Budget Statement (UK)

Yesterday 17 November 2022 saw the UK Government make a budget statement. The following are announcements of interest –

(1) Deletion of Retained EU Law (REUL) – a bill is in progress to delete a significant body of law off the statute books by the end of 2023 (I have blog posted about this a number of times already).

The Budget Statement asserts “the government is committed to reforming retained EU law”. The Statement states 5 areas will be reviewed over the next year, comprising “life sciences”, “green industries”, and “ advanced manufacturing” (along with “financial services”, and “digital technology”).

In addition, the government will task Sir Patrick Vallance to advise on how to regulate “emerging technologies”.

(2) Climate Change Levy (CCL) – the rates will be rebalanced, the CCL rate on gas will be raised, and the CCL rate on electricity will be frozen. These steps will take effect in the Finance Bill 2023. The percentage discount on the CCL main rates available through the Climate Change Agreement Scheme will be fixed at 92% for electricity and 77% for LPG. The discounts for gas and solid fuels will be adjusted to 89%.

(3) Carbon Price Support (CPS) – CPS rates in Britain will be kept at a level equivalent to £18 per tonne of carbon dioxide in 2024-2025.

EU Commission Work Programme (EU)

On 18 October 2022, the European Commission adopted its 2023 work programme (CWP), entitled ‘A Union Standing Firm and United’. It outlines the Commission’s policy initiatives for 2023, and how it would achieve the headline ambitions in Commission President von der Leyen’s Political Guidelines as set out at the start of her mandate.

The 2023 CWP frames the EU’s headline ambitions within the context of global challenges: in Ukraine, on energy, on the environment, and the fall-out of these developments on the global economy.

The 2023 CWP contains 43 new policy initiatives, eight suggestions to simplify regulation, and 116 pending “priority proposals” for legislation.

Re European Green Deal – the core Fit for 55 package from the 2021 CWP continues, added to this is a new planned revision of EU REACH and a call for binding targets to restore degraded ecosystems.

Note as part of EU Fit for 55, the European Parliament and Council already agreed on stricter regulation of greenhouse gas emissions in member states including less flexibility and more transparency – here.

Also, the Carbon Border Adjustment Mechanism (CBAM) is a key element of EU Fit for 55 – here.

Note re UK REACH – the UK’s Defra department is exploring An Alternative Transitional Registration Model which would apply to Britain. Presently EU REACH applies to Northern Ireland.

The EU continues to exchange views on chemicals regulatory developments with the UK, including through the Specialised Committee on Technical Barriers to Trade set up under the Trade and Cooperation Agreement that was agreed with the UK.

Net Zero Strategy Court Case (UK)

On 18 July 2022, the High Court handed down a judgment in a case against the UK government on its Net Zero Strategy (NZS). The judgment is here. The summary is here.

The judgment states – (extracts and some sentences shortened) –

The UK responded to the 21st COP Paris Agreement (2015) in two ways. First, section 1 of the Climate Change Act 2008 (“CCA 2008”) was amended so that it became the obligation of the Secretary of State for Business, Energy and Industrial Strategy (BEIS) to ensure that “the net UK carbon account” for 2050 is at least 100% lower than the baseline in 1990 for CO2 and other GHGs, in substitution for the 80% reduction originally enacted (see the Climate Change Act 2008 (2050 Target Amendment) Order 2019 (SI 2019 No.1056)). That change came into effect on 27 June 2019.

Second, on 12 December 2020 the UK communicated its NDC (National Determined Contributions) to the UNFCCC (UN Framework Convention on Climate Change) to reduce national GHG emissions by 2030 by at least 68% compared to 1990 levels, replacing an earlier EU based figure of 53% for the same year.

Section 4 of the CCA 2008 imposes a duty on the Secretary of State to set an amount for the net UK carbon account, referred to as a carbon budget, for successive 5 year periods beginning with 2008 to 2012 (“CB1”). Each carbon budget must be set “with a view to meeting” the 2050 target in s.1. The ninth period, CB9, will cover the period 2048-2052 for which 2050 is the middle year. Section 4(1)(b) imposes a duty on the Secretary of State to ensure that the net UK carbon account for a budgetary period does not exceed the relevant carbon budget. Thus, the CCA 2008 had established a framework by which the UK may progress towards meeting its 2050 net zero target.

