UK ETS: Post-Brexit carbon market opens for first time with carbon price topping £50 per tonne

The new UK ETS is the world's fourth-largest in terms of volume

The price is almost £5 higher than that currently trading in the EU’s ETS – the world’s largest ETS, which the UK left in December 2020 as part of the Brexit process. Trading prices per tonne of carbon in the EU ETS this morning peaked at €52.40, equivalent to around £45.25.

It is also above the threshold that the UK Government had determined to implement as an intervention; if prices trade above £44.74 for more than a few weeks, this price will be implemented to avoid potential problems internationally and complaints from high-emitting sectors such as building materials, mining, oil and gas. The UK Government’s reserve price was notably £22 per tonne, which green groups have stated seemed low, considering that EU prices have been steadily rising since 2018 and hit a new high of €53 on 11 May.

Under the UK ETS, power plants and other high emitting corporates will be charged for every tonne of CO2e they emit beyond a certain limit. They will also be able to sell excess reductions for profit to other companies that have failed to remain below their specific limits. The ETS is set to cover 155 megatonnes of CO2e in its first year.

Within the first 30 minutes of the UK ETS launch, 26 contracts changed hands. The UK Government will hold its first auction for the allowances later on Wednesday.

Intercontinental Exchange (ICE) – the Fortune 500 firm which operates the EU ETS – has been appointed to oversee the UK’s ETS. ICE claims that its approach is aligned with the UK’s 2050 net-zero goal and the ways in which carbon is accounted for under the Climate Change Act. 

This is a developing story and will be updated by edie in due course.

Green economy reaction 

Responding to the pricing trends seen this morning, Centrica Business Solutions’ head of solution sales and optimisation Louis Burford said many firms will need to “take a big leap of faith” on decarbonisation. 

Burford said: “Businesses will be debating how much of their requirement they should buy now and how much they should defer to a later date. One thing that’s clear is that carbon prices are growing, and it’s a cost that impacts almost all businesses. For those looking to reduce their carbon emissions or become net-zero, there are technologies and services that can help. By taking the cost of carbon off the books altogether, firms can avoid the market and hedging bets on how high carbon prices will go.”

Sustainable Capital Plc’s ESG specialist Kevin Haines added: “The UK leaving the EU’s ETS system could have been seen as a negative, but the establishment of the British ETS is not only key to ensuring that the country remains on track to achieve net-zero, but also a unique chance to capitalise on the shift towards global sustainability and ensure that the City becomes a global emissions trading hub.

“With that being said, the ETS alone is not a substitute for real, proactive action to cut emissions. We must invest in companies that are making real impact towards a greener future.”

The Energy and Climate Intelligence Unit’s (ECIU) head of analysis Dr Jonathan Marshall said: “The first UK emissions auction clearing close to EU prices will bring a sigh of relief for industry and for policy makers. A smaller market and uncertainty about interventions to curb price spikes brought pre-auction worry that the permit prices would soar above those on the mainland and be volatile – potentially damaging the efficacy of carbon trading as a means of cutting carbon.

“Clearing this first hurdle means attention can be turned to the future, taking decisive action to end free permits that undermine the whole purpose of carbon pricing, setting a net-zero-aligned trajectory and thoroughly assessing a link with the EU scheme. The Government has made it clear that it wants carbon pricing to be part of the journey to net-zero, this is the opportunity to make that happen.”

The changing face of carbon trading

Carbon pricing schemes have been deployed in 46 national and international jurisdictions to date and it is estimated that the total value of these mechanisms is some $359bn.

The EU’s ETS is the largest by far, in terms of its volume cap (1.4 gigatonnes) and in terms of value. The UK’s ETS is the fourth largest in terms of volume cap at present, behind South Korea and California as well as the UK. Indeed, the UK Government had faced a legal challenge over its cap being higher than business-as-usual levels in 2020. 

Some experts believe that the UK ETS could quickly become the second most valuable, as its trading prices are already more than double Korean and Californian levels and could rise again.

ETS schemes and carbon pricing mechanisms are only set to become more popular and robust globally in the coming months, as more and more nations are setting enhances climate targets. US President Joe Bidens’ recent Earth Day Summit saw the US commit to halve emissions by 2030, as Japan and Canada beefed up existing 2030 emissions goals.

For the UK, the launch of the ETS comes shortly after the Committee on Climate Change’s (CCC) advice on the Sixth Carbon Budget was adopted. This binds the UK to reducing net emissions by 78% by 2035, against a 1990 baseline.

A key question that remains to be answered is whether – and how – the UK and EU will develop and deliver a link between their two ETSs, enabling bi-directional trading. Several major corporates and trade bodies are urging for the process to be accelerated, to address fears over competitiveness issues.  The post-Brexit UK-EU trade deal states that a link will be considered.

Sarah George

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