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Energy Transition, Emissions, Carbon
May 20, 2025
HIGHLIGHTS
Prices rise 12% since alignment statements
UK-EU carbon price spread narrows further
Market participants remain cautious
UK carbon prices rose sharply May 20 after the UK and EU agreed to work toward linking their respective emission trading systems during talks in London the previous day.
UK Allowances for December 2025 were trading at GBP54.75 mtCO2e ($61.59/mtCO2e; Eur65.04/mtCO2e) at 12:07 BST, up 13.2% from May 16, before the linkage announcement, Intercontinental Exchange data showed.
Market participants welcomed the development as it would create mutual exemptions for the UK and the EU from their respective carbon border adjustment mechanisms. However, they said there were still questions regarding the timeline.
"One of the key motivations to link was to exempt the UK from the EU's CBAM," a carbon trader based in the UK said. "Overall, I think it is more or less along the broader market expectation; however, really anything can still happen over the next few years."
"[It] seems it will take at least until 2027 or so," the trader added.
No linking timeline was released by either UK or EU officials, with market participants pointing out this may lead to a downward price correction after traders readjust their expectations.
"[There's] nothing yet on timeline, [I] don't think they will bring it up in this conference," a carbon analyst said, adding that the lack of clarity surrounding timing may lead to "quite a lot of profit-taking and downward movement."
"UKAs should remain volatile, and the spread between the two will likely vary," the first trader added.
Meanwhile, a carbon broker said that he had expected larger price gains after the summit. "It rallied before the conference; people were thinking it was going to be a bigger arrangement. I thought they'd at least set a timeline, but they haven't even done that."
The spread between EU Allowances for the nearest December to their UKA counterparts has narrowed to Eur8.18/mtCO2e ($9.20/mtCO2e; GBP6.89/mtCO2e) May 19, tightening by 39.4%, or Eur5.32/mtCO2e, day over day. This was the narrowest spread so far this year.
This came as prices rose 8% day over day, the most significant daily gains since Jan. 28, when reports of linkage considerations started to emerge.
As a result of these expectations, investment funds have started to build larger positions in the UK carbon market, holding a total of 18.5 million UKAs in net long positions as of the week ended May 9.
Some traders expressed skepticism about the build-up in positions, pointing to otherwise bearish fundamentals for the UK ETS.
"Funds won't have deep enough pockets to support [UKA] prices," a second UK carbon trader added. "Due to the crescendo in the market, there's now an unwinding of those positions."
In 2023, the UK added additional allowances to the market to the tune of 53.5 million mt from reserve pots between 2024 and 2027. The additional supply led to a sharp price drop, with UKAs trading at a persistent discount to EU counterparts since.
"Fundamentals remain bearish, there is an oversupply of allowances until the end of 2025," the trader added.
Market participants will continue to follow auction results and the Commitment of Traders report to ascertain whether the UKA price rise is sustainable in the long term.
The previous UKA auction held on May 14 cleared at GBP47.44/mtCO2e, with 2.2 million UKAs added to the market. The next auction will take place May 28 on ICE Futures Europe.
The UK government's Carbon Border Adjustment Mechanism will come into effect in 2027, one year after the EU's CBAM. Similarly to the EU carbon tax, the UK fee will apply to emissions-intensive products, such as aluminum, cement, fertilizers, hydrogen, iron and steel.
"Overall, this is good news for UK companies; it is less of a burden as products produced in the UK would then be exempt from the EU CBAM," said Nicolas Endress, CEO and founder of CBAM software solutions company ClimEase.
With UK carbon prices trading at a discount to their EU counterparts, there was concern from market participants and businesses that UK companies will have to pay an added cost because of the price disconnect, as CBAM certificate prices are calculated accounting for average ETS prices.
"The UK CBAM can still be launched in 2027, even if the UK and EU ETS get linked before that. An example of how this could go is Switzerland, where its ETS has been linked with the EU's since 2020, and they have no intention to implement a Swiss CBAM, mostly to avoid trade conflicts with the US, even though consultations on avoiding a 'carbon leakage heaven' have started in 2021," Endress added.
"I assume the exemption would also happen if the linkage is still 'in progress' when CBAM comes into effect," a carbon trader said.
The EU's CBAM is currently in its transitional phase and will come into full effect in 2026, with mandated entities expected to start surrendering certificates that year. Until then, businesses must only report on emissions embedded in their imports without paying any added fees for the emissions-heavy goods.
Platts, part of S&P Global Commodity Insights, last assessed EUAs for December 2025 at Eur70.51/mtCO2e on May 19 and UKAs for the same month at GBP52.49/mtCO2e.