UK ETS value slumps amid concerns over Sunak’s green policy rollbacks

Pictured: Industrial cluster at Port Talbot

This is according to the ‘Carbon Market Year in Review 2023’ briefing published by the London Stock Exchange Group (LSEG).

In 2023, global carbon markets experienced fluctuations characterised by declining prices, driven in part by uncertainties surrounding governmental policies and economic conditions.

Despite this, the European Union Emissions Trading System (EU ETS) remained dominant, comprising approximately 87% of the global carbon market’s value, according to the report.

The trading activity within the UK ETS saw a considerable uptick of nearly 20% throughout the year. This surge brought the UK ETS to constitute approximately 4% of the total value of the global carbon market.

It bears noting that this increase occurred against a backdrop of falling prices, indicating sustained engagement from market participants.

Nevertheless, Prime Minister Rishi Sunak’s rollback on key net-zero policies last year as well as the decision to opt for a less ambitious agenda concerning ETS reform, impacted the carbon prices within the UK market in the latter part of the year.

The report notes that carbon prices within the UK market observed a pronounced downward trend following the Government’s announcement on 20 September 2023.

As a result, UK carbon allowances (UKAs) experienced a considerable depreciation relative to their EU counterparts, plummeting to discounts exceeding €25/t by the end of Q4.

This divergence in environmental policies between the UK and the EU has not only underscored the challenges of Brexit but has also raised concerns about the effectiveness and coherence of carbon trading initiatives.

CBAM concerns

LSEG suggests that the disparity in carbon prices between the UK and the EU could have far-reaching implications, especially for UK industries potentially subject to the EU’s Carbon Border Adjustment Mechanism (CBAM).

Last year, trade body Energy UK cautioned that the UK might face substantial tax liabilities when exporting to the EU upon the implementation of its new CBAM, partly due to fluctuating and inadequate carbon pricing.

The CBAM, which entered a reporting phase in January this year and is set to be fully operational by 2026, aims to impose taxes on imports of goods such as iron, steel, cement, electricity and hydrogen that do not meet the EU’s carbon standards.

According to LSEG, aligning the UK’s ETS with the EU’s ETS could yield higher and more consistent carbon prices.

Energy UK contends that if the UK’s carbon pricing remains ineffective, British exports may fail to meet the EU’s carbon standards, as companies will not be compelled to invest sufficiently or rapidly in decarbonisation efforts.

In 2023, the UK Government confirmed that it will issue its lowest-ever level of carbon allowances to energy-intensive industries this year, as it seeks to align its ETS with its 2050 net-zero target.