Brexit and EU ETS: Tribunal’s €2million decision goes against UK operator

A UK oil and gas operator stands to be out of pocket by c. €2million due to the EU’s suspension of free EU ETS allowances in the context of the ongoing Brexit process

05 December 2019

What is the price of Brexit? For one oil and gas operator, it is at least €2million, thanks to an unfortunate combination of the EU emission trading system rules with the Brexit process. Simon Tilling, partner, and Stephen Lavington, senior associate, examine the implications of the ruling.

The Repsol case

In the case of Repsol Sinopec Resources UK Ltd v The Secretary of State for Business , Energy and Industrial Strategy [2019] UKFTT GGE 2019 0001 (GRC) the First Tier Tribunal General Regulatory Chamber determined that the appellant, Repsol, was required to return an over-allocation of EU Emissions Trading System allowances (EUA) with a value of c.€4million. This was notwithstanding the fact that, in the normal course of operation of the EU Emissions Trading System (EU ETS), Repsol would expect to have received a free allocation of EUA (with an estimated value of c.€2million) which it would have been able to offset against this requirement. 

Since December 2018 the European Commission has suspended free allocation of EUA to UK operators due to Brexit uncertainty. As a result Repsol had not received its usual allocation. The court agreed with BEIS that there was no discretion for a net-off of those free allowances which Repsol would ordinarily have expected to receive against the excess allowances to be returned.

This decision is highly relevant, both as an example of the very real risks of a material impact of Brexit on UK business (despite the fact that, at time of writing, the UK is still an EU member state), and also in demonstrating that the UK’s current state of Brexit limbo can have unintended but significant consequences for UK companies.

The EU ETS

The EU ETS is a market-based system aimed at reducing greenhouse gas (GHG) emissions. Eligible high-emitting installations are required to monitor their GHG emissions and then surrender EUA in proportion to those emissions in each reporting year (running January to December). EUA are freely tradeable and can be purchased at auction or brought (and sold) on the secondary market.

While the default method for allocating allowances is by auction, certain installations are awarded a free allocation of EUA in each reporting year as part of the progressive implementation of EU ETS, aimed at minimising “carbon leakage” of high-emitters to countries outside the EU. 

EU ETS and Brexit

In the event of a no-deal Brexit, the UK would immediately leave EU ETS. In that event, UK operators holding EUA (including freely allocated EUA) may well elect to sell these EUA on the secondary market on the basis that they would no longer be required for compliance, with potentially detrimental effects for a market still dealing with a legacy of under-pricing of carbon.

On 19 December 2018, with the UK then expected to leave the EU on 29 March 2019, the Commission set out a package of no-deal contingency proposals. This included suspension of the issue of UK free allowances, to mitigate the potential impact of a mass sell-off by UK operators. 

The details of the Repsol case

In Repsol v BEIS, Repsol had been found to be entitled to fewer free EUA in the period 2013 – 2017 than it had actually received. In March 2019, the regulator issued a recovery notice requiring Repsol to return these excess EUA (worth c. €4million). This was pursuant to the provisions of the Greenhouse Gas Emissions Trading Scheme Regulations 2012 (the 2012 Regulations), the primary implementing regulations for EU ETS in the UK.

There are no restrictions on the usage of freely awarded EUA. On that basis, Repsol might have used subsequent allocation of free allowances to offset this recovery notice, with the effect that Repsol would only have been required to procure an additional €2million worth of allowances to satisfy the regulator. However, in consequence of the Commission’s suspension, Repsol did not receive its usual free allocation of EUA.

Repsol appealed against the recovery notice.

Repsol argued that BEIS should have “netted off” those free allowances that were due to it, effectively taking into account the free allowances that Repsol should have received when calculating the number of allowances in the recovery notice. To act otherwise would be inequitable as Repsol would be required to surrender €4million worth of EUA without a guarantee that it would ever receive the €2million of free allowances to which it was entitled.

BEIS argued that the regulator was acting in accordance with its obligations and duties under the 2012 Regulations. These regulations did not include any provision or discretion for a “netting-off” mechanism. 

In its decision, the tribunal agreed with BEIS that the 2012 Regulations did not provide relevant discretion to the regulator, which therefore could not have interpreted the 2012 Regulations to allow a “netting-off” arrangement. The tribunal further noted that, under the 2012 Regulations, it was not permitted to make a decision on appeal that the regulator could not have originally made.

The tribunal (and, indeed, BEIS) expressed some concerns about the impact upon Repsol of the Commission’s suspension of free allowances. Nevertheless, the appeal was dismissed and the recovery notice was affirmed.

Conclusion

The tribunal may have sympathised with Repsol, but its hands were tied: it could not imply into the regime a degree of discretion on “netting off” when it was not provided for in the regulations. There was nothing that Repsol could do to mitigate or prevent the EU’s decision to suspend the free allocation of EUA and, in that respect, it was the victim of unfortunate timing. It is to be hoped that few other UK EU ETS operators find themselves in similar circumstances, however business cannot expect the courts to step in where the uncertainties and legislative gaps created by Brexit produce unintended consequences.

It is worth bearing in mind that in May 2019, the then government provided financing for British Steel to purchase EUA to make up for the shortfall experienced from this suspension. This suggests that government (the previous government, at least) is/was prepared to intervene, in exceptional circumstances.

However, the British Steel transaction was truly exceptional. It is more likely that business will find itself increasingly affected by the unintended consequences of Brexit preparations and contingency measures, and will not be able to automatically rely on government or the courts for support. Should the UK eventually leave the EU it is probable that this will continue for the foreseeable future as the country first works its way through the transition period and then begins the process of divergence from Europe and replacement of legacy regulation and legislation. 

Business should be alive to these risks and, if in any doubt, should seek advice, especially in respect of complex technical regimes such as EU ETS.

Key contact

Simon-Tilling--250px x 250px 72dpi - web

Simon Tilling Partner

  • Head of Environment
  • REACH, Chemicals and Product Stewardship
  • Energy, Power and Utilities

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