UK-issued EU ETS allowance sales to resume next month

Auctions of UK-issued allowances under the EU emissions trading system (ETS) will resume on 4 March, while the country's supplies from 2019 and 2020 will be spread across sales held over the whole of this year.

Allocation of the UK's share of free allowances to industry will also resume this month, while the country will hold an auction of EU ETS aviation permits on 25 March.

Confirmation from the UK government and the EU brings to an end several months of uncertainty over the timescale for the return to market of UK supplies of carbon allowances under the EU ETS, the auctioning of which has been suspended since the end of 2018 owing to Brexit uncertainty.

Approval of the Brexit withdrawal agreement by the UK and European parliaments last month ensured that the country exited the bloc with a transition deal in place on 31 January, meaning that the UK's participation in the European carbon market has been extended until at least the end of this year.

UK emitters under the EU ETS will now be required to cover their output from 2019 and 2020 with allowances under the scheme.

But such parties will not receive full access to the supplies that should have been auctioned last year before the end-of-April compliance deadline for surrendering permits to cover 2019 emissions. These will be sold alongside this year's share of allowances, in auctions held throughout 2020.

This scenario had largely been expected by a majority of market participants , because of expectations that the EU would want to limit the potential negative price impact of their return. Market prices could have come under significant downward pressure if all of last year's allowances were brought to market in February-April.

And the UK government indicated that it agreed with this approach to distributing auction supplies.

"The UK proposes to commence auctions as soon as possible and intends to auction its 2019 and 2020 allowances throughout 2020," it said. "The UK is confident that this approach ensures that allowances are made available in an orderly manner over the coming months, as well as protecting the integrity of the EU ETS."

The EU's suspension of auctions of UK-issued allowances came after such permits were to be marked with a country code from 1 January 2019, meaning they could be identified and cancelled in the event of a "no deal" Brexit.

Demand for these allowances was, as a result, likely to be limited owing to the risk that emitters in the EU may not be able to use them for compliance. The EU consequently decided to suspend the sales to avoid any distortive impact of weak auctions on EU ETS market prices.

But the EU has confirmed following ratification of the withdrawal agreement that UK-issued allowances for 2019 and 2020 will not be issued with a country code.

A full calendar of auctions of UK-issued EU ETS allowances has not yet been released and will first require approval by the European Commission. It will be confirmed by the Intercontinental Exchange — the UK government's favoured auction host platform for its share of allowances — once approved.

By Jonathan Sims

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