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UK Carbon Market opens with mixed pricing signals

Having participated in the European Union Emissions Trading Scheme (EU ETS) prior to Brexit and during the transition period, the UK finally launched a standalone UK ETS on 19th May. The scheme, with details available here – Participating in the UK ETS – GOV.UK – operates on an auction basis as well as an exchange or futures market, operated by ICE (InterContinental Exchange), with further scheduled auctions starting on 2nd June 2021 – ICE publishes auction calendar for UK’s new Emissions Trading Scheme .

On the launch of the market there was an Auction Reserve Price (ARP) of £22 per tonne of carbon (tCO2e) and this will set an effective floor as future auctions take place. To put this in context this ARP is equivalent, at current exchange rates, to an EUETS price of €25.52/tCO2e, a level which the EU market breached as recently as October 2020, with the current price at around €51.50. The scheme plans to auction a total of 83 million allowances in 2021, with a cap of allowances for the UK set at 5% lower than the equivalent EU ETS level.

So what happened on Day 1? There were 15 bidders for a total of just over 6 million available allowances. 14 bidders were successful, and the cleared price was £43.99/ tCO2e which was broadly comparable to the €50.86 (£43.74) EU price. The exchange saw prices trading at between £45 and £50/ tCO2e although traded volumes were small compared to the auction. This may change as the market matures.

There is an ongoing consultation about the future levels of free allowances, which will be decided after a benchmark setting phase which will take place in June 2021. However with the price level set in this first auction and the current level of prices in the wider European markets it may be true to say that carbon prices will continue to be the driver for wholesale gas and power costs for the foreseeable future, particularly as the UK embarks on an aggressive decarbonisation plan to 2035.

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