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UK Responds to Post-Brexit Environmental Regulatory Landscape Challenges | Latham & Watkins LLP
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UK Responds to Post-Brexit Environmental Regulatory Landscape Challenges | Latham & Watkins LLP

The UK ETS’s triggering of the CCM and ongoing consultations through UK Reach signal speedbumps for the transition process.

On 30 November 2021, the UK government’s Department of Business, Energy and Industrial Strategy (BEIS) updated its guidance on the UK Emissions Trading Scheme (UK ETS), the UK’s cap-and-trade-based system to reduce the country’s greenhouse gas (GHG) emissions. This update also indicated that the cost containment mechanisms (CCM), which are used to limit the country’s greenhouse gas (GHG) emissions, was activated for December 20,21. This is a further indication of the widespread impact of rising energy prices.

The UK ETS sets a maximum level of emissions for certain sectors of the UK’s economy. It also creates allowances to cover each unit of emission above the cap. Certain companies receive allowances at no cost. Any remaining allowances can be sold by market participants and auctioned off. Emitters must surrender an amount equal to their total emissions. Heavy emitters will need to purchase allowances.

The well-documented problems relating to European gas supply have seen certain emitters in the UK switch from gas generation to that of coal generation in recent months. This, among other things, has led to increased GHG emissions as well as a higher demand for allowances under UK ETS. In turn, this has resulted a higher price in the market-based system.

The CCM is an element of the UK ETS. It is activated when the price of allowances for three consecutive month exceeds twice the two-year rolling mean of prices. This is calculated using both the UK ETS (which is currently calculated using the EU ETS) and the UK ETS (which is less than two years). CCM allows the UK ETS Authority (the UK Scottish, Northern Irish and Welsh governments) the ability to modify the volume or distribution allowances to be sold in an effort to prevent prices from rising too high. This is in contrast with the EU ETS which uses a similar mechanism when prices exceed three (as against two) times a rolling average of two years for three consecutive month.

The CCM was activated, giving the UK ETS Authority two weeks to decide whether to take any action regarding the high price of allowances. The UK ETS Authority issued a statement on 14 December stating that it would not take any further action to reduce the price rises resulting from. Inter alia, the “factors that may have affected UK ETS allowance prices, and the context of recent developments in the energy market”. This suggests that the UK ETS Authority considers the recent high price for allowances temporary. However, the UK ETS Authority also highlighted that it continues to monitor the price of allowances and “remains prepared to take timely and proportionate action” should the CCM be triggered again.

In addition, on 6 December, the head of the UK’s Department for Environment, Food and Rural Affairs (DEFRA) wrote to the UK’s Chemical Industries Association (CIA) in relation to transitional requirements under UK REACH, the post-Brexit chemicals regime in the UK.

In response to feedback from the CIA in Feb 2021, the letter states that DEFRA will collaborate with the chemicals industry, Health and Safety Executive (HSE) and Environment Agency (EA), to develop a new model to allow UK REACH transitional registrations. The letter notes that the proposed model would reduce the need for replicating EU REACH data packages by placing a greater emphasis on improving the government and regulators’ understanding of the uses and exposures of chemicals in the context of Great Britain.

The letter also proposes consulting to extend the deadline by two years for companies to register their full data. DEFRA proposes a new deadline of 27 Oct 2025.

The UK faces many challenges in separating its environmental legal system from EU laws, with the need to extend the deadline and additional consultation under UKREACH as well as the activation of the CCM under UK ETS.

Latham & Watkins will continue to monitor the issues discussed in this post, as well as other Brexit-related amendments and challenges to the UK’s environmental regulatory landscape.

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