Carbon Pricing Consultation (UK Brexit)

Exit day is 31st October 2019

UPDATE : persons are invited to attend one of consultation workshops:

• London, 22 May 2019: book on Eventbrite

• Northern Ireland, Belfast, 30 May 2019*

• North Wales, Llandudno Junction, 3 June 2019

• South Wales, Swansea, 5 June 2019

• Scotland, Glasgow, 12 June 2019*

All the workshops will be available on Eventbrite. * events do not cover aviation

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The UK government and the devolved administrations are now seeking views (by way of consultation) on their proposals for carbon pricing after Exit. The consultation ends 12 July 2019, and the documents are here

The consultation focuses on four aspects :

(1) the design of a UK Emissions Trading System (ETS) (I posted a few days ago, that a UK ETS is a prospect)

(2) the operation of a UK ETS

(3) aviation

(4) continued UK membership of the EU ETS for Phase IV (2021-2030).

[Note: I don’t cover aviation in detail in this Blog]

A UK ETS that is linked to the EU ETS is the UK Government’s and the Devolved Administrations’ preferred carbon pricing option. This is envisaged in the Political Declaration that accompanies the Withdrawal Agreement (that is not ratified by the UK Parliament).

The view is a linked ETS would create a larger carbon market that would deliver more cost-effective emission reduction opportunities for UK businesses.

The consultation document sets out alternatives, including:

* a standalone domestic emissions trading system;

* a tax on carbon, similar to the policy described in the HMRC technical note “Carbon Emissions Tax” (and provided for in Legislation, not yet commenced – I Blog posted about this); or

* participating in Phase IV of the EU ETS.

Note : the consultation does not seek detail re a tax on carbon. But, the summary states – if necessary, responses to this consultation may be used to develop work on such an alternative.

Questions relevant to a standalone UK ETS or a tax on carbon are included. The proposals in Chapters 1-3 would be applicable for either a linked or standalone UK ETS unless clearly stated otherwise.

Chapter 1 focuses on proposals for the design of a linked or standalone UK ETS which covers: the scope in terms of gases and sectors; the cap and trajectory; the distribution of allowances; free allocation; supply flexibility; phases and reviews; the small emitter opt-out; and the ultra-small emitter exemption; and a UK industrial decarbonisation fund.

• To ensure that any UK ETS is linkable to the EU ETS, the proposal is to match the scope of a UK ETS with the scope of the EU ETS both in respect of sectors and greenhouse gases covered. Views are, in addition, sought on the potential to expand scope in later years of UK ETS operation.

• For the free allocation of allowances, the proposal is to follow broadly the free allocation methodology used in the EU ETS to provide a smooth transition for the relevant sectors and to support the potential for linking a UK ETS with the EU ETS.

• The proposals for a Small Emitter and Hospitals Opt-out Scheme and an Ultra- Small Emitter Exemption also align with the EU ETS, including setting a threshold of 25,000t CO2eq/35MW and 2,500t CO2eq respectively.

• In addition, views are sought on the possibility of monetising allowances from within the UK ETS to fund UK industrial decarbonisation.

Chapter 2 seeks views on the operation of a UK ETS.

Chapter 4 covers the scenario whereby the UK remains part of Phase IV of the EU ETS past 2020. Note: while the UK is still within the EU or within the Transition/Implementation Period, the UK has an obligation to transpose the Phase IV revisions to the EU ETS Directive into UK law before 9 October 2019.

The chapter also includes proposed Phase IV implementation features which may be incorporated within a UK ETS.

Chapter 4 seeks views on:

• The timing and method of this transposition (and further transposition arising as a result of tertiary legislation not yet agreed at EU level);

• Elements of Phase IV where the UK has discretion over whether and how to implement – most notably the opt out schemes for small emitters, which the proposal is to implement anyway as part of a linked or standalone UK ETS.

The above sets out some salient features, the reader is asked to scan the entire consultation.

[the Exit Day could change, please continue to follow this Blog]

UK Carbon Emissions Tax (UK Brexit)

I posted before about the Carbon Emissions Tax that will be applied in place of EU ETS (the EU carbon trading scheme). The UK Government issued yesterday further instructions on this Carbon Emissions Tax. These instructions are here.

UK Carbon Emissions Tax – imminent key dates

From 30 March 2019, if there is no transition, business emissions from 1 January 2019 onwards will no longer be covered by the EU ETS, so UK businesses will no longer need to surrender allowances for these emissions at the end of each year.

However, all stationary installations currently participating in the EU ETS should continue to comply with the regulations for the monitoring, reporting and verification of greenhouse gases. These regulations will underlie the new UK Carbon Emissions Tax.

