Climate Regulation in United Kingdom

Main climate regulations, policies and authorities

International agreements

Do any international agreements or regulations on climate matters apply in your country?

The UK has ratified the United Nations Framework Convention on Climate Change (UNFCCC), the Kyoto Protocol, and the Paris Agreement. It has signed up to the voluntary second commitment period agreed by some states under the Kyoto Protocol between 2013 and 2020.

In June 2016, the UK voted to leave the European Union (generally referred to as ‘Brexit’). Under the UK’s Article 50 Withdrawal Notice, and as legislated in the European Union (Withdrawal) Act 2018, the UK originally intended to exit the European Union in March 2019. However, the UK extended the withdrawal date to 31 October 2019. At the time of writing, it is unclear whether the UK will leave the UK on this date. If it does, and subject to any transition period agreed between the UK and European Commission, EU law will cease to apply in the UK from exit day. However, initially, the substance of EU law will be retained in the UK via procedures in the European Union (Withdrawal) Act. Discussion of EU law below should be read with this context in mind. The ‘Update and trends’ section contains further detail as to the operation of withdrawal legislation and the potential effect of the UK’s exit from the EU on UK environmental law.

While the UK is an EU member state, it is covered by the EU’s Nationally Determined Contribution (NDC) for the reduction of GHGs under the Paris Agreement. This commits the EU to a 40 per cent reduction in greenhouse gases (GHGs) by 2030 compared to 1990 levels.

The UK is currently bound by EU climate change legislation, including the EU Emissions Trading System, the Renewable Energy Directive (Directive 2009/28/EC) and the Energy Efficiency Directive (Directive 2012/27/EU). The EU’s climate and energy package requires member states to achieve (with targets in place for both 2020 and 2030):

• reductions in GHG emissions from 1990 levels via the EU Emissions Trading System (EU ETS);
• increases in the share of energy from renewable sources; and
• improvements in energy efficiency and savings.

Under the EU Effort Sharing Decision, annual emission targets for the period 2013-2020 are also set for member states to cover sectors not in the EU ETS, (housing, agriculture, waste and transport (excluding aviation)). These annual emission allocations vary depending on member states’ levels of wealth.

From 1 January 2019, the European Commission suspended the UK from auctioning allowances, issuing any free allowances or exchanging international credits under the EU ETS, because of the UK’s intention to formally exit the European Union. Based on the current draft of the Withdrawal Agreement, if the UK leaves the EU, then the UK would continue to participate in the EU ETS until 2020. Following exit, the UK will need to ensure that it meets its international climate change commitments independently of the EU ETS.

International regulations and national regulatory policies

How are the regulatory policies of your country affected by international regulations on climate matters?

International and EU-level regulations on climate matters heavily influence UK regulatory policy. The UK played a prominent role in the Paris Agreement negotiations and has introduced a raft of regulation and policy to support global efforts to reduce GHG emissions and address the impacts of climate change. The government states that it supports the work of the Intergovernmental Panel on Climate Change (IPCC) and recognises its assessments as the most authoritative view on the science of climate change available.

Main national regulatory policies

Outline recent government policy on climate matters.

Clean Growth Strategy

The main piece of UK climate change policy is the 2017 Clean Growth Strategy, which outlines the policies that are intended to meet the UK’s fourth and fifth statutory carbon budgets (discussed in question 4) for the mid-2020s and early 2030s.

Key policies in the Clean Growth Strategy are:

• accelerating clean growth through developing world-leading green finance capabilities;
• improving business and industry efficiency (through initiatives such as a package of measures to support businesses to improve energy productivity by at least 20 per cent by 2030, an Industrial Energy Efficiency scheme, deployment of carbon capture usage and storage at scale, and other innovations);
• improving efficiency of homes and rolling out low-carbon heating;
• accelerating the shift to low-carbon transport (including ending the sale of new conventional petrol and diesel cars and vans by 2040, investing further in electric vehicle infrastructure, accelerating uptake of zero emissions taxis and buses);
• delivering clean, smart and flexible power (including the phase out of unabated coal in energy production by 2025 and improving the route to market for renewable technologies such as offshore wind);
• enhancing the benefits of the UK’s natural resources (through waste strategy and funding large-scale woodland and forest creation);
• leading in the public sector (with tighter targets for 2020 for central government); and
• government leadership in driving clean growth (including annual reporting on performance).

Sector action plans

In 2017, the Department for Business, Energy and Industrial Strategy (BEIS) published action plans setting commitments from government and industry to reduce GHG emissions and improve energy efficiency in seven energy-intensive sectors: cement, ceramics, chemicals, food and drink, glass, oil and refining, and pulp and paper.

Carbon Reduction Commitment Energy Efficiency Scheme

The UK has had a Carbon Reduction Commitment Energy Efficiency Scheme (CRC Energy Efficiency Scheme) in place since 2010. It applies to large energy users in the public and private sectors across the UK not already covered by the EU ETS. This includes supermarkets, hotels, water companies, banks, local authorities and all central government departments. This is a compulsory emissions trading scheme, requiring qualifying businesses to monitor and report on their energy emissions and to purchase and surrender allowances.

