The future of the UK Emissions Trading Scheme (UK ETS) hangs in the balance as the EU-UK summit gets underway today, with significant consequences anticipated for both UK Allowance (UKA) and EU Allowance (EUA) prices.
According to a report by environmental market risk management consultancy Redshaw Advisors Ltd, the potential linking of the UK and EU carbon markets could eliminate the current ~GBP11 discount on UKAs, bringing them to parity with EUAs. It warns this shift would have "substantial implications" for businesses currently exposed to the UK ETS and could also exert minor downward pressure on EUA prices.
"Such a price change will significantly impact costs," the report notes, but also highlights a potential benefit: price alignment could help insulate UK exporters from the EU's Carbon Border Adjustment Mechanism (CBAM), which takes effect next year.
However, if talks collapse and linkage is ruled out, the report warns of a sharp market reaction. "Investment Funds who have built long UKA positions on the expectation of linking will be forced [to] exit their positions," which could drive UKA prices down by as much as GBP15– reversing the 70 per cent price surge seen since January.
Redshaw Advisors conclude that the "strength of any linking statement that emerges will determine the movement in UKA price," with a wide range of outcomes still on the table.
