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UK carbon prices dive to multi-year lows, EU ETS disconnect widens


UKAs trading at a Eur22/mt discount to EUAs

Demand from power sector remains weak

UK could start to export power from Q3 2023

  • Author
  • Eklavya Gupte    Henry Edwardes-Evans
  • Editor
  • Daniel Lalor
  • Commodity
  • Agriculture Coal Electric Power Energy Transition Natural Gas Metals Petrochemicals

UK carbon prices have plummeted close to three-year lows amid fragile compliance demand and growing macroeconomic concerns.

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With polluters less likely to emit carbon dioxide in the UK than in the EU, a growing price disconnect between the two compliance markets has emerged.

UK carbon permits (UK Allowances) are now trading at a discount of around Eur22/mt ($23.5/mt) to EU Allowances under the EU Emissions Trading System.

The UK Emissions Trading System, operational since 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.

UK Allowances for December 2023 were trading at GBP50/mtCO2e ($61.79/mtCO2e) at 0943 GMT on May 31, compared to EUAs for December 2023 at Eur80.72/mtCO2e ($86.14/mtCO2e), ICE data showed.

UKA prices were assessed at GBP50.21/mtCO2e (Eur54/mtCO2E) on May 30, the lowest since Aug. 26, 2021, according to data from Platts, part of S&P Global Commodity Insights.

Meanwhile, Platts assessed EUAs at Eur80.47/mtCO2e on May 30, the lowest since Jan. 17.

Weak power demand

Analysts said UK carbon prices were falling in large part due to weak power demand, driven lower by declining manufacturing figures.

With the discount of UKAs to EUAs now below the structural premium in UK generator carbon costs, the trend could see UK power exports to Europe increase.

In addition to acquiring UKAs, UK power generators have to pay the Carbon Price Support, currently pegged at GBP18/mtCO2e, giving the sector a structural premium over EU generators.

"Although the UK carbon price is now below that of EUAs for power generation, the renewable strength in Europe and favorable weather conditions have really tempered any short term demand," said Michael Evans, lead carbon analyst at S&P Global.

"In many ways, it is almost the perfect bearish combination, with bearish pressure in the EUA market (amid rising supply expectations into July combined with weak short term compliance/investor demand), combining with falling power generation demand, and limited power export demand, despite favorable prices," he said.

Analysts at S&P Global expect the UK to switch to a net power exporter by the third quarter of 2023 or by October 2023, with UK natural gas prices trading at a discount to continental gas prices.

The EU carbon complex has also been beset by weak fundamentals, but the falls have not been as pronounced. Lower gas prices are resulting in more coal to gas switching and concerns over the EU economy are also limiting significant short term investor demand.

The UK energy mix has recently been dominated by renewables, with lower gas and coal burn figures.

Natural gas accounted for 34% of the British power mix for the three months to end-May, down from 40% for the same period last year, system data showed.

Coal has all but disappeared with the closure of units at Drax and West Burton A in recent months, leaving just Ratcliffe operating in England.

As such the remainder of the indigenous mix is non-fossil, with wind (24%) nuclear (14%) solar (6%) and biomass (5%) balanced by 10% of imports.


The UK government is currently carrying out a comprehensive evaluation of its ETS to understand the "effectiveness" of the scheme's implementation.

The UK has set a target to reduce emissions by 78% by 2035 compared with 1990 levels before reaching net zero by 2050.

Under current UK ETS rules, the industry cap sets an upper bound on the number of free allowances that can be issued each year. The free allocation volume is currently legislated for as a fixed number and does not automatically change with a revision to the overall cap.

Separately, the government recently opened a consultation to consider launching a carbon border tax in order to prevent carbon leakage.

The process should help the government develop proposals for its own carbon border adjustment mechanism (CBAM), applying a carbon tax on imported products.

This development comes a few months after the EU agreed its own CBAM, to apply fully from 2026.

Importers of power, iron and steel, cement, fertilizer, aluminum, hydrogen, some polymers and a few sub-products of iron and steel will be required to pay a carbon tax if carbon charges in their home markets do not match those in the EU.