The Secretary of State has set the first 6 carbon budgets. Each has been the subject of affirmative resolution by Parliament. CB6 came into force on 24 June 2021 (The Carbon Budget Order 2021 – SI 2021 No. 750) and sets a carbon budget of 965 Mt CO2e (million tonnes of carbon dioxide equivalent) for the period 2033 – 2037.

The court case was for judicial review but did not challenge the setting of the net zero target in s.1 of the CCA 2008 nor the setting of any carbon budget (including CB6).

Instead, the court case asked if the UK government had complied with s.13 and/or s.14 of the CCA 2008.

Section 13 imposes a duty on the Secretary of State to “prepare such proposals and policies” as he considers will enable the carbon budgets which have been set under the CCA 2008 to be met. The UK government agrees this is a continuing obligation.

Section 14 provides that “as soon as is reasonably practicable” after setting a carbon budget, the Secretary of State must lay before Parliament a report setting out proposals and policies for meeting the current and future “budgetary periods” up to and including that budget. Following the setting of CB6, the Secretary of State laid the NZS before Parliament on 19 October 2021 as a report under s.14 of the CCA 2008.

Re Section 13 – the court concluded –

(1) s.13(1) of the CCA 2008 does not require the Secretary of State to be satisfied that the quantifiable effects of his proposals and policies will enable the whole of the emissions reductions required by the carbon budgets to be met. The obligation in s.13(1) does not have to be satisfied by quantitative analysis alone.

(2) Information on the numerical contribution made by individual policies in the NZS is legally essential to enable the government to discharge its obligation under s.13(1) by considering the all-important issue of risk to delivery. These are matters for the Secretary of State and not simply his officials.

Re Section 14 – the court concluded –

(3) The NZS should have gone below national and sector levels to look at the contributions to emissions reductions made by individual policies (or by interacting policies) where assessed as being quantifiable in order to comply with the language and statutory purposes of s.14 of the CCA 2008.

(4) It is the responsibility of the Secretary of State, not his officials, to lay a report before Parliament under s.14. The adequacy of such a report is a matter for him, acting on the advice of officials and with legally sufficient briefing.

The Secretary of State must lay before Parliament a fresh report under section 14 before the end of March 2023.

Pension Scheme Climate Focus (UK)

Yesterday (1st September 2022) the UK government commenced a consultation on obliging trustees of the £342bn Local Government Pension Scheme (LGPS) in England and Wales to report and address climate risks in the assets they manage. The consultation document is here.

This continues the climate focus commenced in 2021 across the UK for larger private sector occupational pension scheme trustees. The resulting Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021 (and similar in Northern Ireland) are in your systems (in ENV Energy), and there is an Audit Checklist question also. October will add an amendment to the Regulations in Britain. The statutory guidance for these obligations is here.

[you will note that certain larger UK private companies also have climate reporting obligations, which were enhanced this year, these instruments are in your Registers, as are the Audit Checklist questions]

After the phasing-in, in respect of the private (Occupational Pension) funds, the climate focus will extend to trustees of money purchase and non-money purchase schemes with £1bn or more in “relevant assets”. It will also include trustees of all authorised master trusts and authorised schemes (once established) providing collective money purchase benefits, in both the accumulation and decumulation phases. You are advised to re-check if the climate focus applies to the pension scheme in your organisation.

The (Occupational Pension) statutory guidance states – “To meet the requirements imposed by the Climate Change Governance and Reporting Regulations 2021, trustees should have a good understanding of the climate-related risks and opportunities that are relevant to their scheme. Trustees should understand that as a systemic risk, climate change risk could include risks outside of the obvious sectors, including those which are both directly and indirectly affected.”

And “Trustees have a legal duty to consider matters which are financially material to their investment decision-making. Trustees must not only consider the kinds of financial risks which might affect investments (and in the case of DB schemes, their liabilities and sponsoring employers’ covenant), they should consider where climate change, and action to address climate change, might contribute positively to anticipated returns or to reduced risk.”

