Changing lanes: UK CO2 emissions pooling post-Brexit

The background 

• With COP26 fast approaching, laws to tackle climate change and reduce CO2 emissions are in focus more than ever. As at July 2021, passenger cars comprised around 12% of total EU emissions of CO2, placing the automobile sector under particular scrutiny to reduce emissions.
• The EU has sought to reduce CO2 emissions by imposing mandatory emission reduction targets for new vehicles made in the EU via Regulation 443/2009 (for new cars) and EU Regulation 510/2011 (for new vans). On 1 January 2020, the EU built on those regulations via a new “Regulation 2019/631”, which recast the emissions requirements in previous regulations for 2020-2024 and set new emissions targets for 2025 and 2030.
• Under Regulation 2019/631, manufacturing groups can “pool” their CO2 emissions together and receive one joint CO2 target covering every vehicle registration in the pool. Pooled manufacturers will be considered as one entity for the purposes of assessing performance against this target (see our previous post on CO2-emissions pooling in the EU automotive sector). This approach incentivises manufacturers to lower their emissions - manufacturers with lower emissions can sell their CO2 credits to higher emitting manufacturers and accrue significant revenues in the process.
• Following Brexit, the UK government has had to establish its own independent regime for CO2 pooling meaning that manufacturers will have targets in Great Britain (GB) – as well as the EU – to satisfy. In this post we explain the key changes that have been made by the UK government, and some of the risks for manufacturers.

What’s new? 

• Since Brexit, the UK government has introduced statutory instruments to establish separate CO2 emissions limits in GB, to ensure that CO2 emissions of new cars and vans registered in GB continue to be regulated.
• The UK has essentially copied and pasted EU Regulation 2019/631, with some minor amendments under the new Road Vehicle Carbon Dioxide Emission Performance Standards (Cars and Vans) (Amendment) (EU Exit) Regulations 2020 (the UK Regulations). The UK government has explicitly acknowledged the changes have been designed to “maintain regulations that as closely as possible match the current arrangements”.

At present, the most notable changes in the UK are as follows:

• The reporting authority. Rather than reporting to the European Commission, manufacturers must now report to the Secretary of State for Transport. The Secretary of State is responsible for calculating emission targets, issuing excess emissions premiums for manufacturers or pools who exceed such emissions targets and approving pooling arrangements between manufacturers. 
• The application formalities. The UK Regulations introduce new requirements for information relating to a pooling application, including formality requirements for the pooling application (e.g. the application must be in writing and include the name and address of the pool manager and the names of the other manufacturers in the pool). The requirements are also set out in the VCA guidance, which provides helpful information for manufacturers on all of the changes.
• New appeals mechanism. The UK Regulations introduce a new mechanism under Article 7a for manufacturers or pools to appeal against the Secretary of State’s decisions to impose an emissions penalty. 
• Derogations and super credits. Derogation thresholds (which relate to the ability for manufacturers to apply for slightly adjusted CO2 targets based on their size) and super credit caps (a cap on the extent to which zero or low emission vehicles can attract additional credits in the pool) have been altered to reflect that they now apply in the smaller UK market, rather than throughout the EEA.
• Fines. Manufacturer fines (excess emission premiums) have been converted from €95 per gram of exceedance per vehicle registered to £86, to reflect the current exchange rate.

Does anything remain the same? 

• Yes. Except for some minor changes outlined above, the CO2 emissions pooling system remains largely unchanged.
• In particular, Article 6 of Regulation 2019/631, which allows manufacturers to pool their new registered vehicles in GB and allows manufacturers to be considered as one entity for the purpose of meeting CO2 emissions targets, remains substantively the same.

For manufacturers, that means certain key points remain the same:

• Pooling contracts. Manufacturers pooling emissions from GB-registered vehicles will need to enter into a contractual arrangement with each other to ensure that the pool is governed in compliance with the UK Regulation.
• Open pools. Manufacturers remain able to form “open” pools, where two or more vehicle manufacturers entirely independent of one another join together to form a pool for the purposes of reaching their CO2 emissions targets under the UK Regulation. A new manufacturer is able to join an existing open pool after the initial pooling agreement is formed, provided it is accepted by all members of the pool.
• Antitrust considerations. Whilst Article 6(5) continues to permit pool members to share information in respect of: (i) average specific emissions of CO2, (ii) the specific emissions target and (iii) the total number of vehicles registered, pool members will need to ensure they continue to adhere properly to the strictures of UK competition law and that any current and prospective pool members seek ongoing antitrust advice to minimise the risks for their business.

What’s next?

• On 1 September 2021, Northern Ireland was brought into the scope of the regulation (under The Road Vehicle Carbon Dioxide Emissions Performance Standards (Cars and Vans) (Amendment) (EU Exit) Regulations 2021). This means that all vehicles registered in Northern Ireland on or after 1 September 2021 will fall within the scope of the UK Regulation. Vehicles registered in Northern Ireland prior to this date will not count towards a manufacturer’s CO2 emissions target under UK legislation.
• The regulatory landscape for CO2 emissions targets in the UK continues to evolve following Brexit (see our recent post on the Government’s consultation on its “Green Paper”). It is likely that we will continue to see developments in this area - in the consultation on SI 2020/1418, the government left scope for changes to the regulatory framework where necessary to develop an efficient and coherent regime in the UK: “The regulation already includes a requirement for a review, assessing the effectiveness of the full regulation, to be completed by 2023. This review may be accompanied by legislative proposals to improve the effectiveness if so required”. 
• Manufacturers should remain alert to the possibility of changes to legislation in the coming years and seek advice on the steps necessary to ensure compliance with any new legislative requirements.