What does new Brexit deadline mean for ETS obligations?

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PUSHING Brexit deadline into next year has left organisations in uncertainty over whether they will face EU Emissions Trading System (ETS) compliance obligations for 2019 if a deal is not agreed.

This week EU confirmed a new deadline for negotiations to be completed, 31 January 2020.

Under the new timeline a no-deal Brexit cannot take place before this, meaning that UK emitters will not officially leave the ETS before 31 January 2020.

Still, they do not know whether organisations will be required to comply with the ETS for their 2019 emissions as this could depend on the terms and date of leaving the EU.

ICON spoke to Simon Watson, a senior consultant at Redshaw Advisors, a carbon risk management and procurement firm, about the possible scenarios ahead.

 

Brexit deal

“The UK and EU have agreed that the UK will remain in the carbon market until the end of 2020, if the UK exits the EU with a withdrawal deal in place”, Mr Watson explains.

“This means that even if a deal is ratified before the end of 2019 — which would allow Brexit before the end of this year — UK emitters would still face ETS compliance obligations for both 2019 and 2020.”

 

No-deal Brexit on 31 January

“The situation is less clear if the UK leaves the union without a deal in place. This is because of the timings of the ETS compliance calendar”, Mr Watson explains.

ETS covers emissions produced within a calendar year. Each year, firms must surrender enough ETS allowances to cover the emissions they produced in January-December.

The deadline to surrender these allowances to the EU is at the end of April of the following year.

This means that 30 April 2020 is the deadline by which to surrender ETS allowances to cover emissions produced in January-December of 2019.

Even if a no-deal Brexit would take place at the end of January 2020, UK emitters would still have been part of the ETS for the full 2019 emissions monitoring period, but they would exit the carbon market before the 30 April 2020 ETS compliance deadline.

It is unclear in this scenario whether UK firms would be required to surrender allowances to cover their 2019 emissions.

“The European Commission and UK government both have previously said ETS legislation will cease to apply to the UK as of the date on which the country leaves the EU”, Mr Watson continues.

“However, their guidance on the issue was published ahead of earlier Brexit deadlines — when a no-deal exit would have meant UK emitters were not in the ETS for the full 2019 calendar year.”

The commission and UK government have declined to comment on whether the new Brexit deadline will affect the country’s ETS obligations for 2019.

 

Yet another delay

“There is also a possibility that Brexit could be delayed again”, Mr Watson suggests.

“This is a scenario that the UK government and EU both say they do not want — but it is not impossible, if factors including a general election make it unlikely that a withdrawal deal will be ratified by 31 January.

“If Brexit is delayed beyond 31 January, the deciding issue may be whether the UK is still part of the EU on the ETS compliance deadline. It appears likely that the UK would face ETS compliance obligations if it is still an EU member on 30 April 2020.”

 

Market uncertainty

On 29 October, carbon market participants had mixed views on whether UK emitters would face ETS compliance for 2019 if there is a no-deal Brexit before the April 2020 compliance deadline.

All agreed that the outcome was not yet clear, but some pointed to practical challenges that may make it unlikely that the UK could be forced to comply with the ETS for its 2019 emissions if it exits the bloc before 30 April.

A no-deal would see UK emission sources immediately lose access to their ETS accounts.

This could mean that if there is a no-deal Brexit on 31 January, UK firms would not be able to get into their accounts and surrender allowances by the April compliance deadline.

It may also be difficult for the EU to force UK firms to comply with the ETS after a no-deal, given that the UK would no longer be subject to the European Court of Justice, which is responsible for ensuring that national governments comply with EU law.

“It is feasible that the EU could consider amending the ETS legislation to guarantee that UK emitters will face compliance obligations for 2019 emissions”, Mr Wilson illustrates.

“When the Brexit deadline was scheduled for 29 March this year, the EU moved UK’s 2018 ETS compliance deadline to mid-March to ensure UK emitters would have to comply with the ETS scheme for their 2018 emissions before they left the bloc.

“However, bringing forward the UK’s compliance deadline next year would bring added complications.”

The EU has suspended auctions of UK-issued carbon allowances and the allocation of free permits to UK industry since 1 January 2019 because of the uncertainty over the country’s position in the carbon market beyond Brexit, and it has said it will release the permits only if a Brexit deal is ratified by both parties.