The ‘Brexit clause’ (Amendment 47) conditionally agreed in Trilogue meeting

Unintended Consequences: Challenges Ahead for EU ETS with “Brexit Clause”

During a recent Trialogue meeting, a provisional deal was reached on Amendment 47, also known as the “Brexit clause,” which aims to protect the environmental integrity of the EU Emissions Trading System (EU ETS). While the intention is laudable, it is likely that the politicians involved have not fully considered the unintended consequences of this rushed amendment. The forthcoming changes, based on the available text, pose several challenges for EU installations. This summary highlights the potential issues and urges legislators to address them during the drafting process.

Anticipated Challenges:

  1. Fragmentation of the EU ETS: The creation of a new class of “UK” EU Allowances (EUAs) is expected to lead to the splitting of the EU ETS carbon market.
  2. Legal Review of OTC Forward Contracts: The amendment may require a comprehensive legal review of forward contracts across Europe, covering significant volumes of “repo” and other forward trading.
  3. Updates to Trading Contracts: Regular trading contracts will need to be updated to specify the eligibility of EUAs being delivered, potentially causing disruptions in contract definitions and requiring the listing of duplicate contracts.
  4. Increased Volatility: Volatility in the market is anticipated, with the reaction of the UK government being a key factor. The risk of downside volatility includes the UK’s participation in the EU ETS or a potential transition period, while the risk of upside volatility arises if the UK advises installations to buy EU27 EUAs for compliance.
  5. Registry Changes and Training: The community registry will need to be closed, adjusted, and appropriate instructions or training provided to users across Europe to adapt to the amendment.
  6. Compliance Requirements for UK Installations: The UK must clarify compliance requirements for UK installations, many of which are owned by EU companies.
  7. Uncertainty in Compliance Purchases: UK installations may face uncertainty in purchasing allowances for compliance with 2018 emissions, leading to potential market risks due to policy paralysis.
  8. Potential Auction Postponement: The UK may postpone auctions until a decision on compliance strategy is made.
  9. Discounted UK Allowances: UK allowances are likely to trade at a discount compared to EU27 EUAs.
  10. Inability to Sell Excess Auction Volume: The UK will be unable to sell any excess auction volume it possesses since it will not be valid currency for EU27-based installations. Alternative solutions may be required.
  11. Impact on EU27 EUA Prices: If the UK becomes a net exporter of EUAs, EU27 EUA prices may increase due to reduced auction supply.

Ironies and Consequences:

The amendment’s unintended consequences reveal several ironies. UK installations may experience lower carbon prices than EU27 installations, contrary to the intended outcome. Furthermore, while the legislation was designed to safeguard the EU ETS against a low-probability outcome, the current wording suggests that it will severely disrupt the functioning of the EU ETS market.

Conclusion and Advice:

EU ETS installations should seek expert advice to assess their specific situations and determine risk mitigation strategies. It is crucial for policymakers to carefully consider and address the challenges outlined above to ensure a smooth transition and minimize disruptions in the EU ETS market.

Please note that the above analysis is based on the available text of Amendment 47, and further developments may impact the interpretation and implementation of the clause.

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