Traders want linked UK ETS

A UK emissions trading system (ETS) should be closely linked to the EU ETS from January 2021. A standalone UK ETS or carbon emissions tax would bring adverse consequences for UK carbon and power markets, the European Federation of Energy Traders (Efet) said.

The UK government has indicated that it will introduce either a UK ETS — which it said could either be linked back to the EU ETS or function as a standalone mechanism — or a carbon tax to replace the country's participation in the EU ETS, which ends on 31 December.

But a standalone UK ETS would not deliver sufficient liquidity for the market, Efet said this week. And UK installations would have greater difficulty managing risks from a less liquid market in UK emissions allowances or predicting a carbon tax set annually. While for electricity, a standalone UK ETS or carbon tax would "inevitably" translate into lower power market liquidity and higher risk-management costs.

A linked UK ETS, on the other hand, would bring in government revenues that could be used to finance decarbonisation in the UK or support economic recovery, Efet said.

If the UK government were to opt for a carbon emissions tax from January 2021, it should link to average EU ETS allowance (EUA) forward prices, Efet said. And mirroring outturn prices in EU ETS auctions would also allow UK installations to more easily hedge risks on EUA futures and spot markets.

The traders federation "strongly" advises against a hybrid approach, proposed in the UK treasury's consultation on the tax, for a carbon tax with an unknown fixed premium and adjustment mechanism. This would make it harder to predict and manage carbon price risks, Efet said.

The International Emissions Trading Association warned this week that replacing UK membership of the EU ETS from 1 January 2021 with a carbon tax could put the country's climate targets at risk.

By Dafydd ab Iago