And “Climate-related risk and opportunity is one of the major categories of financial factors of which trustees need to take account. Trustees also need to take account of other risks affecting the pension scheme, in line with their fiduciary duty. As such, trustees are expected to take a proportionate approach to managing climate-related risks and opportunities. The time spent by trustees on considering climate-related risks and opportunities, should not come at the expense of considering other major risks, including financially material social and governance factors.”

The government proposal for the LGPS scheme takes as it’s starting point the above Occupational Pension trustee obligations, but hints at extending it with more specificity on fund investment.

For example, the consultation document points to the UK Energy Security Strategy published in April 2022 (which highlighted energy investment opportunities for the private sector to improve energy security and support the transition to clean energy). The consultation document states the LGPS has an important role to play as a major investor with a commitment to stewardship and engagement.

The consultation document states “These proposals seek to support that approach to addressing high carbon emissions and discourage any pursuit of lower emissions through withdrawing investment from energy companies.”

Another difference with the private sector scheme is the proposed requirements will apply to all LGPS AAs (fund managers) from 2023/24 regardless of fund size. Currently the assets held by LGPS funds range from around £0.5 billion to £25 billion with 65 funds holding less than £5 billion and 8 funds holding less than £1 billion.

It is also proposed that data quality is a mandatory metric (for reporting). The consultation states this is in order to help the LGPS use its scale and market power to drive improvements in the quality of emissions data, which will be a critical factor in raising the quality of climate risk management.

Statutory guidance will be produced. Consultation closes on 24th November 2022.

National Carbon Trading System (Germany)

The FT reports (this morning) higher inflation in Germany, and cites (amongst other components) the carbon tax introduced Jan 1 (2021).

This Blog doesn’t often report on domestic policies in non-UK/Ireland jurisdictions. However, in this case, we comment as follows –

A new national carbon trading system was introduced in Germany, to start Jan 1 2021. In many places, this is cited as a carbon tax. The German National Emissions Trading System sits alongside the EU ETS (and is influential in terms of possible extension of the EU ETS to transport and buildings). The new German system applies to GHG emissions from fuel distribution and supply. Fuel distributors and suppliers based in Germany are obliged to participate (there are exemptions). Specifically, the obligated parties are those that place fuels on the market include fuel wholesalers, gas suppliers or companies in the mineral oil industry that are liable to pay energy tax. For each tonne of CO2 produced by the combustion of these fuels, the party placing the fuel on the market must acquire a corresponding emissions certificate and surrender it to the DEHSt – here.

Further information is set out – here (English).

As you are aware, the UK national carbon trading scheme based on electricity through half hourly meters, was abolished, and the material removed from Cardinal Environment EHS Legislation Registers & Checklists.

CORRECTION : Fuel Duties changes (UK)

The red diesel and biodiesel fuel duty changes (recent blog) are located in the Finance Act 2021, which is enacted but not yet commenced. The blog post is corrected.

There are further changes proposed in the Finance (No 2) Bill. Further information is here.

The changes to the duties on rebated fuels apply from 1 April 2022.

Fuel Duties changes (UK)

CORRECTION : the Finance Act 2021 is enacted. The Finance (No. 2) Bill is being debated. The changes identified below are located in the Finance Act 2021. The text below is amended.

Yesterday 16th November, the government issued information on its proposed changes to fuel duties – here.

The taxation of hydrocarbon oils is regulated by the Hydrocarbon Oil Duties Act 1979 (HODA) and numerous Regulations. It provides a rebate on heavy oils but this rebate is not allowed for any oil that will be used as fuel for a ‘road vehicle’.

Road vehicles not allowed to use red diesel or rebated biodiesel in any circumstances, unless they are ‘excepted vehicles’ as defined in Schedule 1 to the Act. Excepted vehicles include agricultural vehicles and specialist vehicles, such as those used in construction, haulage and some manufacturing.

Biodiesel, bioblends and fuel substitutes are subject to duty if set aside for a chargeable use and rebates are provided for in specified circumstances. Heating is not a chargeable use for these fuels.

The Finance Act 2020 made changes to HODA that are not yet commenced. These relate to private pleasure craft.

