UK ‘missed £1bn opportunity due to weak and volatile carbon prices’

Trade body Energy UK is warning that the UK could fact hefty tax bills for exporting to the EU once it implements its new Carbon Border Adjustment Mechanism (CBAM), partly due to weak and volatile carbon pricing.

UK ‘missed £1bn opportunity due to weak and volatile carbon prices’

Pictured: Aerial view of Port Talbot

The UK launched a new, post-Brexit Emissions Trading Scheme (ETS) in 2021 and, by January 2022, carbon prices had reached around £72 per tonne. This was, at the time, a record peak. It was exceeded in August 2022 when prices almost hit £100 per tonne.

Carbon prices under the UK ETS have been broadly declining since April 2023. The lowest prices seen this year were between £35 and £40.

According to Energy UK, the UK ETS raised around £1bn less between April and October 2023 than if prices had remained at the levels seen in the previous six months.

Graph which shows UK ETS Prices declining over time

The body believes that higher and more stable carbon prices could be delivered by linking the UK’s ETS with the EU’s ETS. This will be particularly crucial as the EU prepares to implement a new CBAM.

The CBAM will enter a reporting phase in January 2024 and be fully operational from 2026. It will levy taxes on imports such as iron, steel, cement, electricity and hydrogen not produced in alignment with the EU’s carbon standards.

If the UK’s carbon pricing remains weak, Energy UK’s line of argument goes, British exports will not comply with the EU’s carbon standards as companies will not be compelled to invest as rapidly or heavily in decarbonisation.

The UK has already said it will give “serious consideration” to linking its own ETS with the EU’s. Energy UK is calling on Ministers to focus more intently on the issue in the coming months.

It bears noting that Energy UK’s membership includes companies responsible for 80% of the UK’s power generation.

“We strongly believe that both sides would benefit from linkage, so we urge the Government and the EU to get round the table before UK companies start paying the price,” said Energy UK’s deputy director Adam Berman.

UK ETS changes

Earlier this month, the UK Government confirmed that it will issue its lowest-ever level of carbon allowances to energy-intensive industries in 2024, as it seeks to align its ETS with its 2050 net-zero target.

It has been confirmed that next year, 12.4% fewer carbon permits will be auctioned than in 2023.

By 2027, the annual allocation should be 45% lower than in 2023. There is then an even sharper decrease in permit allocations through to 2030.

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