EU ETS compliance obligations of UK installations

Assuming that the UK & EU parliaments ratify the European Union Withdrawal Bill, the UK government will seek to issue 2019’s EUA free allocation as soon as possible. This means that UK auctions will be able to re-start (which will involve the sale of 2019 and 2020 auction volumes) and that UK installations will be required to comply with the EU ETS for both 2019 and 2020 emissions. 2020’s free allocation will take place as normal in February 2020. Article 96 of the Withdrawal Bill will enshrine in International Law the UK’s requirement to comply with the EU ETS for the remainder of Phase III.

Issued allowances will not be marked, therefore they will be fully interchangeable with the EUAs issued by the remaining market participants (the EU 27, Norway, Iceland, Liechtenstein and, from 2020, Switzerland). The suspension of international offset exchange for EUAs will be lifted and access to the New Entrant Reserve will be restored.

The timing of the resumption of free allocation and auctions can be a key influencer of the EUA price and thus compliance costs for all installations across Europe. Our discussions with the UK government department responsible (BEIS) have revealed the following:

• The 2019 free allocation will be delivered to UK installations’ registry accounts as soon as possible and, in all but unforeseen circumstances, ahead of the 2019 compliance deadline on 30th April 2020
• The timing of the resumption of auctions will follow normal procedures. The UK government will propose an auction calendar for both the 2019 and 2020 EUAs that they were/are due to sell. The proposal will need to be approved by the European Commission, that normally requires 2 months’ notice
• Ensuring there is minimal EUA price impact caused by the resumption of UK auctions will be one of the key elements to the EU agreeing the calendar
• Therefore, it is expected that the full 2 years’ auction volume will be spread evenly over the course of 2020 and will not be front-loaded, despite comments by BEIS at the Carbon Forward 2019 conference that auctions of 2019’s auction volume should be
completed by 30th April 2020.

• Auctions can be expected to resume within 2 months of ratification of the Withdrawal Agreement. Therefore, sometime between the end of January and the end of March.
• Some market participants currently expect the auctions to be front-loaded, which would cause prices to weaken. However, the auction timetable we are expecting is the opposite of this and thus it will be supportive of carbon price when the auction timetable is officially published.
• The UK government will begin work right away on linking the proposed UK ETS with the EU ETS with the aim of having both in place for the beginning of Phase IV (1st January, 2021)
• If the linking process should fail, the UK will default to either a standalone UK ETS or a UK carbon tax. According to our sources, the UK carbon tax level can be expected to reflect EUA prices at the time it is set.

If you have any questions on the above or wish to discuss how this affects your installation in detail, please get in touch with your Redshaw Advisors account manager.

Also check out our upcoming Carbon Fast Forward in Manchester on 25th February. Super-early-bird ticket sales expire on 31st December.