The Finance Act 2021 changes HODA (not yet commenced) –

• Only ‘excepted machines’ (new Schedule 1A instead of Schedule 1) will be able to use red diesel and rebated biodiesel.

• Heating will be a chargeable use for biodiesel, bioblends and other fuel substitutes (rebated rates when used in non-commercial heating).

Companies, individuals and civil society organisations that will lose their entitlement to use red diesel will need to switch to white diesel. This will include sectors, for example, such as construction, mining and quarrying, ports, manufacturing (e.g. ceramics, steel, timber), haulage (for transport refrigeration units on lorries), road maintenance, airport operations, oil and gas extraction, plant hire, logistics and waste management.

Company Sustainability Disclosure (UK/International)

With COP26 underway a slew of announcements are being made on the topic of business disclosure of environmental impact.

UK

In October (ahead of COP26), the government responded to its consultation on mandatory climate-related financial disclosures by publicly quoted companies, large private companies and LLPs. The response is here. Hitherto, on 9 November 2020, the government had announced it would implement TCFD recommendations across the economy – this announcement is here.

Re the need for better alignment between SECR (UK) and TCFD (International – see below under International) requirements, HMG will consider how best to achieve that. Any changes to the SECR regime to facilitate that alignment will require a separate consultation process, and that process will run in due course, but will take into account the proposed introduction of the Sustainability Disclosures Requirements (SDR) Regime, as set out in Greening Finance: A Roadmap to Sustainable Investment published on 18th October 2021 (see below) and the requirements introduced in the June 2021 Procurement Policy Note that require mandatory Scope 3 disclosures in carbon reduction plans when bidding for major government contracts. HMG will look to implement any changes to the SECR regime by 2023. A Q&A guidance document will set out to in-scope companies and other stakeholders to what extent current SECR requirements meet TCFD recommendation 4b, regarding the disclosure of emissions. This document is not yet published.

On 18 October (ahead of COP26), the Chancellor published a roadmap setting out details of new Sustainability Disclosure Requirements applicable to businesses, pension schemes, investment products and asset managers and owners. This roadmap is here. The document focuses on the “informing” first phase (of the road map), which it states will be delivered through new economy-wide Sustainability Disclosure Requirements. Public consultation is to follow, and thereafter there will be rules.

On 3rd November (within COP26), the Chancellor announced the UK will be the first net-zero aligned financial centre. Initially this means asset managers, regulated asset owners and listed companies must publish transition plans. Standards for these transition plans are being developed. A q&a about this process is here (dated 2nd November)

International

On 3rd November (within COP26), the IFRS Foundation (the International Financial Reporting Standards Foundation, a non-for-profit incorporated in Delaware US) announced the establishment of an International Sustainability Standards Board (ISSB) to develop global baseline sustainability reporting standards. The IFRS Foundation confirmed consolidation of two sustainability reporting organisations, the Value Reporting Foundation and the Climate Disclosure Standards Board, to create a global standard-setter for sustainability disclosures for the capital markets.

The Foundation also published two prototype standards to enable the ISSB to build on existing frameworks, including the Task Force on Climate-Related Financial Disclosures (TCFD) (set up by the Financial Stability Board, an international body), when developing its standards. Standards will be subject to public consultation and can be considered for adoption by jurisdictions on a voluntary basis. Jurisdictions will have their own legal frameworks for adopting, applying or otherwise making use of international standards.

This announcement is welcomed by the UK and a number of other countries – the UK press release is here.

COP26: lead up

EU Environment Ministers, Environment Council of 6 October 2021, approved conclusions setting out the EU’s position for the United Nations climate change summit (COP26) in Glasgow, UK – here.

ECOFIN (5th October 2021) conclusions on climate finance are here.

COP26 aims to bring countries together to accelerate action towards the goals of the Paris Agreement. The Paris Agreement (PA) was adopted in 2015 at the UN Climate Change Conference (COP 21) and entered into force on 4 November 2016.

It counts to date 191 countries and the European Union, and sets two main goals –

(1) limiting the global average temperature increase to well below 2°C above pre-industrial levels, and pursuing efforts to limit it to 1.5°C,

(2) adapting to the unavoidable impacts of climate change while making finance flows consistent with climate-resilient development.

