Emissions trading scheme “unlikely” to diverge too much from EU regime, says Refinitiv Head of Carbon Research.
The UK government has announced its post-Brexit emissions trading scheme (ETS) will be launched in May, with its first auctions hosted by Intercontinental Exchange (ICE) on May 19. ICE also hosts the EU carbon trading platform.
UK utilities companies and other potential market participants have been awaiting details on the new scheme since the UK formally exited the EU on January 1 2021, continuing to buy allowances under the EU ETS scheme in the interim.
ICE said that 83 million UK allowances will be sold this year, with auctions taking place every two weeks. Auction volumes will be in line with the UK government’s pledge to cut allowances for polluting by 5% compared the EU ETS system.
“It was expected that the release of the auction calendar was coming up soon, and it’s good for markets participants to finally have a start date for auctions, futures and spot contracts confirmed,” said Hæge Fjellheim, Head of Carbon Research at Refinitiv.
“The more certainty around the regulatory framework the better. It means that market participants now know when they will have a price signal for the UK ETS.”
Fjellheim explained that UK utilities will be expected to sell their EU hedges, replacing them with UK emission allowances.
“The question remains of course whether it will trade at or just above the [EU] price floor (£22/t) or whether we’ll see prices at levels that EU allowances are currently trading at,” she told ESG Investor.
This follows the European Commission’s announcement that the EU ETS entered Phase IV beginning January this year, which will run from 2021 to 2030, and implement an annual decline of emission allowances of 2.2%. Previously, this rate of decline was limited to 1.74% per year.
Fjellheimn emphasised that the long-term goal is for the EU and UK to “link the two schemes over time”, making it “unlikely” they will diverge from one another. Nonetheless, the how remains complicated.
“There’s a lot of loose ends and confusion around how the EU ETS and UK ETS will interact in the future, but discussions around this are becoming more dynamic,” she added.
“UK emissions have fallen 41% since 1990, more than any other major developed country and this has been driven by the UK’s leadership in promoting market-based mechanisms to support climate goals. There is an enormous opportunity for cap-and-trade programs to take an even greater role in supporting the goals of the Paris Agreement, whether it is increasing their sector coverage or encouraging international linking,” said Gordon Bennett, Managing Director of Utility Markets at ICE.