02 Aug 2023 | 12:15 UTC

UK carbon prices plunge to record-lows as demand dries up

Highlights

UKAs trading at a discounts of almost $40/mt to EUAs

Doubts over UK government's climate reforms

Bearishness due to weak manufacturing, low power generation

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Prices for UK carbon permits are mired in a downward spiral, dragged down by meager demand, along with concerns over the government's climate commitments

UK Allowances for December 2023 contract were trading at GBP40.50/mtCO2e ($51.50/mtCO2e) at 1600 BST on Aug. 2, having hit an all-time low of GBP40.20/mtCO2e earlier in the afternoon..

The UK ETS, operational since January 2021, is currently in its first phase, set to run until 2030. It regulates CO2 emissions from power generation, emissions-intensive heavy industries and aviation -- a similar sectoral scope to the EU ETS.

Platts assessed UKAs at GBP42.14/mtCO2e (Eur51.90/mtCO2e) on Aug. 1, the lowest price since July 2021, when S&P Global Commodity Insights, started assessing these values.

Demand gloom

This price slump comes amid doubts about whether the UK ETS is being reformed(opens in a new tab) at the pace and scale needed.

Demand for UKAs is also in the doldrums due to a combination of factors ranging from low industrial buying interest, feeble power generation, the growing share of renewables in the power mix, and weak manufacturing data.

The reduction in industrial energy demand has also led to a decline in UK greenhouse gas emissions(opens in a new tab), which has been denting buying interest for UKAs.

This has also opened up a strong disconnect with carbon permits under the EU ETS, which are not far from being double the price of UKAs.

EU Allowances for December were trading at Eur83.12/mtCO2e ($90.96/mtCO2e) at 1600 BST, ICE data showed, a premium of almost $40/mt over UKAs.

UKAs received a marginal boost in early-July after the UK ETS authority said it would tighten allowances(opens in a new tab) in 2024, setting the industry cap at 40% of the overall cap from 37% so that it can continue to provide free allowances to those sectors at most risk of carbon leakage.

This initially pushed UK carbon prices up(opens in a new tab) by almost 10% but they have been on a sharp decline since, with analysts saying the reforms were not bold enough.

Climate policy doubts

The UK has set a target to reduce emissions by 78% by 2035 compared with 1990 levels, before reaching net zero by 2050, under its Paris Climate Agreement Nationally Determined Contribution.

But the government's climate strategy is being question by many think tanks, analysts and industry insiders,

The UK needs to nearly quadruple the rate of non-power sector emissions reductions if it is to meet its 2030 goal of at least a 68% fall in greenhouse gas emissions from 1990 levels, the influential Climate Change Committee said in a recent report.

On July 31, the UK government said it plans to grant "hundreds" of new oil and gas licenses as part of efforts to boost energy security in the wake of Russia's invasion of Ukraine.

The government said its commitment to undertake future licensing rounds in the North Sea would continue to be subject to a climate compatibility test, noting that the commitment to issue more licenses is supported by new research showing that domestically produced gas is on average almost four times cleaner than importing gas in LNG form.