Some British companies are still purchasing permits from the EU carbon market as uncertainty surrounding the planned UK Emissions Trading System (ETS) means they cannot yet use it to protect themselves against future price rises. Utilities, which sell power years in advance, typically buy ETS permits to hedge the carbon price exposure of their future power generation.
While the UK launched its own domestic carbon market at the end of 2020, auctions for UK carbon permits have not yet begun, leaving British emitters without access to local permits. As a result, British firms are continuing to buy EU carbon allowances (EUAs) to hedge their future carbon price exposure. UK-based firms have until the end of April 2021 to comply with the EU ETS for 2020 by purchasing EUAs.
The EU and the UK have agreed to explore the possibility of linking their carbon markets, which would enable British companies to use EU permits to comply with the UK ETS. However, until that link is established, analysts warn that permit prices in the UK ETS could rise rapidly once trading begins.
The lack of available UK permits and the potential for price increases in the UK ETS have raised concerns among industrial sectors, such as steel companies, which will be covered by the UK ETS. The exact price of a UK ETS permit will be determined once trading starts, but analysts anticipate further increases in carbon prices following last year’s nearly 30% rise in EU carbon prices.