In 2016, the government announced that it will close the CRC Energy Efficiency Scheme following the 2018-2019 compliance year and replace it with an increase in the climate change levy (discussed below). Organisations will have reported under the CRC for the last time by the end of July 2019 and, as applicable, should surrender allowances for emissions from energy supplied in the 2018-2019 compliance year by the end of October 2019.

Climate change levy

The climate change levy (CCL) was introduced in 2000. This tax is levied on non-domestic consumers of certain energy supplies and aims to encourage businesses to use less energy and obtain energy from renewable sources. The main regulations governing the scheme are the Climate Change Levy (General) Regulations 2001 (SI 2001/838).

The CCL rates were increased significantly on 1 April 2019 (an increase of 45 per cent for electricity and of 67 per cent for gas), following closure of the CRC Energy Efficiency Scheme. Some tax relief is available from the CCL, including exemptions for energy used in metallurgical and mineralogical processes and a mixed-use exemption for solid fuels used in certain gasification processes. Until 2015, renewable energy generation was exempt from the CCL but is now subject to the levy.

Carbon price floor

Since 2013, a carbon price floor mechanism has been in place to encourage the generation of low-carbon energy by supporting and increasing the price paid for emitting carbon dioxide. The CCL rate is determined by the carbon price support rate, which is the difference between the future market price of carbon and the floor price. Under the 2018 UK government budget, the carbon price support rate has been frozen to £18 per tonne of carbon dioxide equivalent until 2021. The carbon price floor does not currently apply in Northern Ireland.

Capital allowances

Businesses can claim capital allowances on some energy- and water-efficient equipment, which reduce the amount of tax payable. This applies to some vehicles with low CO2 emissions, energy-saving equipment, plant and machinery for gas refuelling stations, gas, biogas and hydrogen refuelling equipment and new zero-emission goods vehicles.

National Adaption Programme

In July 2018, the Department for Environment, Food and Rural Affairs (Defra) published the government’s second National Adaptation Programme (2018 to 2023) (NAP) under the Climate Change Act 2008. The NAP sets out objectives, policies and timescales for adapting to the impacts of climate change, until 2023.

Recent developments

In June 2019, the UK committed to reducing GHG emissions to net zero by 2050 by amending the legally binding targets under the Climate Change Act 2008 (see ‘Main national legislation’ for further details).

In July 2019, the UK government published the Clean Maritime Plan, which sets out a strategy to transition to zero-emissions shipping. This plan seeks to maximise the energy efficiency of all vessels operating in UK waters and seeks to ensure that all new vessels ordered for use in UK waters are being designed with zero-emission-propulsion capability. It also sets out plans to install infrastructure to allow for low- or zero-emission marine fuel bunkering options to be readily available across the UK.

Main national legislation

Identify the main national laws and regulations on climate matters.

Climate Change Act 2008

The Climate Change Act is the main piece of climate change legislation and sets the UK’s overall emissions target. In June 2019, the UK government amended this legislation, setting the annual emissions reduction target to net zero by 2050.

The Act creates a system of five-yearly carbon budgets, which set limits with a view to meeting both the overall 2050 target and the UK’s European and international obligations. Each carbon budget is split into traded and non-traded sectors. At present, the UK is in the third budget period (2018-2022), set at 2,544MtCO2e.

Emissions from international aviation or international shipping are not counted for the purposes of the UK’s net zero reduction target. The government has to date deferred the decision on whether to include international aviation and shipping emissions in the UK’s carbon budgets. However, there is some limited regulation of shipping emissions under other legal regimes (discussed further in question 7).

The Climate Change Act gives the government powers to introduce new national emissions trading schemes. It also requires government reporting on climate change impact and proposals for adaptation. Renewable transport fuel obligations, energy performance in buildings, and charges for single use plastic bags were also introduced through the Act.

Energy Act 2011

The Energy Act 2011 introduced several provisions for energy efficiency. This included the ‘Green Deal’, which provided access to finance for energy efficiency measures in domestic and non-domestic properties. The Green Deal has been put on hold since 2015. In July 2019, the UK government confirmed in its Green Finance Strategy that it would continue to consider options to simplify the Green Deal Code of Practice by incorporating revisions to improve the operation of the framework.

Alongside the Green Deal, the Energy Act 2011 introduced energy efficiency obligations for buildings and energy suppliers.

Energy Act 2013

Several new initiatives were contained in the Energy Act 2013, including an obligation for the Secretary of State to set annual decarbonisation targets. It also included a range of measures for electricity market reform, including contracts for difference, capacity market rules, and the ‘Renewables Obligation’, which is a support mechanism for large-scale renewable electricity projects in the UK. The Energy Act 2013 also introduced an emissions performance standard, which imposes annual carbon dioxide emissions limits on operators of fossil fuel power plants.

