UK ETS debuts: summary of current status and thoughts about future development

Following its departure from the European Union on the 31st of December 2020, GB has set up its own ETS scheme (UK ETS) to replace the EU ETS which came into effect on 1 January 2021, with the first auction taking place on the 19th May.

We have published a short note summarising the results of the first auction, and the current status and thoughts about future development of the UK ETS.

Key takaways include:

  • The scheme largely mirrors the operation of the EU ETS, by introducing the supply of allowances via auctions which can subsequently be traded in a secondary market.
  • The inaugural auction issued 6 million allowances at a price of £43.99/tCO2. During the first two days, allowances traded between £45 – 50/tCO2, ~8% higher than the EU ETS price.
  • UK ETS prices are expected to continue to trade at similar levels for the next few months, following the same trajectory as the EU ETS. Aurora’s initial analysis suggests that the average upper boundary of prices for 2021 will be £45/tCO2, while the lower boundary will be £39/tCO2.
  • Due to the delay between the start of the scheme and the first auction, the market outlook for UK allowances remains tight, with demand for allowances far exceeding supply, and excess demand not expected to clear until November ‘21.
  • The aggregate supply of UK ETS allowances for 2021 is set closely to the UK’s old share of EU ETS allowances at 122 MtCO2e , however, with the UK emitting less than it’s allocated share since 2017, GB’s demand is set to only reach 110 MtCO2e, ~18% lower than total supply.
  • The number allowances are set to fall by 2.2% annually until 2030, which will tighten the market. However, if emissions in ETS sectors fall faster, the market could remain oversupplied for the reminder of the decade.

Aurora’s analysis suggests that given current trajectories, the market will remain oversupplied until 2030. However, with the Government already announcing that they will be conducting reviews into the scheme at the latest by 2023 to set it on a Net Zero trajectory, the market could tighten up much sooner or by 2025.
 
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