The UK Carbon Emissions Tax is provided for in the Finance Act 2019 and will be introduced on 1 April 2019 – the reporting period for stationary operators will be 1 April 2019 to 31 December 2019. The 2019 tax will be set at £16 per tonne. Subject to state aid approval, the scheme to compensate energy-intensive industries for the indirect costs of the EU ETS would remain in place to compensate for the indirect emission costs of the new Carbon Emissions Tax.

The Finance Act 2019 is now added to the Brexit Law List, in Cardinal Environment EHS Legislation Registers & Law Checklists.

Accounts administered by the UK in the EU ETS allowance registry and the Kyoto Protocol registry will be blocked from the point of the UK leaving the EU. Operators wishing to retain access to their allowances after the withdrawal date should consider opening an account in another member state’s registry for this purpose, and should consider the amount of time this is likely to take. Clean Development Mechanism project developers with a UK Letter of Authority will also need a letter of approval from a different Designated National Authority.

Until further notice, the UK government will not issue or auction any 2019 EU ETS allowances. It remains possible for allowances to be purchased through the European Energy Exchange (EEX) auction platform, and on the secondary market. Operators should consider this when planning to meet 2018 compliance obligations. To make sure obligations will not be affected, the government brought forward the 2018 compliance year deadlines, published on 7 March 2018. This states that a company (in EU ETS) needs to report its 2018 emissions by 11 March 2019, and surrender allowances for those emissions by 15 March 2019.

Guidance on this was issued in October 2018 – here.

Carbon Emissions Tax (UK Brexit)

I posted before about a carbon emissions tax being introduced in the event the UK access to the EUETS (the EU Emissions Trading System) is discontinued following Brexit.

The Finance (No. 3) Bill, out for Royal Assent, makes provision for this. Once enacted, the Act will be added to the Brexit Law List (in subscribers to Cardinal Environment EHS Legislation Registers & Checklists systems).

An information note is also published, here.

This note identifies that a Carbon Emissions Tax is one option being pursued by the UK Government.

The note sets out how the new Carbon Emissions Tax would operate.

The existing CCL is unaffected.

The new Carbon Emissions Tax will come into force via separate statutory instrument.

New Carbon Emissions Tax (UK)

The recent Budget 2018 announced a new Carbon Emissions Tax would be introduced from 1April 2019 in the event the UK leaves the EU at the end of March 2019 without a deal.

If the UK secures a transition/implementation period, it would remain a member of the EU Emissions Trading System (EU ETS) during this period. The UK government is continuing to develop options for long term carbon pricing, including remaining in the EU ETS; establishing a UK ETS (linked to the EU ETS or standalone) or a carbon tax.

Already published Brexit Preparedness Notices confirm the UK would be excluded from participating in the EU ETS in a ‘no deal’ scenario. This means that current participants in the EU ETS who are UK operators of installations would no longer take part in the system.

The new Carbon Emissions Tax would apply to emissions of carbon dioxide (and other greenhouse gases on a carbon equivalent basis) from UK stationary installations currently in the EU ETS. The aviation sector would not be subject to the Carbon Emissions Tax.

Details of this New Carbon Emissions Tax are here.

Initial information is here.

Note in particular :

(1) The EU ETS requires participants to obtain permits to emit and then to submit a report annually with details of their activities across the previous calendar year, from which their emissions across the period are calculated. The UK would continue to operate a permitting and reporting regime after leaving the EU ETS. Permits issued for EU ETS compliance before 29 March 2019 would remain valid for compliance with the Carbon Emissions Tax although minor amendments to permits may be necessary.

(2) Any stationary EU ETS installation currently covered by the permitting system and the emissions reporting scheme (including those in a simplified reporting scheme for small emitters and certain hospitals) would remain subject to the reporting requirements and potentially become liable to pay the tax, as would any installation that became permitted after the start of the tax.

(3) There would be no requirement for installations to register for tax or send in a tax return – all information needed to calculate tax liability and to bill the installation would be taken by HMRC from the existing IT system known as ETSWAP. The tax year would cover the same calendar year period as under the existing monitoring, reporting and verification system, with installations continuing to use ETSWAP to submit independently verified data to environmental regulators on their activities covering the period 1 January to 31 December. They would continue to do this by 31 March each year. As a result, by 30 April each year, independently verified data would continue to be available on each installation’s greenhouse gas emissions covering the previous calendar year. HMRC would use these data to generate a tax bill, which would be sent to installations in May, with payment required within a specified period agreed following consultation. Transitional arrangements would apply in the first tax year as it would cover only 9 months as a result of the tax starting part way through the year.

(4) For permit holders outside the simplified reporting scheme the tax would be based on the amount by which reported emissions exceeded an emissions allowance set for tax purposes for each installation in advance of the tax year. For 2019 and 2020, the allowance would be set at the level of free allocation of EUAs under Phase 3 of EU ETS, with an installation paying tax only if its emissions exceeded its allowance, albeit that 2019 allowances would be set at 75% of the full year level.

For power generators who receive no free allocation of EUAs under EU ETS, the allowance would be set at zero.