Company law

The Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 (SI 2013/1970) and Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008/410) impose requirements on certain companies to report on their GHG emissions.

The Companies (Director’s Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018 were passed in November 2018 and came into force on 1 April 2019. These regulations require additional reporting on emissions, energy consumption and energy efficiency action by quoted companies, large unquoted companies and large limited liability partnerships.

National regulatory authorities

Identify the national regulatory authorities responsible for climate regulation and its implementation and administration. Outline their areas of competence.

BEIS is the government department responsible for functions related to climate change and energy policy.

The UK also has an independent Committee on Climate Change (CCC), which advises the government on building a low-carbon economy and preparing for the effects of climate change. The CCC carries out independent analysis into climate change science, economics and policy and monitors progress in reducing emissions and achieving carbon budgets and targets.

Defra is responsible for domestic climate change adaptation policy. In addition, regulators in Scotland, Wales and Northern Ireland have roles with respect to climate change regulation and energy efficiency.

With regard to energy more generally, Ofgem is an independent body that regulates pricing, transmission and production of energy in the UK. The Oil & Gas Authority is another independent body, responsible for regulating and promoting the UK oil and gas industry.

General national climate matters

National emissions and limits

What are the main sources of emissions of greenhouse gases (GHG) (or other regulated emissions) in your country and the quantities of emissions from those sources? Describe any limitation or reduction obligations. Do they apply to private parties in your country?

BEIS published provisional UK GHG emission statistics for 2018 in March 2019. In brief, these statistics indicate that the UK’s total GHG emissions for 2018 were 449MtCO2e (of which, 364Mt was carbon dioxide emissions). This represents a 3 per cent reduction on 2017 GHG emissions and a 44 per cent reduction on 1990 levels.

The Clean Growth Strategy (which relies on 2015 figures) states that the biggest sources of emissions in the UK come from:

• business and industry (25 per cent);
• transport (24 per cent);
• power (21 per cent);
• natural resources (15 per cent);
• homes (13 per cent); and
• the public sector (2 per cent).

National GHG emission projects

Describe any major GHG emission reduction projects implemented or to be implemented in your country. Describe any similar projects in other countries involving the participation of government authorities or private parties from your country.

National GHG emission reduction projects

The UK has implemented several national GHG emission reduction projects, including the CRC Energy Efficiency Scheme (which will be discontinued after October 2019), CCL, and a carbon price floor mechanism. The UK also has regulations in place restricting the manufacture, use, import and export of fluorinated greenhouse gases (F gases). Ozone-depleting substances (ODS) are regulated directly through the EU Regulation on Ozone-Depleting Substances 2009 (Regulation (EC) No. 1005/2009) and further through the Ozone-Depleting Substances Regulations 2015 (SI 2015/168), which create offences and penalties for breaches of the EU Regulations.

EU ETS

The UK participates in the EU ETS, which applies to emissions from power and heat generation, certain energy-intensive industrial sectors (eg, manufacturing facilities, oil refineries and power stations) and aviation. Emissions from land transport, domestic premises and agriculture are currently not regulated by the EU ETS, but some of these sectors are captured in the national mechanisms discussed above. Operators of installations participating in the EU ETS must obtain a greenhouse gas emissions permit (see question 10).

The EU ETS is currently in Phase III, in which there are fewer free allowances allocated and decisions as to how many free allowances to allocate are made by the European Commission, not member states. The EU ETS Phase IV Directive 2018 was published on 19 March 2018 (Directive (EU) 2018/410 of the European Parliament and of the Council). Member states are required to implement it by 9 October 2019. If the UK exits the EU without a withdrawal deal, the UK will not be permitted to participate in the EU ETS after the withdrawal date.

Maritime transport projects

The EU Regulation on the monitoring, reporting and verification of carbon dioxide emissions from maritime transport (Regulation (EU) 2015/757) requires shipowners or operators to monitor, verify and report annually on carbon dioxide emissions from ships over 5,000 gross tonnage during voyages to, from and between EU ports. Ships covered by this Regulation must carry a document of compliance. The UK has imposed related domestic regulations establishing penalties for failure to comply - the Merchant Shipping (Monitoring, Reporting and Verification of Carbon Dioxide Emissions) and the Port State Control (Amendment) Regulations 2017 (SI 2017/825).

In April 2018, the International Maritime Organization (IMO) agreed a comprehensive strategy to reduce GHGs from international shipping. The UK participated heavily in the development of this strategy, which includes:

• a commitment to phase out GHGs from international shipping as soon as possible during this century;
• a target of at least 50 per cent reduction, and an aim for 100 per cent reduction, in total GHG emissions from shipping by 2050;
• a target of at least a 40 per cent improvement in carbon intensity of ships by 2030, pursuing efforts towards 70 per cent in 2050; and
• possible emission reduction measures, with a commitment to develop a work-plan for implementation before 2023.

This strategy is reflected in the UK government’s Clean Maritime Plan, which sets out a strategy to transition to zero-emissions shipping in UK waters (see ‘Main national regulatory policies’).

