The U.K.’s withdrawal from the E.U. raises various issues of legal uncertainty relating to the E.U. Emissions Trading Scheme (the “E.U. ETS”) and the European emissions allowances (“EAUs”), whether the U.K. leaves the E.U. ETS from the date of exit (as is expected in the event of a hard Brexit) or stays in the E.U. ETS until the end of 2020. In this paper, the FMLC examines these issues of legal uncertainty, including: (i) the effect of a hard Brexit on existing contracts relating to over-the-counter transactions in EAUs; (ii) the legal nature of U.K. emissions allowances (“U.K. EAUs”) should a separate U.K.-only emissions scheme be established; and (iii) the regulation of EAUs, U.K. EAUs, and activities related to such allowances, during any transition period or following a hard Brexit. The FMLC also considers the impact that Brexit may have upon the U.K.’s participation in the E.U. ETS, in particular upon U.K. account holders in the Union Registry. Finally, the FMLC examines some of the ways by which the uncertainties identified might be mitigated, including through clarification by the European Commission and industry associations, various forms of contingency planning by market participants and possible legislative action by the U.K. and the E.U.
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