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Simplified emissions trading regulations remove "inappropriate" criminal penalties

Changes to the laws implementing European emissions trading rules will simplify an unnecessarily complex area of regulation as well as remove "inappropriate" criminal penalties for misreporting, an expert has said.10 Dec 2012

The new rules replace 13 different sets of regulations implementing the EU Emissions Trading System (EU ETS) in the UK with a single regulatory instrument, and introduce an 'opt out' of the EU ETS into a "lighter touch" alternative scheme for smaller emitters and hospitals. This alternative scheme will allow these institutions to avoid the "disproportionately higher" administrative costs they currently face under the EU ETS.

Climate Change Minister Greg Barker said that the changes, introduced before the third phase of the scheme gets underway in January, would cut regulatory 'red tape' for businesses. It is the first major legislative action as a result of the environmental phase of the Government's 'Red Tape Challenge', which will see 86 regulations dropped completely and a further 48 regimes "improved". The Department of Energy and Climate Change (DECC) has claimed that its simplification drive will save businesses around £400 million over the next 20 years.

Environmental law expert Simon Colvin of Pinsent Masons, the law firm behind, said that the changes were "long overdue" and would "simplify an area that had become congested with lots of different regulations and subsequent amendments".

"The new regulations introduce two key changes: firstly, the opt-out which has been widely welcomed," he said. "Secondly, the replacement of criminal penalties with civil sanctions which is also a welcome change. Often, offences relating to the EU ETS concern misreporting and other paper-based offences that occur as a result of human error, rather than criminal intent. Those that participate in the scheme often accept that if costs have been avoided as a result of an error, then it is fair that these should be recovered; and this is the focus of the civil sanctions. Often, criminal penalties are not appropriate."

The EU ETS began in 2005 and was the first large emissions trading scheme in the world. Its third and final phase begins on 1 January 2013 and runs until 2020. The EU ETS covers more than 11,000 factories, power stations and other installations with a net heat excess of 20MW per year. It currently operates in all 27 EU member states as well as Iceland, Norway and Liechtenstein and is set to fully link up with a future Australian emissions trading scheme by 2018.

Under emissions trading arrangements there is a cap on the amount of greenhouse gases that may be emitted by an industry. Companies are allocated emissions permits or allowances representing the right to emit or discharge a specific volume of emissions in line with national allocation plans. Companies with excess allowances can trade with those who need to buy more allowances to comply with emissions limits.

Last month, the European Commission proposed 'back-loading' auctions for carbon allowances under Phase III of the scheme, transferring some 900 million allowances that would otherwise have been made available for auction between 2013 and 2015 to later in the same period. The move is intended to address the build-up in allowances caused by reduced industrial activity during the economic downturn.

Greg Barker said that the EU ETS would help the UK deliver two-thirds of the emissions reductions required to meet its "ambitious carbon emission reduction targets" from next year.

"By simplifying the regulations for Phase II of EU ETS, we will save companies money and time, while still allowing them to meet environmental goals," he said. "This will mean that smaller businesses, who experience higher costs from complying with the current regulations, those choose to will also be opted out of the system from 2013."

Simon Colvin pointed out that the announcement followed on from the Government's reiterating its commitment to simplify the Carbon Reduction Commitment (CRC), announced last week as part of the Chancellor's Autumn Statement. The CRC is a mandatory scheme aimed at improving energy efficiency and cutting CO2 emissions in large public and private sector organisations that are not caught by the EU ETS. The Chancellor said last week that it would scrap the performance league table associated with the CRC, but stopped short of providing further details on how it would simplify the much-criticised scheme.

"I wonder how long it will be before we see EU ETS and CRC meeting in the middle, perhaps with different tiers and a 'lighter touch' for those that are in the lower tiers?" Colvin said.