Amidst the backdrop of global carbon market fluctuations, the UK’s weakening of green policies under Prime Minister Rishi Sunak’s Government has raised concerns over carbon market stability, impacting industries and policymakers alike.
The UK’s decision to scale back its green policies comes at a crucial juncture when global efforts to combat climate change are intensifying. With the United Kingdom’s withdrawal from the European Union’s Emissions Trading System (EU ETS) and the establishment of its own UK Emissions Trading Scheme (UK ETS), the country had aimed to lead by example in setting ambitious emissions reduction targets and fostering a robust carbon market.
However, recent policy rollbacks, including reductions in subsidies for renewable energy and delays in implementing stricter regulations on emissions-intensive industries, have sent a signal of uncertainty to the market. This uncertainty has translated into a slump in the value of UK ETS carbon credits, reflecting investor concerns about the long-term viability of the market under the current policy trajectory.
The implications of this slump extend beyond financial markets, reverberating across industries that rely on carbon pricing mechanisms to drive decarbonization efforts. Industries ranging from energy to manufacturing are now grappling with the challenge of navigating a market that is increasingly volatile and subject to political whims.
Moreover, policymakers are facing mounting pressure to reassess the government’s stance on environmental regulations and take decisive action to restore confidence in the UK’s commitment to addressing climate change. Failure to do so not only risks undermining the effectiveness of carbon pricing mechanisms but also jeopardizes the UK’s credibility as a global leader in climate action.
In this context, the fate of the UK ETS serves as a bellwether for the broader challenges facing carbon markets worldwide. As governments around the world grapple with balancing economic interests with environmental imperatives, the need for stable and predictable carbon pricing mechanisms has never been more pressing. The UK’s experience underscores the importance of maintaining a clear and consistent policy framework to ensure the resilience and effectiveness of carbon markets in driving the transition to a low-carbon economy.
This is according to the ‘Carbon Market Year in Review 2023’ briefing published by the London Stock Exchange Group (LSEG).
In 2023, global carbon markets experienced fluctuations characterized by declining prices, driven in part by uncertainties surrounding governmental policies and economic conditions.
Despite this, the European Union Emissions Trading System (EU ETS) remained dominant, comprising approximately 87% of the global carbon market’s value, according to the report.
The trading activity within the UK ETS saw a considerable uptick of nearly 20% throughout the year. This surge brought the UK ETS to constitute approximately 4% of the total value of the global carbon market.
It bears noting that this increase occurred against a backdrop of falling prices, indicating sustained engagement from market participants.
Nevertheless, Prime Minister Rishi Sunak’s rollback on key net-zero policies last year as well as the decision to opt for a less ambitious agenda concerning ETS reform, impacted the carbon prices within the UK market in the latter part of the year.
The report notes that carbon prices within the UK market observed a pronounced downward trend following the Government’s announcement on 20 September 2023.
As a result, UK carbon allowances (UKAs) experienced a considerable depreciation relative to their EU counterparts, plummeting to discounts exceeding €25/t by the end of Q4.
This divergence in environmental policies between the UK and the EU has not only underscored the challenges of Brexit but has also raised concerns about the effectiveness and coherence of carbon trading initiatives.
CBAM concerns
LSEG suggests that the disparity in carbon prices between the UK and the EU could have far-reaching implications, especially for UK industries potentially subject to the EU’s Carbon Border Adjustment Mechanism (CBAM).
Last year, trade body Energy UK cautioned that the UK might face substantial tax liabilities when exporting to the EU upon the implementation of its new CBAM, partly due to fluctuating and inadequate carbon pricing.
The CBAM, which entered a reporting phase in January this year and is set to be fully operational by 2026, aims to impose taxes on imports of goods such as iron, steel, cement, electricity and hydrogen that do not meet the EU’s carbon standards.
According to LSEG, aligning the UK’s ETS with the EU’s ETS could yield higher and more consistent carbon prices.
Energy UK contends that if the UK’s carbon pricing remains ineffective, British exports may fail to meet the EU’s carbon standards, as companies will not be compelled to invest sufficiently or rapidly in decarbonisation efforts.
