providing policy makers with the time necessary to establish the future of the UK and carbon trading. Whilst it is likely the UK will remain part of the scheme for a two-year transition period following Brexit, little information has been given beyond that point.

Potential pathways for the UK

Much like other areas of energy policy, there exists multiple pathways for the UK to pursue when it comes to future  involvement with the EU ETS. With each option comes a unique set of opportunities and challenges for policy makers and businesses alike.

Impacts of the UK leaving the EU ETS

The UK’s departure from the EU ETS could impact on the scheme in the following ways:

Further impacts on business

Next month’s technical notice will give us a clearer idea of the impacts of Brexit No Deal on ETS, however we can hypothesize.

For more information please contact the author: Alex Jones, alex.jones@ecuity.com