EU ETS Backloading  returns with Parliament’s  seal of approval 

After much anticipation, on 10 December 2013 the European  Parliament voted in favour of  backloading by 385 votes to 284,  with 24 abstentions. This vote means  that 900 million emission allowances  (EUAs) will be withheld from auction  in Phase III. 

As expected from the plenary  session in July, the key feature of the  voted text specifies that backloading  can only proceed where an  assessment shows no “significant  risk of carbon leakage” for industries  in the EU. Certain industrial sectors  are considered to be carbon  intensive producers, and may be at  risk of relocating trade activities  outside of the EU (“leakage”).  Examples of such sectors identified  as being at risk of carbon leakage  include steel, clinker and cement and  aluminum manufacturers. On this  basis, the European Commission  may amend the auction timetable  between 1 January 2013 and 31  December 2020 and withhold no  more than 900 million EUAs to  ensure orderly functioning of the  carbon market. 

Backloading is expected to be  implemented this year, following  approval of the amended ETS  auctioning regulation by EU diplomats  on 8 January 2014, and the  European Council vote in favour of  the legislation on 16 December 2013. 

Timing of the measure will impact on  the amount of EUAs that will be  withdrawn. If backloading is  implemented by the end of March  then 400 million EUAs will be  withheld, and the remainder will be  removed in 2015 and 2016. If  implementation is delayed, then only  300 million EUAs would be removed  from the market this year. 

Although the vote has not had a  significant impact on the carbon  price so far, it will be interesting to  see how this will impact on prices  over the next six months as  participants prepare for the first  withdrawal.  However, the price is  unlikely to change significantly  without the addition of wider  structural reforms. In response to  such concerns, the European  Commission is due to publish formal  proposals on more fundamental  structural reforms of the EU ETS in  January 2014.

Relaxation of EU ETS  enforcement

As reported in the previous edition of  our newsletter, a Government  consultation on proposed relaxation  of the penalties for non-compliance  imposed under UK EU ETS  regulations closed on 19 September  2013.  These proposals have now  been adopted and the Greenhouse  Gas Emissions Trading Scheme and  National Emissions Inventory  (Amendment) Regulations 2013  come into force on 31 January 2014.

The new regulations will allow  regulators to have more discretion  when imposing penalties. They also  implement the EU’s 2013 Registries  Regulation, replace the National  Emissions Inventory’s criminal  sanction system with a civil penalty  scheme and remove the associated  power of entry. 

Although some concern has been  raised over whether more discretion  will lead to a lack of consistency of  penalties, it is hoped that the  penalties imposed will more  accurately reflect the seriousness of  the offence and the steps taken to  rectify the breach. Most operators  will also welcome the removal of the  powers of entry. 

Global aviation discussions

As reported in our previous  newsletter, the International Civil  Aviation Organisation (ICAO) agreed  that the EU should only be allowed  to apply the EU ETS to intra-EU  flights. ICAO also agreed that a  global system on reducing carbon  emissions from aviation, which is  likely to be based on offsetting rather  than emissions trading, would be  agreed by 2016 and then adopted  by 2020. The Commission has proposed that  the EU ETS should be applied to all  flights within the EEA airspace from 1  January 2014 until a global system is  implemented. In line with the de  minimis threshold agreed by ICAO,  some flights to and from developing  countries will be exempt.

For this proposal to be adopted, it  needs it be approved by the  European Parliament and the  European Council. If no decision is  made by March 2014 the EU ETS  will automatically revert back to the  position before stop the clock, e.g.  covering the full distance of all flights  taking off or landing in the EU, not  just that part of the flight in EU  airspace.

If the proposal is adopted, EU airline  operators will arguably be left at a  competitive disadvantage so it looks  likely that the low cost airlines will  resume their legal challenge over the  ‘stop the clock’ decision, which has  currently been stayed until a measure  is adopted. Whatever decision it  makes the European Commission  will be subject to a degree of  challenge, so it will have to carefully  balance the various interests whilst  also considering the impact of its  decision on climate change.  

CO2 targets for cars

As reported in the previous edition of  this newsletter, following protests  from Germany it was decided that  the agreement reached in June 2013  should be re-negotiated to give car  manufacturers more flexibility when  meeting their carbon emission  reduction targets. On 29 November  2013 it was agreed that the EU  95gCO2/km average emission limit  for all new cars will not be  implemented until 2021 and that the  cap on super credits would be raised  from 2.5 to 7.5gCO2/km. 

Although this agreement will mean  lower emissions reduction targets  than the ones agreed in June at least  some deal has finally been reached.  The agreement will now go to the  European Parliament for formal  adoption in January 2014.

Shipping

Following the difficulties encountered  whilst trying to include aviation in the  EU ETS, proposals for shipping to  monitor and report their emissions  have unsurprisingly been subject to a  lot of debate. The European  Commission’s most recent proposal  that only CO2 emissions from  ships  over 5,000 gross tonnes entering  and leaving EU ports should monitor  and report their CO2 emissions has  been backed by a number of  member states, but there are still  calls for the proposals to be  simplified. 

A variety of different concerns have  been raised, including the unfair  treatment of ships built to operate in  icy seas and ships which only visit  EU ports occasionally for repairs or in  an emergency.

The proposals have some way to go  before they become law so we will  continue to watch the development  of this debate in 2014. 

Another CRC consultation

DECC has launched yet another  consultation on the CRC, this time  considering how the CRC could  encourage the uptake of on-site  renewable energy and proposing the  exclusion of metallurgical and  mineralogical processes from the CRC. The consultation also announced  that DECC will be amending the  CRC Order 2013 to clarify the  wording to avoid double counting of  energy supplies under the CRC,  CCAs and the EU ETS when there is  a landlord and tenant relationship  and to allow more flexibility as to 

when during a phase a subsidiary  can disaggregate from its parent  organisation. Although these look like  positive changes, for participants just  starting to understand the changes  made by the 2013 Order, the  prospect of yet more amendments  may not be welcomed by all.

New CRC Allowances  regulations – confirmation  of allowance prices in fixed  price sales

The CRC Energy Efficiency Scheme  (Allocation of Allowances for  Payment) Regulations 2013 (2013  Allowances Regulations) come into  force on 1 February and will revoke  the 2012 regulations of the same  name. The 2013 Allowances  Regulations will apply to all sales of  CRC allowances from 1 February  2014, including the last sale for the  First Phase.

The 2013 Allowances Regulations  set two fixed price sales in each CRC  compliance year, a forecast sale of  £15.60 per allowance and a  retrospective buy to comply sale at  £16.40. Participants will therefore be  encouraged to estimate their  allowances earlier in the year to  benefit from the saving of purchasing  their allowances at the forecast sale.