UKETS Authority may take action to contain costs, decision due after markets close on 18 January

For the second time the government is considering whether to take action to address rising carbon costs in the UK’s new carbon emissions trading scheme (UKETS). The UK ETS Authority will announce its decision after trading hours on 18 January.
The monthly average carbon prices in October, November and December 2021 were all above £56.58, the level that triggers a ‘Cost Containment Mechanism’ (CCM) for January.
Since Brexit, UK companies have participated in the UKETS instead of its EU counterpart. The cost of carbon emissions in the UKETS has risen sharply – it increased from a three-monthly average of £46/t in August to £60.98 in December.
That was above the trigger price for December, but on 14 December the UKETS Authority decided not to take any action. It said it had “confidence that this decision will uphold the objectives of the UK ETS as a market-based approach to reducing emissions and incentivising participants to find the most cost-effective solutions to decarbonise.”
Any intervention will be to “address sustained price movements that do not correspond to market fundamentals” and it can include:
• redistributing allowances between the current year’s auctions
• bringing allowances into auctions from the flexible share
• increasing the volume of allowances to be auctioned, which may be by bringing forward auctioned allowances from future years, drawing them from the market stability mechanism account, auctioning up to 25% of the allowances in the New Entrants Reserve, or auctioning allowances not allocated in previous years. If there is no agreement on action among the Authority members, the final decision is taken by HM Treasury.
In February the CCM is not expected to be triggered. The CCM was given lower price and time triggers in its first two years, “to ensure the intervention can be more agile in early years whilst the UK ETS matures”. The trigger price was twice the average price in a preceding two-year ‘reference period’ for three consecutive months.
Changed rules take effect in February – from then, and for the rest of 2022, the CCM trigger price will be 2.5 times the average price in the reference period.

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