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Timing of the measure will impact on the amount of EUAs that will be withdrawn.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.
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.