Since the UK government has refused a link between the UK Emissions Trading System (UK ETS) and the EU Emissions Trading System (EU ETS) after Brexit, British businesses are paying far more for their carbon dioxide production than their EU counterparts.
In the face of skyrocketing energy prices, the discrepancy puts UK industry at a huge competitive disadvantage compared to European competitors.
Companies in the UK pay more than £75 (90 euros) per tonne for carbon emissions, whilst equivalent firms in the EU pay up to 85 euros per tonne. The gap has dropped marginally in recent days, but it was around 8-9 euros per tonne of carbon in the previous month, equating to a premium of around 10% for UK businesses.
The UK launched its own emissions trading scheme in 2021 and held the first permit auctions in May. Compared with EU ETS, which has been in operation since 2005 and covers all the EU’s heavy industries, UK carbon market is substantially smaller and lacks the liquidity. The difference resulted in a higher carbon price in the UK.
In both systems, enterprises acquire tradable permits to offset the carbon dioxide they emit, with cleaner companies able to sell spares to laggards. The pricing serves as a financial incentive for businesses to clean up their operations and is seen as a cost-effective solution to assist accomplish the net-zero emissions goal.
A decision on whether the government will lower UK carbon prices is supposed to be made before 18 January, the deadline for the government to provide additional permits to the market, perhaps alleviating some of the pricing pressure. Experts, however, believe that tying to the EU market would be a superior long-term solution, both economically and environmentally.
“UK companies are paying substantially more than they are in the EU,” said Tom Lord, head of trading at Redshaw Advisors. The big problem for the UK market is liquidity, and the fact that it is new. The EU has a historic surplus [of permits] to fall back on, but the UK has pent-up demand and only a drip-feed of supply.
“This is a disadvantage [to UK companies], according to Lawson Steele, joint head of carbon and utilities research at Berenberg bank.” The reality is that the EU ETS dwarfs the UK carbon market. Given the UK’s desire to trade with the EU and the EU’s want to trade with the UK, it would seem reasonable for businesses to be on the same carbon footing.”
According to Joe Morris of UK Steel, which represents the steel industry, British companies are currently paying higher energy bills than their EU competitors, totaling around £35 per megawatt hour. “This has been a long-standing thorn in the side of the steel industry, and it continues to impede our international competitiveness,” he said.
He claimed that the lack of a post-Brexit deal with the US, which just cut tariffs on EU steel, as well as higher carbon and energy prices than the EU, had a deterrent effect on investment. “This has an impact on steel companies’ competitiveness, which is linked to investment in these businesses. It undermines the confidence of our members and does not benefit those who work in the industry.”
Morris reiterated that the steel industry is enthusiastic about the net zero plan and views it as a way to gain a competitive advantage. He stated, “There is a possibility to be world-leading in green steel and net zero steel.”
The administration has not stated why it has rejected a link with the EU system so far, but many believe it is related to the goal for a “clean break” Hard Brexit with as few regulatory ties as possible.
The Green Party and the Liberal Democrats have urged the government to link the UK ETS to the EU system. Because the UK system is based on the EU market, which the UK was a key part of and played a leadership role in designing and updating while a member of the EU, linking would be quite simple if the EU agreed.
“The UK needs bold climate measures,” Liberal Democrat leader Ed Davey said, “but they will always be better if we work together with international partners.” The Conservatives' unwillingness to do so is now wreaking havoc on British business at the worst conceivable time, as energy-intensive businesses grapple with sky-high gas prices.”
Following the financial crisis of 2008, the EU's carbon market experienced a surplus of permits and was mostly ineffective as the carbon price plummeted. Reforms and a renewed desire to reduce emissions have pushed costs up in recent years, and it is currently functioning as planned, boosting investment in low-carbon technologies.
Officials have no intentions to seek a link with the EU ETS but aren't completely ruling out the prospect. “The UK ETS Authority is considering whether to take any appropriate action under the cost containment mechanism [to release more permits on the market] and will announce its decision no later than 18 January to provide market certainty,” a spokesperson for the Department for Business, Energy and Industrial Strategy said.