UK Carbon Prices Plunge After Whitehall Offers More Allowances To Polluting Industries

The UK government is moving their environmental policies a little bit closer to common sense. 

Industrial companies now face less strict financial burdens for polluting after the government "watered down" reforms compared with those set by the EU, the Financial Times reported last week. 

The new reforms offer more allowances than expected to polluting industries, the report says. 

As a result of the changes in UK’s carbon trading scheme, carbon prices are trading at a steep discount compared with Europe. This has led to warnings that the reforms will "undermine" green investments and increase fossil fuel use. 

James Huckstepp, an analyst at BNP Paribas, told FT: “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.”

The UK Emissions Trading Scheme put a price on the emission of one ton of CO2, similar to a plan in place by the EU. Some companies, like electricity generators, get allowances to cover some of their necessary emissions. 

As time progresses, the allowances are cut, thereby incentivizing companies to pollute less - or be forced to pay up. But this year the UK government said it was handing out an additional 53.5 tons of extra allowances between 2024 and 2027. 

Since the announcement, UK carbon prices have been trading at a steep discount to European prices. UK carbon prices are £47 a ton, compared to €88.50 (£75.86) in the EU. Previously, the two prices had been near parity. 

Adam Berman, Energy UK deputy director of advocacy, commented: “A robust carbon price is critical to attracting investment in clean energy that can bring down prices, reduce emissions and bolster our energy security.”

“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,” he added, stating that the carbon market was the “cornerstone of the UK’s decarbonization strategy”.

“While there are short-term benefits to energy-intensive industries, the discount that has emerged versus the EU will make it much more challenging for the UK to meet its climate goals, from disincentivizing wind farms to encouraging power generators to burn more gas," Huckstepp at BNP concluded.