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Climate change

The Climate Change Act 2008 lays out regulation regarding greenhouse gas (GHG) emissions. It requires the United Kingdom to reduce its GHG emissions to 80 per cent below 1990 levels by 2050. The relevant GHGs include carbon dioxide; methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulphur hexafluoride.

There are three primary methods used by the government to restrict GHG emissions: the Climate Change Levy; the Emissions Trading Scheme coupled with the Carbon Price Floor; and Climate Change Agreements.

i Climate Change Levy

Adding approximately 15 per cent to energy bills of businesses and public sector organisations, the Climate Change Levy (CCL) is a carbon tax designed both to encourage the use of energy from renewable resources, and to encourage the use of less energy more generally. There are four categories of taxable commodities that are subject to the CCL: electricity; natural gas as supplied by a gas utility; petroleum and hydrocarbon gas in a liquid state, including liquid petroleum gas; and solid fuels. Solid fuels are categorised as: coal and lignite; coke and semi-coke of coal or lignite; petroleum coke; and low value solid fuel with an open market value of no more than £15 per tonne. However, exemptions were introduced in 2014 for energy used in metallurgical and mineralogical processes, and for solid fuels used in certain gasification processes. The rate of CCL has increased almost every year since 2007, broadly in line with inflation determined with reference to the retail price index.

ii Emissions Trading Scheme and Carbon Price Floor

The Carbon Price Floor (CPF), introduced in April 2013 as part of the government policy of Electricity Market Reform, places a minimum price on GHGs emitted by the power sector. The CPF is designed to supplement the EU ETS transposed into the United Kingdom's domestic GHG emissions trading regulations, which require companies to buy permits to emit greenhouse gases while generating electricity. Since the price of these permits can fall, the incentive to reduce emissions decreases. The CPF therefore imposes a minimum price that companies must pay in order to pollute, providing a baseline incentive for companies to cut emissions. In the 2014 budget, the government declared that the Carbon Price Support (CPS) rate (i.e., the difference between the future market price of carbon and the floor price that acts as one component of the CPF) would be capped at £18 per tonne/CO2 from 2016 to 2020. This cap was extended in the autumn 2018 budget until 2021. From 2021 to 2022, the government has indicated that it will seek to reduce the CPS rate if the total carbon price remains high (i.e., the sum of the CPS rate and the EU ETS price).

In December 2017, the government passed amending regulations to bring forward the 2018 deadlines for UK-issued allowances under the EU ETS. As a result of the amendments, UK-regulated operators are required to report their 2018 emissions and surrender allowances for those emissions by 15 March 2019. The amendments were prompted by concerns that the United Kingdom's exit from the European Union would invalidate UK operators' participation in the EU ETS.

The government has announced that if the United Kingdom departs from the EU ETS in 2019, it will replace the ETS with a carbon emissions tax. The tax would apply to all stationary installations currently participating in the EU ETS from 1 April 2019, at a rate of £16 per tonne of carbon dioxide over and above an installation's emissions allowance, based on the installation's free allowances under the EU ETS. The government has indicated that it is continuing to develop options for long-term carbon pricing, including remaining in the EU ETS, establishing a UK ETS (linked to the EU ETS or standalone) or a carbon tax.

iii Climate Change Agreements

For energy-intensive businesses looking for discounts on the CCL, climate change agreements (CCAs) were introduced in 2012. These are voluntary agreements made between the Environment Agency and sector associations and their members. The agreements set targets for industries to improve energy efficiency or reduce CO2 emissions. Meeting set targets makes the industry eligible for the discount CCL tax rate. From 1 April 2013, the discount received is 90 per cent on electricity bills and 65 per cent on other fuels. However, failure to meet the set targets under a CCA can result in the imposition of a financial penalty. If operators of CCAs fail to meet their requirements, they can continue to be eligible for the discounted tax if they pay a buyout fee to cover the deficit.

The Committee on Climate Change (CCC), established as part of the Climate Change Act 2008, is an independent body that advises the government on how it should meet its carbon budgets and carries out annual assessments as to whether the government is meeting its requirements. In 2017, UK emissions were 43 per cent below 1990 levels. The UK government did meet the first carbon budget and the CCC has predicted that the government will be able to meet its second and third budgets. However, meeting the fourth budget (2023 to 2027) will not be possible without further measures. For the United Kingdom to cut its emissions by 80 per cent below 1990 levels by 2050, domestic emissions must be reduced by at least 3 per cent a year.

iv The UNFCCC, the Kyoto Protocol and the Paris Agreement

The United Kingdom is also a party to the UNFCCC, and accordingly a signatory to the Kyoto Protocol and most recently to the Paris Agreement, which entered into force on 4 November 2016. The Paris Agreement places various requirements on its signatories. This includes limiting global temperature increases by, among other things: developing and implementing nationally determined contributions (NDC); peaking GHG emissions as soon as possible and progressing towards zero net emissions; minimising the loss and damage from climate change; and supporting climate change adaptation. This also requires that signatories provide financial support to developing countries and cooperate with other signatories to transfer technology, achieve their NDCs, build capacity of developing countries and improve public awareness and transparency.

However, the decarbonisation target under the Paris Agreement was agreed at an EU level, and therefore an allocation must take place to assign an NDC to the United Kingdom that may be affected by Brexit. Nevertheless, the UK government has itself committed to a legally binding target of cutting carbon emissions to 57 per cent below 1990 levels by 2032. Further, several of the United Kingdom's decarbonisation initiatives, such as the closure of coal-fired power plants, are domestic in origin and should not be affected by any change in circumstances following Brexit.