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Germany, Essen | 11-13 February
Germany, Essen | 11-13 February
24 February 2025
CFP Energy
It's clear that the Department for Energy Security & Net Zero (DESNZ) still sees the UK ETS as the main tool to drive decarbonisation across high emitting sectors.
However, undertaking comprehensive reform of an active Emissions Trading Scheme presents not only a significant administrative challenge for Government, but also increases carbon price volatility in the secondary market.
Since the publication of the overarching “Developing the Emissions Trading Scheme Consultation” in July 2023, a stream of UK ETS related consultations has followed.
The consultations cover a wide array of topics, including the consideration of biomethane in ETS compliance, the integration of Greenhouse Gas Removals, and the inclusion of waste and maritime sectors within the ETS.
Additionally, four consultations are focused on the second Free Allocation window, which on 16 December 2024, the UK ETS Authority confirmed will be delayed by one year, now starting from 2027.
Simultaneously, a new consultation was launched: “UK Emissions Trading Scheme: Free Allocation Review - Carbon Leakage,” which seeks to harmonise free allocations and the concept of carbon leakage with the proposed UK Carbon Border Adjustment Mechanism (CBAM) from 2027.
The consultation closes on March 10, we have provided a short summary below.
One of the most keenly awaited responses is to the consultation on Future Markets Policy which closed on March 2024. This introduced the concept of a Supply Adjustment Mechanism (SAM)—a tool designed to manage the allowance supply in circulation, much like the MSR in the EU ETS , it could be used to reduce any oversupply within the UK ETS and have significant impact on the market.
Market confidence is being tested by the uncertainty surrounding implementation timelines. Key elements, such as free allocation changes and the SAM, could have a major impact on the future UKA price if introduced. The longer any response remains outstanding, the higher the UK carbon market’s blood pressure will remain.
The latest consultation on ‘Extending the UK ETS cap beyond 2030’ was the icing on the cake and has confused participants further as to why a consultation was really needed to ask the scene-setting question (see our summary below). Whilst it appears that this is merely a “tick box” exercise it has still led to speculation and rumour in the market.
Whilst a change of Government understandably leads to a different route on some policy, the UK ETS is one area that Labour were expected to strengthen, not weaken.
Fundamentally the current UK ETS policy has created a bearish outlook in the short term helped by high renewables and lower industrial output. This has created an oversupply of UK Allowances (UKAs) that is expected to remain until 2026 at least.
On this backdrop, UKA prices hit a new record low on 17th Jan 2025 and seemed content to drift along near record lows.
However, an article published on 28 Jan 2025 in the Financial Times about possible discussions on a UK-EU ETS link was jumped on by traders – pushing prices up 13% on the day and adding up to over 50% in the following 2 weeks.
Whilst the article was big on headlines and little on substance, it is a reminder a reminder of the sensitivity of the UKA carbon market to policy news and increasing speculator activity.
Some of the consultations are intrinsically linked, yet others ask for feedback on specific subjects which could have been resolved on their own.
This raises the question— when will there be clarity for operators who want to set out their decarbonisation goals and develop a strategy to manage future UK ETS compliance costs.
ETS operators face a significant challenge to keep up to date with policy, monitor allowance prices, develop a strategy to manage rising compliance costs and execute trades in an increasingly volatile carbon market.
If you don't know where to start or need support, contact us here.
On 12 February, 2025, the UK ETS Authority launched a consultation to gather stakeholder views on three key parameters that will shape the future of the UK ETS:
The third subject of this consultation explores the Authority’s minded-to position of allowing inter-phase banking of allowances, enabling allowances from Phase I to remain fully valid in Phase II.
The UK ETS Authority clearly seeks to support operators and investors with long-term certainty and reinforce the economic advantage of investing in clean technologies under the ‘polluter-pays-principle’ through the UK ETS.
The 3 objectives within this consultation are:
- Transparency on the long-term cap and ambition of the scheme
- Predictable emission trajectories within covered sectors
- Flexibility in scheme design to ensure it continues to function effectively
DESNZ has in 2023 already expressed its commitment to the UK ETS up until 2050 and beyond. This most recent consultation is therefore looking to explore how the road up to 2050 could be shaped under the UK ETS Authorities’ hat.
In an effort to harmonise the approach to free allocation with actual carbon leakage risk the Authority has proposed a number of options to the second free allocation period from 2027.
The current data underlying the allocation of free allowances was inherited from the EU ETS in 2021, so stakeholders are now being given the option to decide whether a new Carbon Leakage List representative of UK product trade intensity and domestic emissions intensity should be used instead.
The UK ETS Authority is considering cutting free allocations entirely for sectors not included on the Carbon Leakage List and focus resources on sectors most exposed to carbon leakage risks, as early as 2027.
For sectors covered by CBAM—including iron, steel, aluminium, cement, fertiliser, and hydrogen—the Authority is considering reducing free allocations through a phased implementation aligned with the CBAM's introduction.
Subject to consultation outcome a phase-out would scrap the free allocation by 2034 or 2036. Alternatively, free allocation to these sectors could be phased-down to a minimal amount to account for remaining risk on export markets.
The UK ETS is at a crossroads, and the direction it takes will have significant implications for operators and the UK’s decarbonisation ambitions. The decisions made through these consultations will impact market stability and the strategic choices businesses make regarding low-carbon investments.
Learn how to mitigate the compliance cost of the free allocation review and other policy evolution, here.
CFP Energy is pleased to announce the appointment of Ken Kawase as the new Head of Commercial. Ken brings over 14 years of extensive experience in the energy commodities sector.
CFP Energy is pleased to announce the appointment of Jarek Kozlowski as its new Chief Financial Officer (CFO).
Decarbonising the Future: ETS Reforms & Net Zero Solutions - The latest industry report from CFP Energy features the insights of John Booth as well as the results of a survey of data centres across the UK, France and Germany. Operators were questioned on their net zero progress and future outlook for decarbonising their operations.