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ICE to launch UK carbon allowance options contracts


New contracts to launch Oct 10, pending approval

Options aim to provide CO2 price risk management

Contracts relate to forward curve out to March 2024

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  • Frank Watson
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  • Alisdair Bowles
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Markets infrastructure provider Intercontinental Exchange is planning to launch options contracts linked to carbon emissions allowances under the UK Emissions Trading System, it said Aug. 25.

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The contracts -- which will launch Oct. 10 pending regulatory approval -- are aimed at allowing companies to manage and hedge their emissions exposure.

"The launch of UK Carbon Options follows the successful launch of the UK carbon market last year and should provide a meaningful new tool for our customers to manage carbon emissions price risk," said Gordon Bennett, managing director of utility markets at ICE.

"Environmental considerations are touching a much wider spectrum of companies who will need to manage emissions pricing in their business models as part of their net-zero commitments," he said in a statement.

The exchange expects to list UK Allowance Options out to March 2024, and the underlying contract will be the December UKA futures contract for the relevant year, it said. For example, the underlying contract for the March 2023 options will be the December 2023 UK Carbon Allowance futures contract.

Options contracts provide the right but not the obligation to buy or sell assets at pre-determined strike prices.

ICE launched UK carbon allowance futures in May 2021, alongside launching emissions auctions on behalf of the UK government as part of the country's emissions trading system which replaced its participation in the EU scheme after Brexit.

Roughly 775 million mt of CO2 equivalent gas have traded on ICE through the UKA contract since launch, while open interest has grown to the equivalent of about 47 million mt, it said.

Platts assessed UKAs for December 2022 delivery at GBP94.92/mtCO2e ($112.34/mt) at the close Aug. 25, down from an all-time high of GBP98.01/mtCO2e on Aug. 19.

UK carbon prices have rallied in 2022, following a bullish price trend in the wider EU carbon market as high natural gas prices triggered increased use of coal for electricity generation in Europe, raising CO2 emissions and demand for allowances.

Ongoing reforms to align the EU ETS with the bloc's revamped 2030 climate goals have also contributed to the gains.