Jurisdiction: UK
Commencement: 22 April 2021
Amends: New Legislation
The UK Emissions Trading Scheme (UK ETS) implements the principals of emissions trading by allocating and trading greenhouse gas (GHG) emissions allowances to participants of the scheme. These Regulations set out the legal framework to allow auctioning of emissions allowances.
One allowance equals one tonne of carbon dioxide (CO2) equivalent. At the end of each year, installations must have enough allowances to account for their GHG emissions. They have the flexibility to buy additional allowances on top of their allocation, or to sell surplus allowances generated from reducing their emissions below their allocation at auction. An allowance allows a participant to emit 1 tonne of carbon dioxide equivalent.
The UK ETS was implemented in the UK by The Greenhouse Gas Emissions Trading Scheme Order 2020 (‘2020 Order’). It replaces the European Union Emissions Trading System (EU ETS) for UK participants, which also follows the principles of emissions trading. For more general information on the UK ETS and how it works for participants see the entry for the 2020 Order.
The UK ETS authority for these Regulations are the national authorities, which are:
- the Secretary of State;
- the Scottish Ministers;
- the Welsh ministers; and
- the relevant Northern Ireland department.
The Regulations are made under the power in section 96 of the Finance Act 2020 to make Regulations on the allocation of emissions allowances in exchange for payment. They are equivalent to the provisions made around allowances for EU ETS by Regulation (EU) 1031/2010 on the timing, administration and other aspects of auctioning of greenhouse gas allowances.
As with the EU ETS, under the UK ETS auctioning continues to be the main means of introducing allowances into the market. Participants are also able to trade UK ETS emissions allowances on a secondary market. It is set out in Part 2 of the Regulations how bids are to be submitted and withdrawn, and how the auction clearing price is to be determined.
The minimum volume bid is one lot, and each lot auctioned must consist of 500 allowances. Each bid must state:
- the identity of the bidder and whether the bidder is bidding on its own account or on behalf of a client;
- the identity of the client if the bidder is bidding on their behalf;
- the volume bid as a number of allowances in multiples of lots of 500 allowances; and
- the price bid in pounds sterling for each allowance specified to two decimal points.
Each bid may only be submitted, modified or withdrawn during the bidding window set by the auction platform. Any unsold allowances can be added to the next four auctions up to a limit of 125% of their original volume.
The Auction Reserve Price (ARP) is set by these Regulations and this is the minimum price for which allowances can be sold at auctions. Bids below this price will not be accepted. The UK ETS has an ARP of £22. It is not intended that any changes will be made to the ARP before it is likely withdrawn as the scheme matures.
The auctioneer sets the auction calendar, including the bidding windows, individual volumes, auction dates, as well as the auctioned product, payment and delivery dates of the allowances to be auctioned in individual auctions each calendar year. The auction platform provider, ICE Futures, was appointed to host emissions auctions on behalf of the UK Government’s Department for Business, Energy and Industrial Strategy (BEIS), which has been appointed as the UK Auctioneer by the Treasury. ICE published the 2021 calendar for UK ETS auctions on 26th February 2021. The first UK ETS auction is 19th May 2021.
The appointed auction platform must publish the auction calendar for a year by 15th July of the preceding year or as soon as practicable after that date. The auction platform must also report transactions to the Financial Conduct Authority in order to provide appropriate regulatory oversight.
This legislation provides for fees and costs to be charged by the auction platform and auctions are to be monitored for issues such as market abuse, money laundering, terrorist financing or other criminal activity.
Auction participants will need to register with the appointed auction platform and must also hold a registry account in the UK Emissions Trading Registry. This registry system is used to ensure the accurate accounting of all allowances issued under the UK ETS, and it is used by operators to surrender allowances each year as required by the 2020 Order.
The Cost Containment Mechanism will be triggered if the average price for one allowance on secondary futures markets is more than:
- during year one, an amount equal to two times the average price in the preceding two-year period for three consecutive months;
- during year two, an amount equal to two and a half times the average price in the preceding two-year period for three consecutive months; and
- during year three, an amount equal to three times the average price in the preceding two-year period for six consecutive months.
If any of the above occur then the Treasury can authorise changing the distribution of allowances or increasing the volume of allowances to be auctioned at auctions within a calendar year.
Part 4 of the Regulations legislate access to auctions by participants and details the eligibility criteria and process for those applying to bid in auctions and participate in the auction platform’s secondary market. The appointed auction platform can refuse, revoke or suspend admission to bid in auctions.
There is a right of appeal set by these Regulations against decisions made by the auction platform, such as admissions to bid.
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- a UK ETS operator or a UK ETS aircraft operator;
- a member of a UK ETS operator or UK ETS aircraft operator’s group (i.e. parent companies, subsidiaries or affiliates) which is not required to be located in the UK;
- a business grouping of UK ETS operators, UK ETS aircraft operators or their group which is not required to be located in the UK;
- public / state bodies of the UK that control UK ETS operators, UK ETS aircraft operator or members of their group;
- a UK investment firm or credit institution with ‘Part 4A Financial Services and Markets Act 2000′ permissions;
- a third country investment firm or credit institution with ‘Part 4A Financial Services and Markets Act 2000′ permissions; or
- a person whose head office or registered office is situated in the UK, and where the activity of bidding on their own account or on behalf of clients is ancillary to their main business.
Clarity is given on how the auction clearing price for UK ETS auctions will be determined and clarifies that it cannot be significantly below the prevailing secondary market price. This is to ensure there is not a scenario where there is a difference between the auction clearing price when the auction fully clears compared to when it partially clears.
The cost containment mechanism (CCM) enables the Treasury to amend the distribution or volume of allowances to be auctioned in any one year if the carbon price exceeds specified limits. The thresholds for the CCM to be implemented are clarified, as well as how the carbon price is calculated to determine if the CCM is triggered.
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