The first UK Emissions Trading Scheme (UK ETS) auction took place on 19 May with a clearing price of £43.99/t on the ICE UK Allowance (UKA) futures market – broadly in-line with the EU ETS carbon price on the day of €50.86/t (equivalent to ~£43.74/t).
Auctions will take place on the Intercontinental Exchange (ICE) every two weeks, with around 83M allowances (divided between the fortnightly auctions) predicted to be sold this year and auctions have a floor price of £22/tonne.
Separately the government has set out plans for how the supply of allowances under the scheme will work in the early years of the programme.
The UK ETS went live on 1 January 2021, replacing the UK’s participation in the EU Emissions Trading System (EU ETS). Both schemes work on the basis of a reducing cap with freely tradable allowances, and they currently cover the same industries. Allowances are obtained through either auctions or free allocations. The UK ETS currently uses the same benchmarks for free allocations as its European equivalent. However, the UK ETS aims to increase the ambition of the UK’s carbon pricing policy, while mitigating the risk of carbon leakage – where businesses transfer production to other countries with less stringent emission constraints – through provision of free allowances.
The policy paper, published on 12 May, provides further information on the functioning of the auctions and secondary market, free allocation and the market stability mechanisms that the ETS Authority has in place. The paper also notes the government’s commitment to reviewing and consulting on the allowance cap and setting a trajectory that is consistent with UK’s emissions reduction targets. This will be implemented “in 2023, or 2024 at the latest”, and the government will communicate the specifics of policy changes to market participants “well in advance of implementation”.
Michael Phelan, Chief Executive and Co-founder at GridBeyond said:
“The UK ETS will be pivotal in supporting the net-zero ambitions of the UK, and reliable and liquid markets are crucial to delivering a low carbon future. Carbon cap and trade programs have proved to be an incredibly successful policy tool in abating emissions, but the key to any of these is an accurate measuring of your site’s emissions.
“By consolidating your energy management and greenhouse gas reporting, you could identify not only areas for emissions reduction but where your assets could be optimised or bring revenue streams to your business.”
Does it impact my business?
Have your UK installations previously been subject to the EU Emissions Trading System (EU ETS)? If so from 1 January 2021 your UK-based omissions will be subject to the UK ETS.
Established through the Greenhouse Gas Emissions Trading Scheme Order 2020, the UK ETS currently covers the same industries as the EU ETS:
- the power generation industry
- the aviation sector
- other energy intensive industries.
The UK government has stated that it intends to expand the scope of the UK ETS to other sectors but further details have not yet been announced.