The UK government has finally released the much-awaited 2021 auction calendar for UK Allowances (UKA) in the newly formed UK Emissions Trading Scheme (UK ETS). The UK ETS replaced the country's participation in the EU Emissions Trading Scheme (EU ETS) on January 1, 2021. The 2021 UK ETS cap of 156Mt is 5% lower than the UK's share of the Phase IV EU ETS cap, indicating a more ambitious approach.
Key Details of the Auction Calendar:
The auctions for UKAs will begin on May 19, 2021, and will continue Wednesdays every fortnight throughout the year. A total of 83 million UKAs will be offered in the auctions. The initial auctions between May and July will have over 6Mt on offer every two weeks, which will decrease to 2.6Mt per auction in August. Between September and December, the eight auctions will have 5.2Mt on offer. The start of auctions will also see the introduction of UKA spot and futures contracts on The ICE exchange.
The clarity for Businesses and Operators:
The release of the auction calendar aims to provide businesses and operators with clarity regarding this year's supply of emissions allowances. UK Energy Minister Anne-Marie Trevelyan believes that this clarity will help businesses plan, build back greener, and prepare for the transition to a low-carbon economy.
Liquidity Concerns and Price Spikes:
While the auction calendar brings relief to UK emitters, it does not address the liquidity concerns and risk of price spikes in the early stages of the UK ETS. The fortnightly sales may contribute to liquidity issues, and the market may experience a scarcity of supply for prolonged periods. The lack of front loading of auction volumes is expected to lead to oversubscription, and the auction floor price is unlikely to be challenged.
Impact on UK Emitters:
UK emitters may face higher carbon costs compared to their European counterparts due to liquidity concerns and potential price spikes. Although UKAs are expected to trade at a similar price to EUAs (currently trading at €38), UK emitters with forward hedges are likely to replace EUAs with UKAs, putting selling pressure on EUAs.
The release of the 2021 auction calendar provides clarity for businesses and operators regarding the supply of UKAs in the UK ETS. However, concerns remain regarding liquidity and price volatility in the nascent scheme. UK emitters face challenges in budgeting and hedging carbon costs, potentially impacting their competitiveness. The expert team at Redshaw Advisors offers support and guidance to clients in managing risks in environmental markets, and the Carbon Forward 2021 Conference provides further insights and analysis in this area.