The main goals of COP26 are to encourage parties to come forward with ambitious Nationally Determined Contributions (NDCs) that establish their emission reduction targets for 2030, to discuss adaptation measures, to increase climate finance and to finalise the Paris Rulebook (the detailed rules that make the Paris Agreement operational).

The state of NDCs is collated in the interim NDC Registry, the latest NDC Synthesis Report is 17th September 2021 (NDCs submitted and recorded to 30 July 2021). NDCs contain information on targets, and policies and measures for reducing national emissions and on adapting to climate change impacts.  NDCs also contain information on either the needs for, or the provision of, finance, technologies and capacity building for these actions. Countries communicate new or updated NDCs to the interim NDC Registry every five years starting in 2020. The interim NDC Registry is here.

The state of domestic mitigation measures (not country specified) is here.

An update of the key findings of the NDC Synthesis Report, which will cover updated or new NDCs submitted between 31 July and 12 October 2021, will be published on 25 October. This is to ensure that the most updated information is made available to COP26.

The September 2021 NDC Synthesis Report identified an urgent need for either –

* a significant increase in the level of ambition of NDCs between now and 2030, or

* a significant overachievement of the latest NDCs,

* or a combination of both,

in order to attain cost-optimal emission levels suggested in many of the scenarios considered by the IPCC for keeping warming well below 2 °C or limiting it to 1.5 °C.

If emissions are not reduced by 2030, they will need to be substantially reduced thereafter to compensate for the slow start on the path to net zero emissions. Net zero CO2 emissions are a prerequisite for halting warming at any level.

At COP26, parties also need to agree on the details of the so-called Art.6 that lays down rules for international carbon markets, enabling parties to trade emission reductions. In addition, parties will seek to establish a common time frame for their NDCs. Discussions at global level revolve around setting a five-year or a ten-year common time frame.

The UK (COP26 host) is making announcements currently about its domestic measures, I will blog post separately when the strategy documents are published.

Hydrogen Strategy (UK)

UPDATE (18th August) : the 121 page UK Hydrogen Strategy is here.

Four consultations are started –

(1) the business model – here,

(2) a NetZero Fund – here,

(3) a UK low carbon hydrogen standard – here,

(4) facilitating a grid conversion hydrogen heating trial – here.

The current intention is that low carbon hydrogen producers seeking government support, through a Net Zero Hydrogen Fund, and/or the Hydrogen Business Model would be required to comply with a UK low carbon hydrogen standard in order to secure support.

The standard could also be developed into a certification scheme.

The design elements of a UK low carbon hydrogen standard are expected to be finalised by early 2022, while work continues on delivery and administration considerations.

The approach in the UK will involve a mix of hydrogen production methods, including large scale gas reforming with carbon capture, utilisation, and storage (CCUS) (blue hydrogen with CCUS) and electrolytic hydrogen from low carbon electricity (green hydrogen).

Note the following are out of scope for the purpose of developing a UK low carbon hydrogen standard (and are addressed by separate BEIS work streams that are not yet reporting) –

* End use safety / quality standards e.g., regulations for use of hydrogen in transport, or regulations on hydrogen boilers,

* Gas Safety (Management) Regulations and entry standards for blending hydrogen into the gas grid,

* Standards for other (non-hydrogen) decarbonised gases,

* Wider environmental standards and regulations (e.g., water consumption, air quality) although later work on these areas is not excluded. Hydrogen producers will, in any event, need to comply with current and future regulations on air pollutants including nitrogen oxides (NOx),

* Gas quality – e.g., the Wobbe Index.

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The UK government issued this morning a press release – here – signalling its published Hydrogen Strategy which it is consulting on – but (once again as is typical of these press releases) the strategy document itself is not published (even though the press release is written using the past tense that the document is already in the public domain) nor the consultation questions.

I will update this post on the blog itself (that won’t be a second email notification, so check the blog post) when the strategy document is finally available, with a link to that document, and some comments on its content.

Here is the link to government consultations.

Here is the New Scientist take on the strategy – its link to the strategy itself sends to a 404 page not found.