Domestic climate sector

Domestic climate sector

Describe the main commercial aspects of the climate sector in your country, including any related government policies.

The EU ETS applies to many large businesses and requires organisations to buy and sell emission allowances. The CCL applies to a wide range of businesses and creates a heavy financial incentive for businesses to become more energy efficient. These regimes have created a major commercial element to climate change regulation since their introduction.

The UK renewable energy sector has attracted substantial investment in recent years and continues to develop and mature. It is focused predominantly on renewable electricity assets. There are various incentives for renewable energy investment, although these incentives have been cut back somewhat in recent years. This is discussed further below.

As a global financial centre, London has seen a significant increase in green finance activity to support efforts to address climate change in the past decade. The City of London Corporation launched a Green Finance Initiative in 2016 with the aim to provide public and market leadership on green finance, advocate for specific regulatory and policy proposals in this area, and promote London and the UK as a leading global centre for green financial services. As of May 2019, there were 107 green bonds listed on the London Stock Exchange. According to the Climate Bonds Initiative, over US$5.7 billion worth of green bonds were listed on the London Stock Exchange in the first quarter of 2019 alone.

In 2015, the London Stock Exchange was the first major exchange to launch dedicated green bond segments, with admission criteria aligned with the International Capital Market Association’s Green Bond Principles. The green loan market in the UK is also expanding and developing rapidly.

The Climate Change Act 2008, the Companies Act 2006 and related regulations impose carbon disclosure and reporting obligations on some organisations in their annual reports.

General GHG emissions regulation

Regulation of emissions

Do any obligations for GHG emission limitation, reduction or removal apply to your country and private parties in your country? If so, describe the main obligations.

The Climate Change Act sets the main UK target of net zero GHG emissions by 2050, with medium-term targets set in the UK government’s carbon budgets.

There are also various other laws and policies in the UK requiring GHG emission limitation, reduction or removal. This includes legislation regulating point-source emissions through the environmental permitting regime and laws regulating ODS and f-gases. The EU ETS and CCL create trading schemes and tax incentives that are designed to encourage GHG emission limitation and reduction. The electricity market reform scheme (see question 19) and related initiatives such as the renewables obligation require GHG emission limitation and reduction by requiring electricity providers to supply certain amounts of renewable energy, which will displace energy obtained from non-renewable sources.

The UK government published the National Policy Statement for Fossil Fuel Electricity Generating Infrastructure in July 2011. Fossil fuel power stations are also required to comply with any applicable emissions performance standard (EPS) under the Energy Act 2013 and the Emissions Performance Standard Regulations 2015 (see ‘GHG emission permits or approvals’). These instruments require any new coal-fired power station to be equipped with carbon capture and storage technology and restrict the total amount of carbon dioxide that can be emitted from fossil fuel power stations.

GHG emission permits or approvals

Are there any requirements for obtaining GHG emission permits or approvals? If so, describe the main requirements.

Any business operating in the UK and falling within the EU ETS must hold a greenhouse gas emissions permit. In brief, permit applications must include:

• a description of the installation and site;
• the activities to be carried out including a description of the technology and materials used;
• the sources of specified emissions from the relevant activities;
• a description of planned monitoring and reporting measures;
• a description of any environmental licence issued in relation to the installation; and
• any further information that the applicant wishes the regulator to take into account.

Permits may contain conditions and monitoring and reporting requirements. Failure to comply with the requirements for greenhouse gas emissions permits may attract criminal penalties.

In addition to greenhouse gas emissions permits, activities involving emissions to air (particularly large combustion plants and waste incineration plants) are also subject to the environmental permitting regime. This regime covers a wide range of activities that relate to emissions to land, air and water or involve waste. The main legislation is the Environmental Permitting (England and Wales) Regulations 2016 (SI 2016/1154). These Regulations contain schedules dealing with specific permitting requirements for particular activities or sectors.

Oversight of GHG emissions

How are GHG emissions monitored, reported and verified?

Participants in the EU ETS are required to monitor and report on their emissions each year and surrender enough allowances to cover their annual emissions. There are various EU regulations setting out the specifics of these requirements, as well as guidance issued by the European Commission. The operator must propose a monitoring plan when applying for a greenhouse gas emissions permit. Annual emissions reports and monitoring will then be verified independently.

Participants in the CRC Energy Efficiency Scheme are also required to monitor their energy use and report annually. Emissions factors are applied to calculate participants’ emissions on the basis of the information that they supply. As noted above, this scheme will end after October 2019.

GHG emission allowances (or similar emission instruments)

Regime

Is there a GHG emission allowance regime (or similar regime) in your country? How does it operate?

The EU ETS imposes an EU-wide cap on allowances, and the free allowances issued to participants decrease annually. Participants are required to purchase allowances to cover their emissions through auctions or the emissions trading market. The EU ETS is currently in Phase III, in which there are fewer free allowances allocated to participants and decisions as to how many free allowances to allocate are made by the European Commission, and no longer by member states.

