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.

Carbon Border Adjustment Mechanism (EU)

In March, the European Parliament adopted a resolution on a WTO-compatible carbon border adjustment mechanism (CBAM). WTO rules mean an imported product cannot be subject to tougher measures than products produced domestically. The EU’s March CBAM Resolution is here.

The EU’s CBAM would be part of a broader EU industrial strategy and cover all imports of products and commodities covered by the EU ETS, adding a carbon tax to the import of these products or adding a mechanism mirroring the EU ETS. The preference is for a mechanism mirroring the EU ETS – importers would buy permits for imports of certain goods – with countries of similar carbon price e.g. Norway, Liechtenstein, Iceland, and possibly Switzerland, exempted.

By 2023, and following an impact assessment, the Resolution calls for CBAM to cover the power sector and energy-intensive industrial sectors like cement, steel, aluminium, oil refinery, paper, glass, chemicals and fertilisers.

Specifically in para 10, the Resolution –

10. Reiterates that the introduction of a CBAM should be part of a package of legislative measures to ensure the swift reduction of GHG emissions deriving from EU production and consumption, in particular by scaling up energy efficiency and renewable energies; stresses that the CBAM should be coupled with policies aimed at enabling and promoting investments in low-carbon industrial processes, including through innovative financing tools, the new Circular Economy Action Plan and a broader EU industrial policy that is both environmentally ambitious and socially fair, with a view to steering a decarbonised reindustrialisation of Europe to create quality jobs at a local level and ensure the competitiveness of the European economy, while fulfilling the EU’s climate ambition and offering predictability and certainty to secure investments towards climate neutrality;

And at para 16, the Resolution –

16. Considers that in order to address the potential risk of carbon leakage [competition from countries with lax climate rules] while complying with WTO rules, the CBAM needs to charge the carbon content of imports in a way that mirrors the carbon costs paid by EU producers; stresses that carbon pricing under the CBAM should mirror the dynamic evolution of the price of EU allowances under the EU ETS while ensuring predictability and less volatility in the price of carbon; is of the opinion that importers should buy allowances from a separate pool of allowances to the EU ETS whose carbon price corresponds to that of the day of the transaction in the EU ETS; underlines that the introduction of the CBAM is only one of the measures in the implementation of the European Green Deal objectives and must also be accompanied by the necessary measures in non-ETS sectors as well as an ambitious reform of the EU ETS to ensure it delivers meaningful carbon pricing that fully respects the polluter pays principle, and to contribute to the necessary GHG emissions reduction in line with the EU’s updated 2030 climate target and 2050 net zero GHG emissions target, including by addressing the linear reduction factor, a rebasing of the cap and assessing the potential need for a carbon floor price;

And at para 32, the Resolution –

32. Acknowledges that the CBAM could be implemented either as an extension of the current regime of customs duties or as a complementary scheme within the existing EU ETS framework; emphasises that both approaches could be entirely consistent with an own resources initiative;

The European Commission is expected to present a legislative proposal on a CBAM in July 2021 as part of the European Green Deal.

In early June, the first draft of the EU’s CBAM legislative proposal became public (it ‘leaked’ essentially).

Under the current draft, importation of products covered by the CBAM would be carried out by “authorized declarants” who would lodge “CBAM declarations” annually. These declarations would reflect direct and indirect GHG emissions embedded in the imported products. Regulated entities (importers) would then surrender a corresponding amount of “CBAM certificates.”

The proposal identifies a preference for the declaration of an actual installation-specific value of the specific embedded emissions of an imported good rather than using default values. Each authorized declarant would ensure that the declared embedded emissions are verified by an independent verifier. In the situation where actual GHG emission values could not be verified—for example, as a result of the authorized declarant’s failure to submit the required information—default values would be used to determine the number of CBAM certificates to be surrendered. Default values are proposed to be set at a relatively high level corresponding to the emissions of the 10 percent worst performing sites in the EU for each of the processes involved in the production of goods.

The proposal provides for the possibility of offsetting the cost compliance with the CBAM against a carbon price paid in the country of origin of the imported good. Declarants would apply for compensation—i.e., a reduction in the number of certificates to be required—if a carbon price had already been paid in the country of origin for the embedded emissions in the imported goods.

Further details are in this Mayer Brown explainer – here, which also notes that the actual legislative proposal might be significantly altered.

I will post again when the legislative proposal is issued.

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.