The launch of the UK Emissions Trading System (UK ETS) has sparked significant interest and uncertainty in the market as the UK aims to achieve its climate neutrality goal by 2050. The UK has set a more ambitious emissions reduction target than the EU, with a goal of slashing emissions by 78% in 2030. However, the limited supply of UK allowances and the potential for pent-up demand create concerns about the pricing and stability of the nascent scheme.
High Demand and Pricing:
Experts predict that utilities and industrial polluters will show immense interest in acquiring UK allowances (UKAs) to comply with emission reduction targets. Prices are expected to be similar to those of EU permits, which are trading at around €56 per ton. However, due to the limited supply of UKAs, prices could potentially be higher than those in the EU's carbon market.
Supply Challenges and Cost Containment Mechanism:
Unlike the EU ETS, which has faced surplus permits, the UK ETS has a leaner supply, making it challenging for companies to hedge their future needs by purchasing allowances. The UK market's cost containment mechanism (CCM) can be triggered if allowance prices remain above £44.74 per ton for three consecutive months. The government has the authority to intervene and consider appropriate measures, but this raises concerns about the credibility of the scheme and its impact on climate efforts.
Impact on EU ETS and Potential Linkage:
The launch of the UK ETS could affect the EU ETS as British emitters who hedged their exposure may sell off their unneeded EU permits. While some experts believe this would have a limited impact on EU market prices, others caution that the transfer of permits to EU subsidiaries of UK utilities could influence the EU market. The possibility of linking the UK ETS with the EU ETS remains uncertain, as the EU is focusing on a major reform of its emissions trading system with the Fit for 55 packages. Political priorities and strained relations between Brussels and London may hinder the process of linkage between the two systems.
The launch of the UK ETS has generated significant interest and uncertainty in the market. The limited supply of UKAs, along with the potential for high demand and price volatility, raises concerns for businesses and operators. The UK government has the option to trigger the cost containment mechanism, but its usage and impact on the market remain uncertain. The long-term prospects of linking the UK ETS with the EU ETS are uncertain, with evolving climate targets and political dynamics playing a significant role in the process.
