U.K. Polluters Face Higher Costs as Breakaway Carbon Market Goes Live

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    U.K. Polluters Face Higher Costs as Breakaway Carbon Market Goes Live

    LONDON—British polluters could face higher costs for emissions in the U.K.’s new post-Brexit carbon market, a key plank of the country’s efforts to reduce greenhouse-gas emissions.

    In the first-ever auction for U.K. emission allowances Wednesday, companies bought the maximum 6.052 million permits, each allowing them to emit one metric ton of carbon dioxide or an equivalent amount of other greenhouse gases. The auction was oversubscribed: Fifteen companies placed bids for more than 29 million permits. One of the bidders missed out.

    The auction cleared at £43.99 a metric ton, equivalent to about $62. That placed prices for U.K. allowances 1.5% higher than futures prices in the European Union’s carbon market, the world’s largest.

    The market went live at a time when prices in the EU’s carbon market—which the U.K. helped develop but quit after leaving the bloc—are soaring. Prices have risen 58% this year to €51.24, or about $63, and recently touched a record. High gas prices, coupled with an influx of money from investors betting the bloc’s efforts to combat climate change will tighten carbon supplies, have fueled the climb.

    As with existing carbon markets in the EU and California, Britain’s trading program will run on a cap-and-trade model. The government sets the overall emissions allowed from energy-intensive industries including power, steel and aviation.

    Companies buy and sell allowances, via periodic auctions and in the secondary market, to cover their emissions. The government’s aim is to place a price on planet-warming emissions, encouraging companies to decarbonize.

    The limit on overall emissions will fall slowly at first, but analysts expect the pace to pick up because the government has committed to net-zero emissions by 2050. That would crimp supplies and likely spell higher prices.

    Also Wednesday, futures for U.K. emission allowances changed hands at £45.75 a metric ton, or just under $65, in their trading debut on Intercontinental Exchange Inc.’s marketplace. Trading was thin: Just 491 contracts, for permits covering 491,000 metric tons of carbon dioxide, changed hands by 9:22 a.m. ET.

    The futures are a vehicle for emitters to hedge against swings in the price of carbon. They also give hedge funds and other investors a means of betting on the direction of prices as carbon markets are ballooning globally.

    The total value of traded permits grew nearly 20% to €229 billion in 2020, according to a January report by Refinitiv. The EU’s market accounted for almost 90% of trades by value.

    Carbon markets are ballooning globally. The total value of traded permits grew nearly 20% to €229 billion in 2020, according to a January report by Refinitiv. The EU’s market accounted for almost 90% of trades by value.

    China is in the process of launching a national emission-trading program. The U.S. oil industry’s top lobbying group, the American Petroleum Institute, endorsed setting carbon prices in March.

    Britain’s program will be scrutinized as a guide to how effective carbon markets are at encouraging industrial emitters, such as steel and cement makers, to invest in low-carbon technologies that are untested at large scales. These include harnessing hydrogen made with renewable sources of energy as source of heat, or capturing and storing carbon.

    The EU’s carbon market, set up in 2005, has worked to reduce emissions by prompting utilities to switch from coal to gas when generating electricity. This isn’t possible in the U.K. because coal accounted for just 1.6% of electricity generated in Britain last year, according to the National Grid.

    The inability of utilities to swap from coal to gas at speed when there is a rise in carbon prices is likely to lead to volatility in the U.K. market, said Phil MacDonald, an analyst at Ember, a think tank that aims to speed up the decarbonization of the power sector.

    The market could be particularly choppy in its opening months. Utilities are expected to snap up U.K. permits and sell down their holdings of European allowances, creating strong demand, said Trevor Sikorski, head of natural gas, coal and carbon research at Energy Aspects. Supplies will be tight because the U.K. government is releasing allowances into the market in auctions held every two weeks.

    “There is the potential that the market will be extremely volatile because essentially you’re drip-feeding in supply,” said Tom Lord, head of trading at Redshaw Advisors Ltd., which advises companies on emissions and trades allowances on their behalf.

    Write to Joe Wallace at Joe.Wallace@wsj.com

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    Published at Wed, 19 May 2021 15:49:00 +0000

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