Installations that became permitted after the UK left the EU ETS would have no EUAs on which to base their emissions allowance – their allowance would be set in a comparable way to existing EU ETS participants.

(5) Premises covered by the simplified reporting scheme would continue to operate as they do at present except that the tax (rather than the current civil penalty) would be payable on emissions above the allowance. The allowances would be set at equivalent levels to the targets that would have been set for them under the current simplified reporting scheme.

(6) HMRC would tax emissions in excess of the emissions allowance on a carbon equivalent basis per tonne. For 1 April to 31 December 2019 the rate would be £16 per tonne. The rate for years beyond 2019 would be set at future Budgets.

(7) As the tax would be introduced from April 2019, the arrangements for the first year would differ from the arrangements set out above. The first tax period would run for only 9 months and cover the period from 1 April to 31 December 2019. As indicated above, installations’ emissions allowances for 2019 would be set at 75% of the level that would have applied had the first tax period covered 12 months. Although they would still need to monitor their emissions for the full 12 months, installations would need to submit 9 months’ activity data by 31 March 2020 covering this first tax period. Payment details for the first tax year would be confirmed after the consultation planned for 2019 but it is possible that tax bills for 2019 would be sent out later than May 2020.

(8) Legislation will be introduced in Finance Bill 2018-19 to create a new Carbon Emissions Tax, setting the scope, rate and basic structure of the tax and establishing that it would be payable only on emissions above an emissions allowance set for each installation. The Finance Bill will provide for a statutory instrument or instruments which would be laid in early 2020 following a consultation in 2019. The instrument or instruments would be wide-ranging.

(9) The government currently sets a total carbon price, created by the price of allowances from the EU ETS and the Carbon Price Support (CPS) rate per tonne of carbon dioxide (t/CO2) which tops up the EU ETS price for electricity generators. The total carbon price is designed to provide an incentive to invest in low-carbon power generation. In a ‘no deal’ exit from the EU the CPS would remain in place.

FURTHER DETAIL IS IN THE LINKED NOTE (see earlier)

Energy Sector (UK Brexit Preparedness)

As with the Financial Sector, the UK government has advised it will issue Regulations to ‘onshore’ energy legislation. This communication is here.

Unless the forthcoming changes to energy legislation relate to the Climate Change Levy or other climate related areas, this Blog post will be the only Blog post I will write about the matter.

UK exits the EU (more EU Notices)

Reminder : more EU Notices are issued – please find all EU Notices and Notices issued by EU Bodies (such as ECHA) here.

Please note the latest ones include EU Notices on Aviation and the internal Energy Market.

Unless a ratified Withdrawal Agreement establishes another date, the UK will become a third country (as respects the EU rules and participation in EU institutions and bodies) from midnight CET on 29th March 2019. These Notices set out the changes that will apply from that date. The changes are subject to any transition arrangements that may be contained in any ratified Withdrawal Agreement at the date above.

ESOS II (UK)

ESOS is a UK law that gives effect to EU Law concerning the energy audits of large companies (an article of the Energy Efficiency Directive). An equivalent of ESOS is in place in each of the other EU-27 member state countries.

Under ESOS, large UK organisations were required to carry out ESOS energy assessments before the deadline of 5 December 2015, using one of four compliance routes:

• ESOS Energy Audit

• ISO 50001 Certification

• Display Energy Certificates

• Green Deal Assessments.

By the deadline, qualifying organisations should have carried out their energy assessment(s) and notified the Environment Agency (EA). The assessments should then be repeated at least once every 4 years.

If an organisation has a UKAS-accredited ISO 50001 certificate that covers the full scope of ESOS, then this will suffice as ESOS compliance. All organisations need to do then, is notify the EA and provide proof of compliance via that route.

However, if ISO 50001 is not used as a route to compliance, then an ESOS energy audit will be needed as the next best and most common available route to compliance.

ESOS II or ESOS 2 ?

Every four years, a new compliance period starts. The qualification date for compliance Period 2 is 31 December 2018, with proof of compliance covering the period (from 6 December 2015 to 5 December 2019) being required by 5 December 2019. This is known as ESOS II or ESOS 2. It is not a change in the law, it is a new compliance period starting.

If your organisation has chosen an ESOS energy audit as the compliance route for Period 1 then you will now have an ESOS evidence pack that will include:

• the calculation for your total energy consumption

• a list of your identified areas of significant energy consumption

• details of the energy saving opportunities identified.

However, you won’t be able to use this information to demonstrate Period 2 compliance, so this exercise will need to be repeated – see earlier for the ESOS 2 deadlines.

Alternatively, information from your first ESOS energy audit can be used as the basis for implementing an energy management system (EnMS) to allow realisation of the energy saving opportunities.

If your system is then certified to ISO 50001 during the first four years, your organisation will automatically demonstrate Period 2 ESOS compliance.