The UK government’s recent changes to the carbon trading scheme have sparked controversy and raised questions about its commitment to combating climate change. By offering more allowances than expected to pollute industries, the government has made it cheaper for certain industries to emit carbon in the UK compared to the European Union (EU).
This move has led to carbon prices trading at a significant discount compared to the EU, resulting in warnings from industry experts that it could undermine green investments and encourage greater fossil fuel use.
“The changes to the carbon market have largely passed under the radar in the UK but will have the biggest impact of any policy on the UK’s emissions path,” said James Huckstepp, an analyst at BNP Paribas.
The UK Emissions Trading Scheme, launched in 2021 after Brexit, put a price on emitting a tonne of CO₂. Large industrial emitters and electricity generators receive allowances to cover some of their emissions, with the aim to be a gradual reduction in the overall allowance.
The recent reforms have altered the dynamics of the cap and trade system by increasing the number of allowances available, potentially reducing incentives for companies to cut emissions.
The UK government’s decision to offer 53.5 million tonnes of extra allowances to polluters between 2024 and 2027 along with excluding domestic shipping from the scheme until 2026, two years later than the EU, has raised concerns about the government’s commitment to climate action.
The most significant consequence of these changes has been a nearly 40% discount in the UK Emissions Trading Scheme compared to its EU counterpart, which is a departure from their previous near-parity trading. This discount has caused UK electricity prices to fall, potentially aiding investment but also raising doubts about the government’s efforts to reduce carbon emissions and promote renewable energy.
“A robust carbon price is critical to attracting investment in clean energy that can bring down prices, reduce emissions and bolster our energy security,” said Adam Berman, Energy UK deputy director of advocacy. “Swapping lower prices in the long run for a short period of low prices today is the definition of a penny-wise, pound-foolish approach. The carbon market is the “cornerstone of the UK’s decarbonisation strategy.”
While the Department of Energy and Climate Change defended the reforms as a means to ensure a smooth transition for market participants, concerns remain about the impact on the UK’s decarbonisation strategy. Experts warn that the discount in the carbon market could make it more challenging for the UK to meet its climate goals, hindering initiatives like wind farms and encouraging power generators to rely more on gas.
The situation has divided opinions within the industry, with UK Steel acknowledging that carbon prices in the UK remain historically high, while the Energy Intensive Users Group sees the drop in prices as a welcome outcome.
However, E3G, a climate consultancy, has raised the alarm about the UK potentially becoming less attractive for low-carbon industrial development, impacting the country’s competitiveness in the race to achieve net zero emissions.
Already, the impact of the changes on emissions is being observed in the power market, with UK utilities shifting towards burning more gas to generate electricity while reducing imports. This is in contrast to the typical imports from low-emission sources such as Norwegian hydropower or French nuclear power.
New oil and gas licences in the North Sea
Britain has also committed to granting hundreds of licences for North Sea oil and gas extraction as part of efforts to become more energy-independent, drawing criticism from environmental campaigners.
Prime Minister Rishi Sunak confirmed the plans for more than 100 such licences, which attracted bids earlier this year and said hundreds of future licenses could also be granted. He also announced fresh support for two carbon capture and storage (CCS) clusters in Scotland and northern England.
Britain has a target to reach net zero emissions by 2050 but Prime Minister Rishi Sunak said even by this date the country is expected to get more than a quarter of its energy from oil and gas.
He said new domestic fossil fuels would help to improve energy security and reduce reliance on states such as Russia. “We have all witnessed how (Russia’s President) Putin has manipulated and weaponised energy… Now more than ever, it’s vital that we bolster our energy security,” he said in a statement.
