The UK will be excluded from participating in the EU ETS under a ‘no deal’ Brexit scenario, the government announced late on Friday.

**Read Carbon Pulse’s article on the announcement**

Below is the full announcement, which appeared on the website of the UK’s Department for Business, Energy and Industrial Strategy (BEIS):

The UK will be excluded from participating in the EU Emissions Trading System in a ‘no deal’ scenario. This means that current participants in the EU Emissions Trading System who are UK operators of installations will no longer take part in the system and flights within the UK will no longer be covered by EU ETS obligations.

Flights between the UK and the European Economic Area (EEA) are not expected to be covered by EU ETS obligations.

The UK will no longer be responsible for managing the EU ETS requirements for the aircraft operators it currently administers. If those aircraft operators continue to fall within the scope of the EU Emissions Trading System (for example, if they operate intra-EEA flights after exit), these requirements will need to be administered by an EU Member State.

In a ‘no deal’ scenario, UK government will therefore remove requirements relating to the surrender of emissions allowances. However, to retain as much continuity as possible, UK government intends to maintain Monitoring, Reporting and Verification arrangements.

The European Commission Regulation 389/2013, as amended by Commission Regulation 2018/208, will invalidate any allowances issued by the UK in 2019 such that they will not have any value on the carbon market.

The UK will not have guaranteed access to the Consolidated System of European Registries which includes the EU Emissions Trading System Union Registry and the UK’s Kyoto Protocol National Registry.

Implications

EU Emissions Trading System

The government has taken steps to provide certainty to UK operators in meeting their compliance obligations for the 2018 compliance year. To ensure this will not be affected in a ‘no deal’ scenario, the government brought forward the 2018 compliance year deadline in domestic legislation for operators to report their 2018 emissions and surrender allowances for those emissions from 30 March 2019 and 30 April 2019, to 11 March 2019 and 15 March 2019 respectively.

Any EU Emissions Trading System allowances issued by the UK for the 2019 compliance year cannot be used by UK operators to meet their 2018 compliance obligations. Operators will want to consider this when planning to meet their 2018 compliance obligations.

The government will retain the existing financial penalty for failure to surrender allowances for the 2018 compliance year.

As noted above, in a ‘no deal’ scenario the UK will not have guaranteed access to the Consolidated System of European Registries which also includes the EU Emissions Trading System Union Registry. UK operators will not have guaranteed access to the UK section of the EU Emissions Trading System Union Registry.

There will be no requirement to surrender EU Emissions Trading System allowances after the 2018 compliance year – the surrender deadline for 2018 emissions is 15 March 2019.

The UK government intends to maintain Monitoring, Reporting and Verification arrangements to ensure continuing transparency over Greenhouse Gas emissions. The Monitoring, Reporting and Verification framework requires all operators to monitor and report on their annual greenhouse gas emissions and produce a verified annual emissions report. Monitoring, Reporting and Verification falls under the devolved competence of environmental policy.

UK operators of stationary installations will continue to report on their emissions. Aircraft operators who will be registered in the UK after exit day will continue to report their emissions on the same flights as required on exit day. Operators in the Small Emitter and Hospital Opt-Out scheme will also continue to report.

There is no immediate action for aircraft operators who will be registered outside the UK after exit day, even if they are currently administered by the UK (but not registered in the UK), as the UK government will not initially place Monitoring, Reporting and Verification requirements on these operators in a ‘no deal’ scenario.

The current UK regulators will continue to have powers to enforce non-compliance with these ongoing requirements.

Carbon pricing

The UK government currently sets a Total Carbon Price, created by the EU Emissions Trading System and the (Great Britain only) Carbon Price Support mechanism. The UK government announced at Autumn Budget 2017 that the Total Carbon Price was set at the right level and that it would target a similar Total Carbon Price until unabated coal is no longer used.

In a ‘no deal’ scenario, the UK government will initially meet its existing carbon pricing commitments via the tax system, taking effect in 2019. A carbon price will apply across the UK, including Northern Ireland. The Single Electricity Market is being accounted for in all options.

The UK government will publish more details of how it will initially apply a carbon price in a ‘no deal’ scenario at Budget 2018 and legislation will be included in the Finance Bill 2018-19.

Consolidated System of European Registries

As noted above, in a ‘no deal’ scenario the UK will not have guaranteed access to the Consolidated System of European Registries which also includes the UK’s Kyoto Protocol National Registry. Loss of access would affect the UK’s ability to provide routine and essential administrative support to account holders.

Geological storage of carbon dioxide

Geological storage of carbon dioxide is not a direct component of the EU Emissions Trading System, but there is a legislative link between the licensing regime for the geological storage of carbon dioxide and the EU Emissions Trading System. In a ‘no deal’ scenario, the licensing regime for geological storage of carbon dioxide would become inoperable as legal consent to undertake storage could not be granted.

The government is planning to restore functionality in areas where the Oil and Gas Authority licenses storage. Elsewhere (that is, in Scotland and Northern Ireland) restoring functionality would require devolved administrations to modify their respective licensing regulations.

Actions for businesses and other stakeholders

Operators and traders with EU Emissions Trading System

Operators and traders with EU Emissions Trading System allowances in their account in the UK section of the Registry should plan for a loss of registry access and consider taking action to manage the risk of this happening. Such action might include opening a second account in another Member State’s Registry as part of their contingency planning for a ‘no deal’ scenario. The risk of loss of registry access should similarly be considered in relation to any open futures, options or other derivative contracts and hedging positions for any allowances in the Registry.

Operators should continue to comply with the EU Emissions Trading System Directive whilst the UK remains a participant. Operators should be prepared to leave the System in the event of a ‘no deal’ scenario, but plan to comply with Monitoring, Reporting and Verification requirements into the future.

Energy intensive industry relief schemes participants

Businesses that currently benefit from energy intensive industry relief schemes for the indirect policy costs of carbon pricing should continue to comply with the requirements set out in the government guidance for these schemes.

Kyoto Protocol National Registry

As the UK may not be guaranteed access to the Consolidated System of European Registries in a ‘no deal’ scenario, the UK may not have the ability to provide routine and essential administrative support to holders of accounts in the UK Kyoto Protocol National Registry which is located within the consolidated European system.

The UK government is considering contingency measures for this scenario and will issue further advice later this year. In the meantime:

• account holders who use their accounts to trade Certified Emission Reductions and Emission Reduction Units may want to consider opening an account in another country’s registry for this purpose
• Clean Development Mechanism project developers should consider the information in this notice carefully before approaching the UK’s Designated National Authority for new letters of approval
• Clean Development Mechanism project developers who have previously received a letter of approval from the UK Designated National Authority may want to consider whether to reapply for a letter of approval from a different Designated National Authority and the timescales for securing this

Geological storage of carbon dioxide

Developers of facilities for geological storage of carbon dioxide in areas where the Oil and Gas Authority is the licensing authority may contact the Oil and Gas Authority for further information about its implementation of changes to the licensing regime, once these changes come into force. Installations do not need to be located inside this area, to access geological storage facilities within this area.

Elsewhere (that is, in Scotland and Northern Ireland) developers should contact the relevant devolved administration to confirm when regulatory updates would be implemented.