BREXIT and the EU Emissions Trading Scheme (ETS)
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.
- Pathway one: The UK remains part of the ETS & participates in phase four, a reformed phase of the EU ETS (more information on this phase can be found )
- Pathway two: The UK adopts a ‘Norwegian model’ whereby it is linked to the ETS but with a much bigger share of cap then current EEA members. Norway has its own Carbon Credit Procurement Programme and about 50% of Norwegian emissions are covered by the EU ETS.
- Pathway three: The UK establishes own ETS, akin to the Swiss model, with a recognition of the other EU countries allowances. The issue with this is that it may be time consuming and difficult to set caps. The EU ETS and Swiss ETS linking negotiations began in 2010 and are expected to conclude with a link in 2019. Given the urgent need to reduce emissions, the time-consuming nature of this potential pathway is concerned.
- Pathway four: complete separation is, arguably, the most straightforward option, but requires creation of UK’s own policy to address emissions in the traded sector. Further, decisions would be needed on what would happen to unallocated allowances. Alongside this, a broader UK carbon tax could arguably be required. Given the UK’s Carbon Price Floor has been successful in cutting emissions from coal UK Ministers may claim competency in this area and seek to pursue a clean break.
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:
- There may need to be a recalculation of auctioning shares and of the cumulative EU emissions cap.
- The UK may need to develop a new cap for industrial and power emissions. Provisos may then also be put in place in place for the accounting of traded sector emissions.
- It is possible that the UK’s (potential) departure from the EU ETS would damage climate change action on an international scale. Given the UK were proponents of the EU ETS, their leaving the EU ETS could result in a decrease in ambition. Unbound by EU caps, it could also reduce the UKs ambition in setting national targets.
- Research suggests that, given the UK is the second largest emitter in the EU, it’s departure from the EU ETS would tighten the supply-demand balance of the system by around 745 million tonnes.
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.
- Currently, ETS allows UK-based industries to, essentially, purchase emissions reductions from overseas, instead of reducing their emissions directly (something which incurs an operational cost.) As a result, it is worth considering whether Brexit No Deal would limit the UK’s ability to buy international credits. This will require some businesses to work harder to reduce the emissions they produce, else face fines or legal action.
- If we leave the scheme under BREXIT No Deal, UK businesses will not be able to access, and subsequently benefit from, the innovation fund proposed in phase 4.
- Whilst proposed measures are in place to safeguard against the market being flooded by allowances intended for compliance by the UK but that will not be used, inability to sell back permits/ allowances means less proceeds to use to fund clean energy projects.
- In addition to the aforementioned points regarding the funding of clean energy projects, given that the UK government earns around £0.5bn a year from ETS auctions, they would have to find another way to generate such income. If the UK leaves the EU ETS, this revenue would cease.
For more information please contact the author: Alex Jones, email@example.com