The triggering of the CCM under the UK ETS and ongoing consultations under UK Reach signal speedbumps in the transition process.

By Paul A. Davies, Michael D. Green, and James Bee

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 signalled that the cost containment mechanism (CCM) was triggered for December 2021, which is further indicative of the widespread impacts of increasing energy prices.

Under the UK ETS, the UK government sets a cap on the maximum level of emissions across certain sectors of the UK economy and creates allowances for each unit of emission up to the level of the cap. Certain companies are then allocated free allowances, and remaining allowances are auctioned off and can be subsequently traded by market participants. Emitters are required to surrender the amount of allowances equal to their total in scope emissions, meaning that heavy emitters are required to purchase allowances.

In the last few months, the well-documented issues relating to gas supply in Europe have led to certain emitters in the UK switching from gas generation to coal generation. This, among other factors, has increased GHG emissions and boosted demand for allowances under the UK ETS, which, in turn, has resulted in higher prices in the market-based system.

The CCM is a mechanism built into the UK ETS that is triggered if the price of allowances for three consecutive months is greater than twice the two-year rolling average of prices (which, at present, is calculated by reference to both the UK ETS and the EU ETS, given that the UK ETS has been operational for less than two years). The CCM allows the UK ETS Authority (the UK, Scottish, Northern Irish, and Welsh governments) to amend the volume or distribution of allowances to be auctioned, in an attempt to avoid prices rising too high. This contrasts with the EU ETS, in which a similar mechanism applies if prices reach three (as opposed to two) times the two-year rolling average for three consecutive months.

The triggering of the CCM gave the UK ETS Authority two weeks to determine whether to take action in respect of the elevated price of allowances. On 14 December, the UK ETS Authority released a statement saying that it will take no further action at this time to curb the price rises, due to, 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 views the recent high price of allowances as 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.

The letter, in response to feedback received from the CIA in February 2021, says that DEFRA will work with the chemicals industry, the Health and Safety Executive (HSE), and the Environment Agency (EA) to explore a new model for 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 on a two-year extension to the deadline for companies to provide full registration data. DEFRA suggests a new deadline of 27 October 2025.

Both the extension of the deadline and the need for additional consultation under UK REACH, as well as the triggering of the CCM under the UK ETS, highlight some of the challenges the UK faces in extricating its environmental legal regime from EU laws.

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.