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)

Shipping MRV Regulation (EU)

The Shipping MRV Regulation is a new European Regulation (EU) 2015/757 on the monitoring, reporting and verification of carbon dioxide emissions from maritime transport. It applies to shipping activities carried out from 1st January 2018. 

From that date, companies must monitor and report the verified amount of carbon dioxide emitted by their large ships (above 5,000 gross tons) on voyages to, from and between ports in European Union countries. Companies must also provide certain other aggregated annual information, such as data to determine the ships’ energy efficiency. A valid document of compliance issued by an independent verifier has to be carried on board, relating to the shipping activities falling under the MRV Regulation in the previous year.

The European Regulation is found here.

Energy Bill 2013-2014 Energy Performance Standard (EPS)

I posted earlier on the House of Lords (HL) amendment to give the Secretary of State the power to apply the EPS to any fossil fuel power station continuing to operate (by upgrading to the European Industrial Emissions Directive – IED).

The HL amendment was defeated yesterday in the House of Commons – my updated post is here.

The EPS will limit the amount of annual CO2 emissions to be allowed from new fossil fuel generating stations, and those extending their life through substantive investment (Energy Bill 2012).

The HL exemption (from the EPS until end 2027) proposed for new fossil fuel plant equipping themselves with Carbon Capture and Storage (CCS), itself subject to environmental permitting, is agreed.

My updated post on CCS is here.

Update (11th December 19.00) – the EPS matter returned to the House of Lords and is now accepted (no further amendment). The next step is Royal Assent.

The position is – the EPS will limit the amount of annual CO2 emissions to be allowed from new fossil fuel generating stations, and those extending their life through substantive investment. Exemption (from the EPS until end 2027) will exist for new fossil fuel plant equipping themselves with Carbon Capture and Storage (CCS), itself subject to environmental permitting.

Energy Bill 2012-13 Emissions Performance Standard (UK) (HL amendment)

UPDATE: House of Lords amendment (older coal fired stations) is defeated (4th December vote of the House of Commons).

An Emissions Performance Standard (EPS) is proposed to limit the amount of CO2 emitted by new fossil fuel power stations – this is a statutory limit set by the Energy Bill 2012 on the amount of annual CO2 emissions to be allowed from new fossil fuel generating stations. The limit is set at 450g/kWh until 2045. This document is an update on the technical details of the EPS.

The EPS does not apply to existing plant, which must in any event fit pollution clean-up equipment to meet tighter limits from January 2016. Under the European Industrial Emissions Directive (IED), plants that do not fit clean-up equipment will from January 2016 be subject to a 17,500 hour limit on their operation, after which they must close, or, from mid-2020 be limited to just 1,500 hours of operation a year.

The House of Lords had voted 4th November to give the Secretary of State the power to apply the emissions performance standard—EPS—to any existing fossil fuel power station upgrading to conform to the IED. The Energy Bill returned to the House of Commons, where MPs voted 318 to 236 (4th December) to overturn the amendment. The Government did not consider it necessary to grant itself this power.

Per the 4th December debate – “Let us be clear about what the amendment would do and what it would mean for coal plant. Coal plants operating in 2013 effectively have three choices. The first is to leave the plant as it is, without investment, in which case it would close some time before 2023, depending on how quickly it used the permitted hours of operation to which the Minister referred. The second is to upgrade in order to conform to the industrial emissions directive, as has been done at least once, at Ratcliffe-on-Soar, and as others are considering doing. The third is to upgrade more significantly to extend the lifetime and meet the IED stipulations.

The coal-fired power stations in the first category would be unaffected by the amendment. If they burned through their allowances quickly, operating at 55% load factor, they would still run until 2020, and because of the likely profitability of the capacity market being introduced, I suspect that many would choose to run at slightly lower load levels until 2023. The Government’s emissions performance standards, already in the Bill, will apply to the third category of plant—those that extend their lives through investment. The amendment would impact on the second group and take effect, effectively, from 2023.

The EPS limits on carbon emissions are expressed as the amount of CO2 per kWh, but they limit the amount produced not per hour but per year. A typical power station, therefore, would be limited to a 40% to 45% load factor without lowering its emissions rate. That means running at a low load factor, to manage peaks in demand or in winter, or becoming serious about CCS. Neither choice is the end of coal generation in the UK.

From the Minister’s remarks, it seems that the Government are not persuaded by the amendment for several reasons.”