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UK ETS ‘loophole’: Millions in free carbon allowances handed to shuttered UK factories

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Greenpeace Unearthed has revealed that the UK’s main regulated carbon trading market allows companies to profit from closing factories. 

  • Greenpeace’s Unearthed investigation unit analysed the UK emissions trading scheme (ETS) and found that it allowed one company to make £32 m on the carbon market after closing a factory and causing large-scale job losses. 
  • The UK ETS is a key part of the UK government’s efforts to decarbonise hard-to-abate sectors through caps for emissions and carbon allowances. 
  • This finding indicates a flaw in the system that allows companies to profit from overallocation for the year, reducing the UK ETS’s efficacy for decarbonisation. 

The finding by Unearthed, the investigative journalism unit of Greenpeace, found that some companies in energy-intensive sectors in the UK could be making windfall profits from the government’s carbon emissions trading scheme, instead of decarbonising effectively. 

The ‘cornerstone’ of UK net zero

The UK ETS  is the cap-and-trade system that caps the total amount of greenhouse gas (GHG) emissions for specific sectors and industries in the UK. It provides the framework for a carbon market by allowing participants to trade allowances – if they have any remaining following their own work on decarbonisation.

It came into effect in 2021 as a replacement for the EU Emissions Trading scheme (after the UK left the European Union), and is designed to reduce the GHG emissions of energy-intensive industries such as steelmaking, aviation and power generation. These sectors receive free carbon allowances intended to support decarbonisation while allowing them to remain competitive in international markets. 

Companies must obtain allowances for every tonne of emissions produced each year and any allowance remaining after it has met its compliance requirements can be sold at the end of the year.

‘Loophole’ generates tradeable allowance from closing factories

According to Greenpeace Unearthed, the ‘loophole’ that companies were found to exploit was that firms could reduce reported emissions simply by closing factories, and the government has no means of retrieving these unused credits once allocated. They could then sell their additional carbon allowance from the UK ETS to make millions on the carbon market, thus able to profit significantly from factory closures and job losses.

The primary case study in the investigation is the US firm CF industries, which had announced in June 2022, that it would close its fertiliser works in Ince, Cheshire, due to high energy costs – a move that led to job losses of 350 jobs. Unearthed found that closing their facilities in mid-2022 left the company with a total of 630,000 leftover credits from the facility in 2021 and 2022, worth £49 million using the average UK carbon price from 2022 of £78 a tonne.

Moreover, the team also found that an ammonia plant owned by CF in Billingham, Teeside recorded a 26% drop in emissions in 2022, in part due to being closed for the last four months of the year. This left CF industries with an additional 249,000 leftover credits for 2022, worth £19.4 million. 

CF industries made £32m from the sale of carbon credits under UK ETS in 2023, which helped its parent company CF Industries triple revenue from carbon credit sales compared to the same period in 2022, according to disclosures to the US regulator.  

In July 2023, CF also announced the closure of its ammonia plant in Billingham, after that facility had been idle since September 2022.

In response to the investigation, Alex Cunningham, a Labour shadow justice minister whose constituency includes Billingham told Unearthed: “Good local jobs were lost when Mitsubishi and CF Fertilisers closed their operations on Teesside so it is nothing short of outrageous that these companies continue to make tens of millions through the sale of their emissions credits due to a loophole in the UK ETS.”

CF Industries has been contacted for comment. 

How does this impact the UK ETS markets?

According to Sam Van den plas, policy director at Carbon Market Watch, handing out free emissions allowances to those who don’t need it undermines the carbon price signal for everyone else and weakens decarbonisation efforts . 

He adds: “In the short term, a company receives more emissions allowances than it actually needs to cover its GHG emissions, and for free. It can sell those market allowances to other companies, and generate windfall profits.

“In the longer term, it makes allowances available to market participants who don’t need them so it weakens the carbon price signal to others and doesn’t support the longer-term decarbonisation efforts in these industries. On the contrary, you are subsidising the polluters instead of making them pay.

Dealing with ‘overallocated’ credits

On a similar note, the investigation found that closure of Mitsubishi Chemical’s Cassel works chemical plant in Billingham Teeside in May 2023 left the company with 155,000 of unused carbon credit allocation. These were, worth about £12.1 million based on 2022 prices, but only made available after the company halted production in February 2022. Claiming commercial confidentiality, the company did not disclose to Unearthed its plans regarding the excess allocation. 

Yet that has not stopped other companies returning their excess credits.  Mexican cement company Cemex (that has had a plant in North Lincolnshire on standby since mid-2020)  had received 338,000 credits during the period that the plant was not in operation. It said that it intended to return them to the UK registry when their account is updated.

Credits from 2022 under the UK ETS do not have to be sold by the end of the year. Participants can choose when to sell their unused credits, which can be carried forward to future compliance years, meaning that companies can wait for carbon prices to rise to sell their allowance. 

How allocations can be modified

Following the initial allocation in 2021 for the years 2021-2025, the next allocation period for free carbon allowances for ‘stationary installations’ under the UK ETS is from 2026-2030 adjusted for changes in activity levels and operations.

The free allowances for the company can be updated for the next year depending on any changes to operational facilities in the previous year. A report on the company’s activity level is due on 31 March every year, identifying whether any factories have been shut down or operations suspended. 

The free allowance for the year is however already allocated a month before the report, by 28 February. This means that the decision on how many free allowances to allocate to the company is taken before its activity report is due, risking overallocation.

According to guidance from the UK Government: “If your report shows a decrease in your activity level, which decreases your free allocation entitlement for that year, you must return any over-allocation.” It also mentions that the regulator may instruct the registry administrator to transfer the allowances out of the company’s operating holding account in the UK ETS registry. 

Nevertheless, this does not apply within the calendar year. Van den plas says: “The problem is that if a company closes on the 2nd January, it is entitled to free emission allowances for the remainder of the calendar year. New regulations could be proposed by the UK government to correct this.”

He also adds that ‘free’ emissions allowances have not incentivised significant decarbonisation in these sectors. He says: “We also believe this is a fundamentally flawed way of allocating the emissions allowances for companies operating in steel, cement and petrochemicals, for example. It would be much more preferable to auction them rather than handing them out for free. 

“You give a clear carbon price signal so that no one gets the impression that it’s a smart thing to pollute for free during a climate crisis. It also generates revenues for the government that could be reinvested in renewable and green technologies.”

In the future, the UK ETS is also set to cover domestic maritime transport, waste incineration and ‘process emissions’. The Government has recently announced extra allowances, making the carbon price fall below that of Europe’s Emissions Trading Scheme. 

Reforms proposed by the Department for Energy Security and Net Zero would also see carbon-capture technologies added to the market. Carbon-capture technologies are nevertheless associated with a range of issues, previously termed ‘ineffective, uneconomic, and unsafe’ by the Centre for Environmental Law due to energy-intensive processes, limited success and delays in deployment, for example. This may further allow hard-to-abate sectors targeted by the UK ETS to delay operational decarbonisation for short-term solutions.

SGV Take 

This finding that companies can generate millions in the carbon markets by closing factories is an urgent issue that must be addressed to retain the efficacy and integrity of the UK ETS carbon markets. The mechanism that allows the overallocation of allowances also diverts allowance from other companies, and may fail to incentivise operational decarbonisation as companies can resort to closures to reduce reported emissions.

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