Under the CRC Energy Efficiency Scheme, the government holds two fixed-price sales of allowances per compliance year. Participants must purchase and surrender allowances to cover their annual emissions. As noted above, the CRC Energy Efficiency Scheme will end after October 2019.

Registration

Are there any GHG emission allowance registries in your country? How are they administered?

There is a central EU registry for the EU ETS administered by the European Commission. It is an online database that covers all participating countries and holds accounts for stationary installations and for aircraft operators. Based on the current draft of the Withdrawal Agreement, if the UK leaves the EU, then the UK would continue to participate in the EU ETS until 2020.

There is a CRC Registry for the CRC Energy Efficiency Scheme. After the scheme closes, the government will maintain a record of the information held on the Registry until the end of March 2025.

Obtaining, possessing and using GHG emission allowances

What are the requirements for obtaining GHG emission allowances? How are allowances held, cancelled, surrendered and transferred? Can rights in favour of third parties (eg, a pledge) be created on allowances?

The EU ETS requires participants to purchase allowances. At the start of the year, installation operators are either allocated allowances or must buy allowances through an auctioning process to cover all of their emissions for the coming year. There is a limited number of free allowances provided each year. Free allowances are provided to all sectors on a transitional basis, except the power sector, and CCS installations and pipelines (these sectors became ineligible from 2013). Free allocations are also made to installations in sectors deemed at risk of carbon leakage.

Under the EU ETS, allowances may be transferred between installation operators and other market participants in the EU ETS when, at the end of the year: (i) an operator’s emissions exceeds the amount of allowances they hold (ie, they must buy additional allowances in order to meet their total emissions); or (ii) operators have emitted fewer GHGs than the amount of allowances they hold (ie, they may sell unused allowances).

Under the CRC Energy Efficiency Scheme, allowances must be purchased by participants. There are no free allowances under the CRC Energy Efficiency Scheme. The government holds two fixed-price sales during the compliance year, and allowances can also be traded between participants. Participants will have to surrender their allowances for the last time in October 2019, at which time, trading will cease and the CRC Energy Efficiency Scheme will come to an end.

Trading of GHG emission allowances (or similar emission instruments)

Emission allowances trading

What GHG emission trading systems or schemes are applied in your country?

The two main emissions trading schemes in the UK are the EU ETS and the CRC Energy Efficiency Scheme. Businesses can trade EU ETS allowances directly, through intermediaries such as banks or specialist traders, using the services of a broker, or by joining one of the several exchanges that list carbon allowance products.

Continued membership of the EU ETS will be affected by the UK’s decision to exit the EU. The UK has announced that it intends to remain part of the EU ETS until 2020, after which it intends to implement a domestic emissions trading scheme linked to the EU ETS. The CRC Energy Efficiency Scheme will be closed after October 2019.

Trading agreements

Are any standard agreements on GHG emissions trading used in your country? If so, describe their main features and provisions.

There are no UK-specific standard form agreements used for GHG emissions trading.

However, some standard form contracts exist internationally, including:

• the International Emissions Trading Association (IETA) Master Trading Agreement for Emissions Allowances (version 3);
• the International Swaps and Derivatives Association (ISDA) EU Emissions Trading Schedule (Part 6) to their Master Trading Agreement (version 4 (including options) and version 2.5 (not including options) are adapted for Phase II delivery); and
• the European Federation of Energy Traders (EFET) CO2 Annexes to their Electricity (version 4) and their gas (version 3) trading contracts.

Sectoral regulation

Energy sector

Give details of (non-renewable) energy production and consumption in your country. Describe any regulations on GHG emissions. Describe any obligations on the state and private persons for minimising energy consumption and improving energy efficiency. Describe the main features of any scheme for registration of energy savings and for trade of related accounting units or credits.

The BEIS Digest of UK Energy Statistics 2019 found that overall, primary energy production rose by 2.9 per cent in 2018. Gross natural gas production decreased by 3.3 per cent compared to 2017. BEIS notes a long-term pattern of decline in natural gas production, with 2018 production levels 64 per cent below the peak in 2000. Crude oil (including NGL) production in 2018 was 51 million tonnes, which is 37 per cent below the UK’s peak in 1999. In 2018, coal production was down by 15 per cent, to a record low of 3 million tonnes compared to 2017.

BEIS Statistics further show that there was a 0.3 per cent drop in the total supply of electricity in the UK in 2018, to 352TWh, as demand fell. However, the UK remained a net importer of electricity. In 2018, domestic renewable generation rose to a record high of 33 per cent.

The UK has implemented a number of regulations stemming from both domestic and EU policies to minimise energy consumption, improve efficiency and reduce GHG emissions.

As well as the schemes discussed above, the UK has regulations in place regarding energy efficiency in buildings, products and appliances. This includes schemes for energy ratings and certificates for efficiency.

