The price of carbon emission allowances in the UK is expected to go up amid expectations that the next government will take tougher action against big polluters, the Financial Times reports.
Since Prime Minister Rishi Sunak’s announcement of snap elections in May, the price of allowances on the UK carbon market has risen by 9%. Thus, as of June 7, 2024, the price has reached £47 per tonne of CO2, up from a low of £31 at the start of the year. This fluctuation was influenced by the Conservative government’s decision to increase the number of allowances for the next three years.
The most widely traded contract is the December contract, which allows the price to be set ahead of the deadline for quotas.
Expectations of a change of government have generated record trading volumes, speculating that the price of carbon in the UK will rise by the end of 2024. According to the Intercontinental Exchange, hedge funds and asset managers currently hold net long positions worth £300 million, the highest level since the scheme launched in 2021.
Labor has a lead of around 21 points over the Conservatives in opinion polls and is perceived as a greener government. Although they have not publicly declared their intention to intervene in the market, they have a long-term plan to turn Britain into a clean energy superpower. The decision on the UK ETS will be discussed with other MPs.
Another major factor contributing to the price increase in June is the expectation of a reduction in the number of allowances available in the second half of the decade. Lower wind speeds have also prompted some energy consumers to switch to gas, increasing demand for allowances.
Compared to the pan-European trading system, the price of carbon in the UK remains significantly lower, trading at a discount to the €71 per tonne (£60) price. This difference could lead to hundreds of millions of pounds in fees for UK exporters under CBAM, complicating trade deals with the Republic of Ireland, prompting industry groups to call for the two markets to merge.
The UK carbon market trades far fewer credits daily and is more volatile. Adam Berman, deputy director of Energy UK, described it as a sentiment-sensitive market.
The Institute for Energy Economics and Financial Analysis (IEEFA) forecasts that global revenues from carbon pricing schemes will continue to grow. They currently apply to a quarter of global emissions and have generated over $500 billion from polluters.