The UK government announced on Jan. 18 that it will not intervene to curb costs under the UK Emissions Trading System, following a similar decision in December. The decision implies that the market will be left to operate without intervention in January, although future action may be taken if prices rise too quickly.
In October, November, and December, UK Allowance prices averaged above the January 2022 trigger level of £56.58/mt CO2e ($76.87/mt), prompting a meeting of the UK ETS Authority to consider taking measures in January.
The government published a statement after the market closed on Monday, saying, “Following the triggering of the UK ETS's Cost Containment Mechanism at the beginning of January, the UK ETS Authority has concluded that the appropriate course of action at this time is not to redistribute or release additional supply into the scheme's market.”
According to the government, “The decision is made in light of the current circumstances and has no bearing on future decisions. The UK ETS Authority will continue to keep a careful eye on the market.”
If prices increase above long-term averages for three consecutive months, the UK ETS rules allow allowances from future auctions to be brought forward. The guidelines, on the other hand, do not require such involvement and leave it to the government to judge if prices are justified by fundamentals.
On the ICE Futures Europe market, UK Allowance futures contracts for December 2022 delivery were quoted at £72.30/mt at the close Jan. 17, down from an all-time high of £80.97/mt on Dec. 16.
The government stated, “The UK ETS Authority appreciates the sensitivity of the issues under examination in the context of concern about energy prices and commitment to combat climate change. Ministers considered these problems and acknowledged that any final decision was finely balanced.”
The UK ETS Authority stated that it intends to continue releasing a continuous supply of allowances to the market until the 2021 compliance deadline of April 30, 2022.
It is expected that almost 81 million allowances would be auctioned in 2022, with little under 26 million being sold in fortnightly auctions before the end of April. It further stated that by February 28, 2022, a free allocation of roughly 38 million allowances for fixed installations and around 4 million for aircraft operators will be provided.
The government’s decision has, however, provoked concerns among certain companies. The Energy Intensive Users' Group, a group of heavy industries including steel and chemical manufacturers, slammed the government's decision not to interfere in the country's carbon market right away.
In a statement, EIUG chair Richard Leese said, “UK carbon costs have continuously been higher than those faced by our European competitors. This exacerbates the competitive disadvantage faced by UK enterprise as energy price continues to increase.”
“With the massive cost constraints that energy intensive industries are facing, it is mystifying that the government and the UK ETS Authority have refused to employ the tools readily at their disposal to remedy this issue, which is essentially related with an immature UK carbon market,” Leese added.