Further, the Clean Growth Strategy 2017 identifies several future measures for improving energy efficiency, including:

• consultation on improving the energy efficiency of new and existing commercial buildings;
• consultation on the minimum standards of energy efficiency for rented commercial buildings;
• determining steps for landlords and businesses to understand and disclose operational energy use;
• exploration of voluntary building standards to support improvements in the energy efficiency performance of business buildings, and how the provision of information and advice on energy efficiency to SMEs can be improved; and
• simplification of the requirements for businesses to measure and report on energy use, to help them identify where they can cut bills.

The UK government published the Green Finance Strategy: Transforming finance for a greener future (GFS) in July 2019. The GFS also identifies government measures with respect to energy efficiency, including:

• determining steps for landlords and businesses to understand and disclose operational energy use;
• consultation on setting requirements for lenders to assist households to improve the energy performance of the houses covered by a mortgage;
• consideration of ways to simplify the Green Deal framework to support funding of energy efficiency measures;
• review of how government energy efficiency data could be used to support green finance product development;
• updating the public national register for Energy Performance Certificates regularly, to support lenders to drive energy efficiency; and
• developing an Industrial Energy Transformation Fund, backed by up to £315 million of investment, to support businesses with high energy use to transition to a low-carbon future.

Other sectors

Describe, in general terms, any regulation on GHG emissions in connection with other sectors.

In the transport sector, the UK has implemented a Renewable Transport Fuels Obligation (RTFO). The RTFO requires suppliers of liquid fossil fuel for use in road transport or non-road mobile machinery to supply a certain amount of sustainable biofuel. Vehicle emissions are also subject to regulation, and there are a number of ‘clean air zones’ in place in the UK to improve localised air pollution. Various policies and regulations have been put in place to encourage low emissions vehicles.

In the agricultural sector, there is currently a voluntary, industry-led approach to carbon emissions reduction. The CCC stated in its 2018 progress report that this has been insufficient and recommended replacing it with a stronger framework to deliver GHG abatement in the agricultural sector. As part of the legislation associated with the UK’s exit from the EU, the government announced an Agriculture Bill. The Agriculture Bill is still going through the parliamentary approval process, and is at the report stage in the House of Commons.

Renewable energy and carbon capture

Renewable energy consumption, policy and general regulation

Give details of the production and consumption of renewable energy in your country. What is the policy on renewable energy? Describe any obligations on the state and private parties for renewable energy production or use. Describe the main provisions of any scheme for registration of renewable energy production and use and for trade of related accounting units or credits.

The UK has an obligation to ensure that renewable energy accounts for at least 20 per cent of total energy needs by 2020, under the EU Renewable Energy Directive (2009/28/EC). This is incorporated into UK law via the Promotion of the Use of Energy from Renewable Sources Regulations 2011 (SI 2011/243). Each EU member state is also required to ensure that 10 per cent of its transport energy consumption comes from renewable sources by 2020.

BEIS reported in 2019 that renewable electricity generation in the UK increased by 3.8 per cent between 2017 and 2018 to 44.3GW. Renewable energy accounted for a record 33 per cent of the electricity generated in the UK in 2018. Onshore and offshore wind power, together, represent the highest proportion (49 per cent) of the UK’s renewable energy capacity. Offshore wind in particular has seen significant expansion. Total offshore wind power generation increased by 28 per cent compared with 2017, to a record capacity of 26.7TWh. Solar photovoltaics also increased in capacity to 12.9TWh in 2018, compared with 11.5TWh in 2017.

The Planning Act 2008 and National Planning Policy Framework provide a regime for developing and consenting infrastructure projects. Some large-scale renewable energy projects may be considered to be ‘nationally significant infrastructure projects’, in which case applications for development consent are considered under special procedures. Those projects not falling within the statutory definition are subject to conventional Town and Country Planning Act 1990 procedures. Depending on the project, major infrastructure projects may also require licences under the Electricity Act 1989.

The UK government has a stated ambition to attract low-carbon innovation in the UK economy and invest in innovation in this area. There are several support schemes for renewables. However, government policy in this space can change rapidly. In 2015, the government announced that it will limit renewables support to technologies that have the potential to scale up and to compete in a global market without subsidy.

The schemes currently in place to support renewables include:

• The Renewables Obligation (RO): a scheme providing financial incentives for large-scale renewable electricity generation in England and Wales. It requires all licensed electricity suppliers to produce evidence that they have supplied customers in Great Britain with a certain amount of energy from renewable sources. This is currently being replaced by the Contracts for Difference scheme. New generation from 31 March 2017 is not able to take advantage of the RO. Projects that already receive support under the RO will continue to receive support until the end of a project’s ‘support lifetime’ (20 years) or in 2037, when the scheme will ultimately come to an end.
• Contracts for Difference: a statutory instrument that provides for a contracting mechanism to convert the risk of a variable price for electricity into a fixed price. When the market price is below the strike price, the generator will receive a top-up payment from the counterparty. When the market price is above the strike price, the generator must pay back the difference to the counterparty.
• Feed-in-tariff (FIT) schemes: FIT schemes provide financial incentives for small-scale renewable and low-carbon electricity generation. However, note that the FIT scheme has been closed to new applications since 31 March 2019.
• Renewable heat incentive (RHI): this scheme incentivises renewable heat projects by making regular payments to those who install an eligible renewable heating system or inject bio methane into the gas grid. The RHI scheme applies to both domestic and non-domestic projects.
• Renewable Transport Fuel Obligation (RTFO): this scheme requires suppliers of fuels for road-transport and ‘non-road mobile machinery’ to ensure that a certain proportion of the fuel they supply is sustainable biofuel.

