Starting from January 1, 2019, in the absence of an agreed transition period, EU law requires that EU Allowances (EUAs) issued by the UK be marked to differentiate them from EUAs issued by other member states. These marked UK EUAs, identified with a “GB” prefix, have certain limitations and considerations:
Limited usability and value: EUAs marked with “GB” cannot be used for compliance with 2018 emissions, future emissions obligations for EU 27 companies, or as offsets for a UK carbon tax in the event of a hard Brexit. Without the removal of the “GB” marking or a change in EU legislation, UK EUAs issued after December 31, 2018, risk being rendered worthless.
Impact on auctions and prices: The UK is likely to refrain from auctioning EUAs, at least for the first three months of the year, until the EU overturns or adjusts the marking legislation. If auctions do take place, they may attract less bidding interest. Poorly subscribed auctions may benefit UK installations with lower “GB” EUA prices compared to regular EUAs faced by EU competitors, creating trading opportunities if the marking is subsequently removed.
Validity of EUAs in contracts: Buyers across Europe need to ensure that any EUA contracts, particularly forward contracts, explicitly state that “GB” marked EUAs will not be delivered to avoid receiving invalid EUAs.
Lost value in International Offset (CER) exchange: If UK installations exchange Certified Emission Reductions (CERs) for EUAs after December 31, 2018, they will receive marked EUAs. In the event of a hard Brexit, the value of exchanging cheaper CERs for “GB” EUAs will be lost, unless the marking is removed later. In the case of a soft Brexit, there may still be value if the marking is subsequently removed.
Considering the risks involved, the UK’s Environment Agency advises UK Operators and Aircraft Operators with remaining International Offset entitlement to consider using their entitlement before January 1, 2019, by swapping CERs for unmarked allowances.
It is important to note that unmarked UK EUAs issued before January 1, 2019, can be sold in the EUA market at their full market value or used for compliance with the EU ETS by EU/EEA member states at any time. In the event of a hard Brexit, unused unmarked EUAs should be held in a non-UK registry account to maintain their transferability and marketability due to the UK’s restricted access to the Community Independent Transaction Log (CITL) after March 29, 2019.
In summary, the marking of UK EUAs and their limitations during the transition period require careful consideration for market participants, ensuring compliance and understanding the potential impact on EUA prices and contracts.
