Climate Change and EUETS (UK Brexit)

Exit day is 31st October 2019

Climate Change

Today (2 May 2019) sees the publication, by the UK Committee on Climate Change (CCC), of (277 pages of) advice in response to the request of the governments in Westminster, Edinburgh and Cardiff, sent in October 2018.

The CCC advice is for the UK Government to legislate for and reach a net-zero emissions goal by 2050, so as to end its contribution to global warming within thirty years. This net-zero target should cover all greenhouse gases and should include international aviation and shipping, but exclude the use of emissions credits.

Carbon Brief has summarised in a useful Q&A – here – extracts are below –

In 2015, almost every country of the world promised to reach net-zero emissions later this century as part of the Paris Agreement on climate change. The deal set a limit to global warming of “well-below” 2C above pre-industrial temperatures and said countries will “pursue efforts” to keep warming to 1.5C.

In contrast, the UK’s existing climate targets were set in the context of a 2C warming limit. Its overall goal, first set in 2008, has been to cut greenhouse gas emissions to 80% below 1990 levels by 2050.

In the wake of the raised ambition of the Paris deal, the government asked its official climate advisers, the CCC, what this should mean for the UK.

In two separate pieces of advice in 2016, the CCC said that the UK would ultimately have to raise its ambition for 2050, to match the Paris goals, but that it was not the time for doing so.

Under the Climate Change Act 2008, the UK has legally binding five-yearly carbon budgets, which mark staging posts on the way towards the “80% by 2050” goal. So far, the first five carbon budgets have been set down in legislation, covering 2008-2032.

On 8 October 2018, the Intergovernmental Panel on Climate Change (IPCC) published a special report on 1.5C that clearly set out the risks of allowing warming to exceed this level. This report also summarised the latest scientific evidence on what would be needed to stay below 1.5C.

Following this report, on 15 October 2018, the governments in Westminster, Cardiff and Edinburgh asked collectively the CCC for advice on when the UK should cut its emissions to net-zero.

Their letter asked whether the UK should set separate targets for CO2 and other greenhouse gases (GHGs). It asked “whether now is the right time for the UK to set such a target” in legislation. And it asked how the UK would reach net-zero, as well as the costs and benefits of doing so.

Today’s advice from the CCC is its response to this formal request. It comprises 277 pages of advice to the three governments, covering each of the questions posed by their October letter.

This advice is backed by another 300-odd pages setting out the significant changes in scientific knowledge and international policy that have taken place since the UK’s existing 2050 target was set. Behind the scenes are numerous research projects, technical annexes and advisory groups.

The UK Government response is to welcome the advice, to not accept its recommendations immediately, and to respond in due course. The response is here.

Re Scotland, the CCC advice is for Scotland to reach net-zero by 2045 (5 years earlier). The Scottish Government will now legislate to achieve this, and on Sunday its First Minister declared a “Climate Emergency”. A 2018 bill currently going through the Scottish Parliament aims to increase the current 2009 Climate Change (Scotland) Act target to 90% (emissions reduction by 2050 against a 1990 benchmark). It will now be amended so MSPs can vote on the new target of net-zero by 2045.

The current Scotland bill is here.

Re Wales, the CCC advice is the 2050 goal should be for a 95% reduction on 1990 levels. This is due to its relatively lower potential for CO2 storage and relatively high agricultural emissions. The Welsh government has also declared a “Climate Emergency” – here. And in March 2019, the Welsh government published its Plan to set out how Wales aims to meet the first carbon budget (2016-2020) and consequently the 2020 interim target through 100 policies and proposals across Ministerial portfolios.

I will update this post online, with the Welsh government response to the CCC advice.

EUETS

The EU emissions trading system (EUETS) requires heavy industry and power producers to obtain and surrender allowances equal to their level of carbon emissions on an annual basis. Companies that are the most exposed to international competition are allocated a proportion of free ETS allowances annually. For years, many companies have used these free allowances to comply with their obligations for the previous year.

Just over four months ago, in December 2018, the European Commission suspended the UK’s ability to auction ETS allowances until the withdrawal agreement was ratified. This was decided in order to maintain the integrity of the European carbon market in the event that the UK left the EU without a deal on 29 March this year. This position means that free allowances for 2019 are not issued. I posted about this decision before Christmas.

The withdrawal agreement negotiated with the European Union (but not ratified by the UK Parliament) allows for full and continuing membership of the EU ETS until the end of December 2020.

If it had been ratified when planned, the UK would have had the full legal basis immediately to issue free 2019 allowances. However, the decision of the UK Parliament was not to vote in favour of the withdrawal agreement. This has meant that UK businesses have, since December, been left without access to 2019 free allowances.

Despite the situation, all UK installations had met their 2018 obligations in full (allowances are available in other markets) – before the 30th April compliance deadline. The UK government (BEIS department) had reminded all participants that they still had a legal duty to meet their obligations for 2018 and that the UK is committed to upholding its environmental standards and continuing to comply fully with European law while its remains a member of the EU. I posted before about this deadline and the delay in the no-Deal replacement carbon tax.

Re British Steel (special case) – the UK Government has entered into a short-term bridge facility, valued at about £120 million, under section 7 of the Industrial Development Act 1982, at an interest rate of LIBOR plus 7%. The effect of this agreement is that the Government has, in the last week, purchased the necessary emissions allowances on behalf of British Steel, to enable British Steel to meet its EUETS obligations.

Per the BEIS Minister statement to Parliament yesterday – In return, under a deed of forfeiture, ownership of the company’s 2019 allowances will now be transferred to the Government once they are released. Through the subsequent sale of these 2019 allowances, the UK Government expect the taxpayer to be repaid in full. The 2019 allowances are more than are needed to fulfil the 2018 obligations, and all of them will come to the Government.

The terms of the deal ensure that if the price of allowances were to rise, the taxpayer would receive half of any financial upside once the allowances are sold back into the market. To ensure the taxpayer is protected in the event that allowances were to fall, under the terms of the deal, British Steel has been required to underwrite any shortfall and is covering the cost of arranging the facility. The price of carbon allowances has been rising over the past two years, and the Exchequer received £1.4 billion from auctioning allowances in 2018, up from £533 million in 2017.

The UK Government is engaging with the Commission about the implications for the UK continued participation in the EU ETS.

In the event that an agreement is not reached (and the Withdrawal Agreement stays unratified) – the UKGovernment will put in place a domestic scheme that provides security against the loss of EU-derived allowances. I will post again about this, when further information is public.

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