Effect of Article 27 and 27a on Participation in Phase IV

Effect of Article 27 and 27a on Participation in Phase IV

On 19th August 2019, the UK government announced its intention to introduce an opt-out scheme for Phase IV of the EU ETS, formally known as the Article 27 and Article 27a scheme. The schemes will take effect from 2021 onwards, potentially affecting all hospitals and smalls emitters (those with under 25,000 tCO2 emission and 35 MWth thermal input capacity). Unfortunately, the phrase ‘opt-out’ is somewhat of a misnomer, as will be discussed.

Despite the announcement being on the 19th August, operators were expected to declare their intention to apply for the then-yet-unconfirmed scheme prior to submission of the NIMs return on 30th June. This caused a lot of uncertainty for many hospitals and small emitters as the government chose to use the unhelpful language of claiming that operators had to make a “risk-based decision” on whether to pay for a full verification to ensure they received a free allowances in case the scheme was not approved. Consequently, many operators paid for full verification with many having to bring in external consultants to complete the work. This is despite the fact that there is historical precedent for opt-out schemes, a consultation on the future of UK carbon pricing (which flew under the radar with many operators) published on 2nd May 2019 strongly suggested that the opt-out was the preferred way forward, and the same consultation estimated the government would receive £88.2 million in revenue from civil penalties.

Going forward, there are some key changes to the opt-out scheme in Phase V compared to Phase III, chief among which is the introduction of the new Article 27a scheme. This is distinct from the Article 27 scheme and is solely for ultra-low emitters; those emitting below 2,500 tCO2e per year. The closest thing to an “opt-out” in the true sense of the word, under this scheme operators would no longer be required to report their emissions or get them verified. The only requirement would be to introduce a simplified monitoring plan to assess whether the 2,500 tonne limit is exceeded. Those above the 2,500 tonne limit, but still below 25,000 tonnes and 35MWth, or are hospitals, qualify for the Article 27 scheme. These operators do not have to trade and surrender allowances on the carbon market, however they are still subject to the same monitoring and reporting standards as the ‘full participants’, and are instead obligated to adhere to an annual carbon target and are required to pay a civil penalty if they exceed their target. As the civil penalty rate is set before the reporting year begins (typically November), this allows for much easier budgeting and forecasting since the civil penalty rate does not fluctuate.

It was identified in the Assessment Of Costs To UK Participants Of Compliance With Phase III Of The EU Emissions Trading System report, published in August 2016, that Phase III opt-outs were on average paying over six times as much per tonne of CO2 emitted as those in the main scheme emitting between 50,000 - 500,000, and 73 times as much as those emitting over 50,000. Despite the misnomer of “opt-out”, the new 27 and 27a schemes do alleviate some of the burden on many operators, with the Article 27a scheme being a particularly welcome addition.

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