UK government decides against intervening in domestic carbon market

The UK government will not be intervening to calm prices under the UK Emissions Trading System, it announced Jan. 18, prompting an immediate reaction from industries exposed to carbon prices.

The decision means the market will be allowed to function without intervention in January, although the option remains for future action if prices were to make excessive gains.

"Following the triggering of the UK ETS's Cost Containment Mechanism at the start of January, the UK ETS Authority has concluded that the appropriate course of action is not to redistribute or release additional supply into the scheme's market at this time," the government said in a statement after the markets closed.

UK Allowance prices averaged above the January 2022 trigger level of GBP56.58/mt CO2e ($76.87/mt) in October, November and December, triggering a meeting by the UK ETS Authority to consider taking action in January.

"The decision is based on the specific circumstances at the current time and does not prejudice future decisions. The UK ETS Authority will continue to monitor the market closely," the government said.

The rules of the UK ETS provide the option to bring forward supply of allowances from future auctions, as well as other measures, if prices move above long-term averages for three straight months. However, the rules do not obligate such intervention and give the government the discretion to decide whether prices are justified by fundamentals.

UK Allowance futures contracts for December 2022 delivery on the ICE Futures Europe exchange were quoted at GBP72.30/mt at the close Jan. 17, down from an all-time high of GBP80.97/mt on Dec. 16.

Decision 'finely balanced'

"The UK ETS Authority recognizes the sensitivity of the issues under consideration in the context of concern about energy prices and determination to tackle climate change," the government said.

"Ministers discussed these issues, acknowledging that any final decision was finely balanced," it said.

The announcement follows a similar decision not to intervene in December.

The UK ETS Authority plans to continue to release a steady supply of allowances to the market ahead of the 2021 compliance deadline of April 30, 2022, it said.

Around 81 million allowances will be auctioned in 2022, including just under 26 million through fortnightly auctions before the end of April, it said. In addition, free allocation of around 38 million allowances for stationary installations, and around 4 million for aircraft operators, will be issued by Feb. 28, 2022, it said.

The Energy Intensive Users' Group – a coalition of heavy industries including steel and chemicals producers -- immediately hit out at the government's decision not to intervene in the nation's carbon market.

"UK carbon prices have been consistently higher than those faced by our European competitors," said EIUG chair Richard Leese in a statement. "This adds to the competitive disadvantage for UK businesses, a situation which is compounded by the impacts of significant energy price rises.

"With the huge cumulative cost pressures facing EIIs [energy intensive industries], it is inexplicable that the government and the UK ETS Authority has failed to use the tools immediately at its disposal to address this issue, which is largely associated with an immature UK carbon market," Leese said.