UK ETS needs more reforms to boost carbon price, urges Climate Change Committee

The UK government needs to take steps to strengthen the country's Emissions Trading Scheme, the influential Climate Change Committee said July 18, urging stronger linkages with the EU's compliance carbon market.

In a new report, the independent non-departmental public body called on the new Labour government to make "necessary changes" to the UK ETS to ensure that the carbon price is consistently above the per metric ton costs of decarbonization actions.

"This could include setting a higher carbon price floor within the scheme or building in linkages with the much larger EU ETS," it said.

UK Allowances, or UKAs, have languished over the past couple of years years amid a lack of policy initiatives by the previous Conservative government and bearish fundamentals, with reduced gas-for-power burn, a higher share of renewables in the country's energy mix and shaky manufacturing data.

Platts, part of S&P Global Commodity Insights, assessed UKAs at GBP40.94/mtCO2e ($53.16/mtCO2e) on July 17, a fall of around 10% since Prime Minister Keir Starmer formed a government.

In August 2022, UKAs were at a record-high of GBP95/mtCO2e but prices have fallen sharply since, sinking to a record low of GBP31.62/mtCO2e ($39.72/mtCO2e) on Jan. 29, dragged down by soft demand and concerns over the government's climate commitments.

The CCC report noted that UK carbon prices have been too low to drive decarbonization action.

"The average UK ETS auction price for January to May 2024 was GBP35.08/mt of CO2 emitted. This has fallen from GBP53.38/mt in 2023 and is substantially below the government's central carbon value of GBP268.97/mt of CO2 emitted," the CCC said in the report.

EU ETS linkage

Many in the energy and renewables sector have urged the government to link the UK ETS with the EU's cap-and-trade carbon pricing system.

Trade body Energy UK has repeatedly warned that "weak and volatile" carbon prices under the UK ETS were undermining investment in clean energy, and with the introduction of the EU's Carbon Border Adjustment Mechanism, UK companies could incur significant costs for trading with its largest export market.

If UK carbon prices remain at a sharp discount to EUAs, UK companies will have to pay a "hefty cost" on the price disconnect if they still want to keep exporting to the EU.

EU Allowances were assessed at Eu68.19/mtCO2e on July 17, data from Platts, part of S&P Global Commodity Insights, showed.

The UK recently launched a consultation as it mulls including greenhouse gas or carbon removals in its ETS.

The UK ETS Authority is also seeking input on the implementation of how waste incineration and energy from waste will be included in the scheme from 2026 for the Monitoring, Reporting and Verification (MRV) only period, with full cost exposure from 2028.

The UK has set a target to reduce emissions by 78% by 2035 compared with 1990 levels, before reaching net zero by 2050. UK greenhouse gas emissions fell 5.4% last year as gas demand for power generation fell sharply amid elevated energy prices.

The UK ETS, which became operational in 2021, is currently in its first phase, set to run until 2025. It regulates CO2 emissions from power generation, emissions-intensive heavy industries and aviation -- a similar sectoral scope to the EU ETS.