The government provides some support for microgeneration (small-scale renewables generating electricity up to and including 50kW or heat with a capacity up to 45kW thermal). As well as FIT and RHI incentives, microgeneration activities also have permitted development rights, allowing them to be carried out with deemed planning permission.

Wind energy

Describe, in general terms, any regulation of wind energy.

In order to construct and operate a wind energy project, a variety of environmental permits are required. In the offshore context, a development consent order, a lease of the seabed from the Crown estate and a marine licence are required. In the onshore context, planning permission must be obtained under the Planning Act 2008 or the Town and Country Planning Act 1990, depending on the size of the proposed development. Land use and access rights will also need to be secured. Larger projects are likely to require an environmental impact assessment. Enhanced community engagement requirements exist for larger developments under the Localism Act 2011.

There are government-led support schemes for wind generation, although these schemes are frequently subject to change as the government develops its energy policy. For instance, the exemption for renewable energy projects under the CCL became unavailable from 1 August 2015.

Solar energy

Describe, in general terms, any regulation of solar energy.

Solar energy has grown rapidly in the UK’s energy mix. In 2017, the UK’s first subsidy-free solar photovoltaic (PV) farm was opened in Bedfordshire. By 2018, solar photovoltaics accounts for 29.6 per cent of the UK’s total renewable energy capacity.

Large-scale solar projects must obtain planning permission and any other necessary environmental permits. Developers must also secure land use and access rights for the substantial land area usually required for large-scale solar farms. Planning permission is commonly granted for a period of 25 years, with requirements for decommissioning and site restoration included as planning conditions.

Small-scale solar installations may be able to benefit from the support provided for microgeneration. However, note that the government has recently proposed closure of the FIT scheme to new applications after 31 March 2019.

Hydropower, geothermal, wave and tidal energy

Describe, in general terms, any regulation of hydropower, geothermal, wave or tidal energy.

Most hydropower generation activity in the UK occurs in Scotland. There is limited scope for developing new hydropower installations. However, small-scale hydropower has some growth potential. As with wind and solar facilities, hydropower projects require planning permission and environmental permits, particularly with respect to water abstraction and discharges. Flood risk assessment and related permissions may also be required.

In 2018, the European Commission published guidance on the impact of EU habitat and species protection legislation and policy on hydropower projects. The guide emphasises the need to consider biodiversity and ecology issues at an early stage of a project planning process. It also provides examples of best practice and mitigation measures.

There is significant potential for wave or tidal energy in the UK. However, the industry is still in its infancy. There is no specialist regulation in place for this industry, but more general laws addressing marine permitting, marine protected areas, and other environmental permits would be required to undertake activities associated with wave or tidal energy generation.

Waste-to-energy

Describe, in general terms, any regulation of production of energy based on waste.

There are several Energy from Waste (EfW) plants in the UK. Landfill diversion targets have become increasingly pressing, driven by the EU Landfill Directive (Directive 99/31/EC) and EU Waste Framework Directive (Directive 2008/98/EC), which in turn has driven the development of EfW facilities across the UK. EfW processes still generate GHG emissions but overall are considered preferable to disposal of waste by landfill, as heat energy or electricity is recovered in the process. Defra has published ‘Energy from waste: a guide to the debate’, which highlights the key environmental, technical and economic issues at play.

EfW activities require environmental permits, planning permission, Electricity Act licences and will also be subject to laws regulating emissions to air.

The UK government provides opportunities for financial support for community heating programmes which can be fulfilled through EfW processes. EfW projects providing head may also be able to benefit from the RHI.

Biofuels and biomass

Describe, in general terms, any regulation of biofuel for transport uses and any regulation of biomass for generation of heat and power.

Biofuels

Under the EU Renewable Energy Directive, 10 per cent of the UK’s transport energy consumption must come from renewable sources by 2020. The UK also has obligations to reduce life-cycle GHG emissions from transport fuel under the EU Fuel Quality Directive (Directive 2009/28/EC).

The RTFO is the primary way that the government incentivises and supports biofuels in transport, requiring fuel suppliers to provide a certain proportion of biofuels alongside fossil fuels. In April 2018, the government announced changes to the RTFO, increasing the proportion of biofuel required. Under these new requirements, owners of transport fuel who supply at least 450,000 litres a year or more must make sure the mix is at least 9.75 per cent biofuel in 2020 and 12.4 per cent biofuel by 2032. The RTFO applies to refiners, importers and any other suppliers of fossil-based road transport fuel (hydrocarbon oil) in the UK.

