Britain will start its own market for trading fossil fuel emission permits this week, but with no sign of a link to the European Union’s market, prices could end up being more volatile than the EU’s.
The UK emissions trading system (ETS), which charges power plants and other industrial entities for each tonne of carbon dioxide they emit, is part of Britain’s plan to reach net zero greenhouse gas emissions by 2050.
When Britain left Europe at the end of 2020, it also quit the EU’s carbon market. The two sides agreed in a post-Brexit trade deal to give “serious consideration” to linking their carbon markets, allowing permits to be traded between them to create one shared carbon price.
But with the British ETS about to launch, there is no sign of negotiations starting on a link – stoking fears among emitters that separate schemes could put British and EU firms on an uneven footing.
The German power producer RWE, which has ETS compliance obligations in both Britain and the EU, said a standalone British ETS would be less effective than the EU’s.
“The main issue is the additional risk posed by the less liquid market in the UK,” a spokeswoman said.
The large, liquid EU ETS enables firms to hedge their carbon exposure years in advance.
Mark Copley, CEO of the European Federation of Energy Traders, said linking the schemes would make it easier for firms to hedge their risk, adding, “The linking would bring back the ability for market participants to hedge UK power in a much more fungible market.”
Fears over competitiveness
With trading only just beginning in the UK system, some fear that companies will scramble to snap up the first permits available, limiting the supply on offer for hedging, and potentially leading to higher prices.
“Even with the recent high prices in the EU, it’s not unlikely they will be even higher in UK ETS,” said Frank Aaskov, energy and climate change policy manager at the industry group Steel UK. “That will make us more uncompetitive here in the UK.”
Eurogas Secretary General James Watson said his industry group anticipated “competitive distortions” between the EU and Britain if the schemes were not linked.
EU carbon prices last week soared to a record high of above €56 per tonne. The price of permits in the UK ETS is not yet known, since trading has not begun.
With Brussels policymakers now focusing on a huge overhaul of the bloc’s climate policies, due in July, and post-Brexit tensions continuing to flare, analysts said political appetite was lacking to establish a link to the British system quickly.
A spokeswoman for the British government said it was “considering a range of options on how the UK’s Emissions Trading Scheme can work best with other carbon markets”.
A European Commission representative pointed to the post-Brexit trade deal’s agreement to consider a link and said this would need to be negotiated.