UK carbon price drop raises risk of green levies on EU exports.

UK carbon price drop raises risk of green levies on EU exports.

The Impact of Plummeting Prices on the UK’s Carbon Market and the Threat to Steel Exports

Carbon Market

London/Brussels, August 3 (ANBLE) – Plummeting prices in the UK’s carbon market have increased the likelihood that exports of steel will be slapped with additional CO2 levies to access the European Union market, unless London matches EU carbon policies.

Industries are bracing for the European Union’s carbon border levy, which from 2026 will impose fees on imports of emissions-heavy goods including steel, aluminium, and cement – unless the exporting country has equal CO2 pricing policies.

The UK, which has its own emissions trading scheme (ETS), had looked likely to meet that criteria. But changes made by the UK government earlier this year have seen the British CO2 price almost halve since the beginning of April, and UK allowances are now around 40% below the EU’s.

The Basics of an ETS

An ETS sets a cap on the amount of emissions that a sector, or group of sectors, can produce. It creates “carbon allowances” for those emissions, which companies can buy for each metric tonne of CO2 they emit.

Implications for Steel Trade

“If the government doesn’t do anything… 75% of our trade would be at risk of facing a financial trade barrier and administrative trade barrier when exporting to the EU,” said Frank Aaskov, energy and climate change policy manager at industry group UK Steel.

Britain exported more than 2.5 million tonnes of steel to Europe last year, UK Steel said. That trade would face the CO2 levy unless Britain matched the EU’s carbon pricing policies or linked its carbon market to the bloc’s.

The Unlikelihood of Market Linkage

Energy Aspects analyst Benjamin Lee said linking the two carbon markets appeared unlikely. “Post-Brexit politics make linkage tricky,” he said. Without a market link, Energy Aspects expects UK carbon prices to trade below EU CO2 prices until the late 2020s – exposing UK firms to the EU’s border levy.

Future Price Predictions

In 2026, when the EU carbon border levy will kick in, Energy Aspects expects the UK CO2 price to be around £55 (€63.71), versus an expected EU CO2 price of €108.

The EU’s Approach to Carbon Pricing

The EU’s carbon market charges domestic industries when they emit CO2. Its upcoming carbon border levy will slap an equivalent CO2 cost on imports, aiming to avoid EU industry being undercut by cheaper goods from countries with weaker green policies.

Changes in the UK Carbon Market

The UK launched its own carbon market in 2021 to replace the EU’s after it left the bloc. Prices in the UK scheme had been trading above those in the EU or around similar levels until the second quarter of the year when a large discount began to emerge.

UK prices fell as lower gas use in the power sector curbed permit demand, and with the changes announced by the government signaling a boost to allowance supply.

A spokesperson for Britain’s Department for Energy Security and Net Zero said it has recently tightened the cap under its ETS, and releasing the additional allowances would ensure there is no sudden drop in supply.

Government Consultation on Decarbonization

The UK government ran a public consultation earlier this year on policies to support British industries as they decarbonize, including a possible UK carbon border levy.

(1 euro = 0.8633 pounds)

The plunge in carbon prices in the UK’s carbon market has raised concerns about the impact it may have on the steel industry’s ability to export to the European Union (EU). The EU is set to implement a carbon border levy by 2026, which will impose fees on imports of emissions-heavy goods like steel, aluminium, and cement, unless the exporting country has similar CO2 pricing policies to the EU.

The UK, having its own emissions trading scheme (ETS), initially seemed likely to meet the criteria to avoid the levy. However, changes made by the UK government earlier this year have caused the British CO2 price to nearly halve since April, with UK allowances now approximately 40% below those of the EU.

Industry experts warn that if the UK government fails to address the issue, steel exports could face financial and administrative trade barriers when exporting to the EU, potentially affecting 75% of trade between the two regions. To avoid the CO2 levy, the UK would need to align with the EU’s carbon pricing policies or establish a link between their respective carbon markets.

While linking the two carbon markets appears challenging, predominantly due to post-Brexit politics, Energy Aspects analysts predict that UK carbon prices will likely trade below EU prices until the late 2020s without market linkage. As a result, UK firms would be exposed to the EU’s carbon border levy, further impacting trade and competitiveness.

Looking ahead to 2026, Energy Aspects expects the UK CO2 price to be around £55 (€63.71), while the EU CO2 price is anticipated to reach €108. The EU’s carbon market charges domestic industries for CO2 emissions, and the forthcoming carbon border levy aims to prevent unfair competition from countries with weaker environmental policies.

Following the UK’s departure from the EU, the country launched its own carbon market in 2021, initially seeing prices trading above or at similar levels to the EU market. However, in the second quarter of this year, a significant discount emerged in the UK market. This decline in prices can be attributed to lower gas consumption in the power sector, which reduced permit demand, and changes made by the UK government to increase allowance supply.

In response to the concerns raised by the plummeting carbon prices, the UK’s Department for Energy Security and Net Zero has tightened the cap under its ETS. Additionally, the department plans to release additional allowances to avoid a sudden drop in supply.

To address the broader issue of decarbonization and support the UK’s industries, including steel, the government launched a public consultation earlier this year. One possible measure discussed in the consultation was the implementation of a UK carbon border levy.

Overall, the significant drop in carbon prices in the UK’s market poses a challenge for the steel industry and its exports to the EU. The potential impact of the EU’s carbon border levy highlights the need for the UK government to take action to either align carbon pricing policies or establish a market linkage to protect trade relationships and industry competitiveness. Failure to address these concerns could have long-term implications for the UK’s position in the European steel market.

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