Biomass

Biomass generation is regulated in a similar way to other industrial emissions installations. In addition, all bioliquids and stations equal to or larger than 1MW that use solid biomass or biogas fuels must meet sustainability reporting requirements relating to the land from which the biomass is sourced and the life cycle GHG emissions of the biomass.

The government launched an initiative to promote heat energy investment - the Heat Network Investment Project (HNIP) - in December 2018. This follows a successful pilot initiative in 2016 and 2017 in which local authority-led heat network projects received £24 million to provide heat to 5,000 domestic customers and 50 non-domestic buildings. Several of these projects involved biomass boilers.

Carbon capture and storage

Describe, in general terms, any policy on and regulation of carbon capture and storage.

The UK government has affirmed its commitment to supporting carbon capture, usage and storage (CCUS), with the aim of being able to deploy CCUS at scale during the 2030s. This includes establishing the CCUS Cost Challenge Taskforce to advice on steps to reduce the cost of deploying CCUS in the UK. BEIS has committed to spend up to £100 million to support industry and CCSU innovation and deployment in the UK.

However, the Business, Energy and Industrial Strategy House of Commons select committee launched an inquiry into the government’s plans for CCUS policy in May 2018. In particular, the inquiry is investigating how essential CCUS is for the UK to meet its emission reduction target for 2050, how the government should set targets for cost reduction in CCSU, what a realistic level of cost reduction might look like, and what alternatives the government might consider if CCSU costs do not come down ‘sufficiently’. The inquiry report was published on 25 April 2019, and is awaiting a government response.

Climate matters in transactions

Climate matters in M&A transactions

What are the main climate matters and regulations to consider in M&A transactions and other transactions?

Climate matters can arise in corporate transactions in a variety of ways. Buyers and lenders should be aware of and understand aspects of the target’s business affected by climate change policy or legislation.

Through the due diligence process, a buyer or lender will need to consider whether the target is subject to any emissions schemes such as the EU ETS and CRC Energy Efficiency Scheme (until the scheme comes to an end after October 2019) or required to comply with other climate change related legislation. If the target business requires permits for carbon emissions or more general planning and environmental permits, these details should be investigated, as should permit compliance. If the target business is required to participate in an emissions trading scheme then details of the target’s emissions, the allowances it holds, and projected emissions should also be considered.

Government support schemes may also be relevant to the target business. However, this policy landscape can also change quickly. Climate policy changes may affect things like the target’s valuation. This uncertainty may mean that parties require specific warranties and indemnities in transaction documents, clawbacks against the purchase price, or arrangements such as protective exit structures.

Green finance has grown substantially in the past decade, and the role for finance in tackling climate change is undisputed. Significant investment is required to fund the transition to a low-carbon economy required in order to meet the targets set under international climate agreements. ‘Green’ labelled or certified financial instruments are also an increasingly attractive way to fund projects or activities related to climate change or renewables and are popular with many investors and lenders. Initiatives such as the Sustainability Linked Loan Principles, the Green Bond Principles and Green Loan Principles indicate that the sophistication and maturity in this market will continue to rise.

Update and trends

Emerging trends

Are there any emerging trends or hot topics that may affect climate regulation in your country in the foreseeable future?

Emerging trends27 Are there any emerging trends or hot topics that may affect climate regulation in your country in the foreseeable future?

The UK intends to exit the EU in 2019. Following Brexit, the UK will need to ensure that it meets its international climate change commitments independently of the EU and it will also be able to diverge from the EU laws relating to the EU ETS, renewables, and energy efficiency.

The European Union (Withdrawal) Act 2018 (EU Withdrawal Act) details procedures for the retention of EU law in the UK on the date that it exits the EU (exit day is expected to be 31 October 2019). The general approach of the EU Withdrawal Act is to retain the EU laws applicable in the UK on exit day, with limited powers granted to government ministers to make amendments to ensure ‘operability’ and remove or amend references to EU law or institutions. The approach to withdraw from the EU and its effect on the laws applicable in the UK will also be influenced by the outcome of political negotiations between the UK government and the European Commission.

A draft withdrawal agreement, pending approval by European Parliament and UK Parliament, was published on 14 November 2018. The draft withdrawal agreement includes a ‘transition’ period in which the UK would remain subject to EU law, preserving much of the pre-Brexit status quo. Since the draft withdrawal agreement was published in November 2018, it has failed to pass through UK Parliament three separate times. There is still considerable uncertainty as to whether the withdrawal agreement will be passed by Parliament or amended, or whether the UK will seek to negotiate a new deal or leave the EU without an withdrawal agreement.

In May 2018, Minister for Energy and Clean Growth, Claire Perry, announced that the UK will seek to remain a member of the EU ETS until the end of 2020. Note that the European Commission has made clear that the UK will not be permitted to participate in the EU ETS after exit day if no withdrawal agreement is in place.