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Carbon opens at 10% premium to EUAs on UK ETS

Published May 28, 2021

The price of UK allowances (UKAs) peaked nearly 10% above that of EUAs on the opening day of trading on the UK emissions trading system (ETS).

The UK carbon price reached £50 during the UK ETS’ initial trading, around £5 higher than for EUAs on the EU market.

The UK started its own market for trading permits to emit greenhouse gases after leaving the European Union at the beginning of 2021. The UK ETS is expected to link to the much larger EU ETS, allowing allowances to be traded between them, re-establishing a pan-European carbon price. Until that happens, prices on the UK market could remain higher and possibly more volatile than the EU’s.

“The first auction was highly oversubscribed,” said Jason Durden, Alfa Energy’s head of energy markets and risk management. “A slight surprise was that the UK was trading at a significant premium to EUAs. The UK price was around 10% above the EUAs, once you adjust the currency. It underpins the fact that the UK power market is a one-way bet.”

Durden believes the UK premium will remain, particularly in the short term, although this could improve if there’s a linkage between UK and EU systems. “In the short and medium term to December 21, it would be fair to understand there won’t be a link between the systems, and therefore there could be a UK premium. The one bright spot is, the UK market is less attractive to the investor speculator market, because it’s relatively small compared to the EU ETS. If the goal is to have them connected, then eventually they’ll move to parity.”

The exchange UKAs were priced at more than double the £22 auction reserve price set by the government. The initial auction price fell just short of the threshold the government has threatened to intervene at.

Tags Jason Durden UK ETS UKAs