UK launches emissions trading scheme
The UK launched its emissions trading scheme (ETS) May 19 with an auction of allowances that cover power generation, industry, aviation and some other sectors. The country had until the end of last year been part of the European Union ETS, but with the expiry of the 11-month transition period it had the option of starting its own scheme or negotiating to rejoin the EU scheme.
Media reports say that the UK price was a little higher than the EU ETS price by the close of the market, trading at the equivalent of about $3/metric ton higher in US dollar terms.
Reuniting the two schemes would benefit liquidity, but the two markets now have different carbon emissions targets as the UK has lowered its cap by 5%. And the further both sides drift apart in terms of market design, the harder it will be to reunite them.
The UK government said: “Our UK ETS is more ambitious than the EU system it replaces and with today just the start of regular auctions, we are one step closer in our ambition to have the world’s first net-zero carbon cap and trade market.”
The government said the auction would help to "clean up our energy system, support businesses to decarbonise at the least cost and drive forward the green industrial revolution on our path to net zero by 2050. At every step of the way, we will protect the competitiveness of British industry and minimise risk of carbon leakage as we transition to a green economy."
In a note, UK consultancy Cornwall Insight said May 6: "The government also has tools in place to 'cap' carbon prices as well as creating floors. These tools include the Market Stability Mechanism and Cost Containment Mechanism to reduce volatility in the market."
The UK ETS has been designed to incentivise permanent emissions reductions whilst protecting the competitiveness of UK businesses and ensuring UK manufacturing and emissions do not move abroad. A major problem with taxing emissions is that countries become uncompetitive in sectors such as steel making and so have to buy back the finished goods, creating the so-called carbon leakage.