Government considers intervention to slash carbon prices

Officials are concerned that prices have been so high for the past four months that they may need to make a call on whether to intervene and make changes by 18 January.

Companies covered by the UK Emissions Trading Scheme (ETS) must purchase one “allowance” per tonne of CO2 emitted. This is intended to disincentivise use of the most polluting fuels, such as coal, closing the cost gap between these fuels and lower-carbon and zero-carbon alternatives.

For the second time in two months, officials have triggered the “cost containment mechanism”, which occurs when the carbon price is consistently above expectations. Carbon prices have remained high in recent months for a variety of reasons, such as the spike in natural gas prices making it relatively cheaper to burn coal even when accounting for the adjusted cost, in turn pushing up demand for ETS allowances.

The mechanism was triggered in December, as the average price per ETS allowance in September, October and November exceeded the “trigger level” of £52.88. The UK government and devolved governments decided that, although prices were unexpectedly high, they would not intervene to lower them. At the time, the UK ETS Authority said: “This decision is based on the specific circumstances at the current time and does not prejudice future decisions.”

It said: “The Authority will continue to monitor the market closely. Should the [mechanism] be triggered again in the future, the Authority will consider the most appropriate course of action given the market context and will implement any intervention in a timely manner.”

After the UK withdrew from the EU - and thus from EU ETS - the UK government established its own ETS, which is by-and-large the same as the EU ETS albeit with a lower initial cap. This cap and trade came into force at the start of 2021.

The auction reserve price under the UK ETS is £22 per tonne, with a fine of £100 per tonne exceeded. The government has indicated that it could expand the ETS to cover direct air capture.

The UK ETS has remained around five to 10 per cent more expensive than its EU counterpart since coming into force. There are several potential reasons for this price difference. For instance, the lower number of participants in the UK carbon market means there are fewer sellers, potentially keeping prices artificially high. There is also some speculation that companies participating in the UK ETS may be trying to trigger a government intervention to push down the cost of ETS Allowances.