–Hartree: U.K. carbon market seen tighter than the EU
By Mathew Carr
May 11, 2021 — LONDON: The U.K. has set a “cost containment price” in its carbon market that’s starting next week at a level that’s effectively about two fifths higher than the market price in Europe.
Britain was forced out of EU carbon market, the world’s biggest, this year because of its Brexit vote in 2016. It’s new market begins May 19.
“As of 10 May 2021, for the COST CONTAINMENT MECHANISM to be triggered, the average December 2021 futures contract price as traded on the ICE exchange, would need to remain above £46 for 3 consecutive months,” the U.K. government said last night on its website.
U.K. is seen favoring a tighter, wider carbon market than the EU, according to Hartree Partners, the energy solutions company (see link below).
“The UK is likely to favour more stringent measures for its own ETS and expand the comparatively narrow range of industries covered by it,” Hartree said in an emailed note.
This 46-quid figure is based on the rolling 2-year average carbon price present in the UK. Because Britain has an £18 a ton “floor support” policy, that makes the U.K. level the equivalent of about 74 euros a ton. EU carbon futures ended yesterday at about 52.22 euros a ton, after an impressive run higher since the beginning of the global pandemic.
EU carbon rose to another all-time high Tuesday:
HOW THE BRITISH CCM WORKS:
The cost containment mechanism will be triggered if the average price for one allowance on secondary futures markets is more than:
o During year one, an amount equal to two times the average price in the preceding two year period for three consecutive months;
o During year two, an amount equal to two and a half times the average price in the preceding two year period for three consecutive months; and
o During year three, an amount equal to three times the average price inthe preceding two year period for six consecutive months.
(SOURCE: https://www.legislation.gov.uk/ukdsi/2021/9780348220049/pdfs/ukdsiem_9780348220049_en.pdf )
The U.K. has also apparently reduced the volume of free allowances it will hand out this year (amid the global pandemic):
RELEVANT TEXT: The CCM is more responsive than its equivalent in the EU ETS, providing a powerful tool for the UK ETS Authority to intervene if prices are elevated for a sustained period. In 2021 and 2022, the CCM will be triggered if the average allowance price on the secondary futures market is double the average price for the preceding 2-year period, for 3 consecutive months.
The UK ETS Authority will update the UK ETS guidance page on a monthly basis with the price at which the CCM would be triggered. As of 10 May 2021, for the CCM to be triggered, the average December 2021 futures contract price as traded on the ICE exchange, would need to remain above £46 for 3 consecutive months. This figure is based on the rolling 2-year average carbon price present in the UK. The next update will be 10 June 2021.
If the CCM is triggered, the Authority will consider the most appropriate interventions given the market context and will implement them in a timely manner. The interventions the Authority may take in this instance are changing distribution of allowances to be auctioned within the year or increasing the number of allowances to be auctioned within the year by bringing forward allowances from future years, releasing allowances from the New Entrants’ Reserve or releasing allowances from the market stability mechanism account. As indicated above, the Authority may also consider additional interventions should the circumstances warrant further or earlier action.
(Updates with Hartree, with notes, adds tweet, links; COMMENTS MY WAY AT MATHEWNCARR@GMAIL.COM)
*The operation of the CCM is set out in the explanatory memorandum to the UK ETS auctioning regulations.
*The EU inserted a similar measure in its 2009 law:
- The following Article shall be inserted:
Measures in the event of excessive price fluctuations
- If, for more than six consecutive months, the allowance
price is more than three times the average price of allowances
during the two preceding years on the European carbon market, the Commission shall immediately convene a meeting of
the Committee established by Article 9 of Decision
- If the price evolution referred to in paragraph 1 does
not correspond to changing market fundamentals, one of the
following measures may be adopted, taking into account the
degree of price evolution:
(a) a measure which allows Member States to bring forward
the auctioning of a part of the quantity to be auctioned;
(b) a measure which allows Member States to auction up
to 25 % of the remaining allowances in the new entrants
Those measures shall be adopted in accordance with the
management procedure referred to in Article 23(4).
- Any measure shall take utmost account of the reports
submitted by the Commission to the European Parliament
and to the Council pursuant to Article 29, as well as any
other relevant information provided by Member States.
- The arrangements for the application of these provisions shall be laid down in the regulation referred to in
*Also note this 29a and the EU market stability reserve section:
- In any year, if paragraph 6 of this Article is not applicable and
measures are adopted under Article 29a of Directive 2003/87/EC, 100 million allowances shall be released from the reserve and added to the volume of allowances to be auctioned by the Member States under Article 10(2) of Directive 2003/87/EC. Where fewer than 100 million allowances are in the reserve, all allowances in the reserve shall be released under this paragraph.
*Hartree research: https://www.hartreesolutions.com/market-insights/carbon-in-uk-power-part-3-a-look-ahead-at-the-uks-first-ets-auction/?utm_campaign=Market%20Insights&utm_medium=email&hsmi=126504446&_hsenc=p2ANqtz-_0X6y2KmZpE9Zl9QRbIM19GVTuuYtHZ6b9X91H_t0l1uyc3eF_qBkeMXBn1LAGzjRdBeqCeE3htm-87lXMw97CwPDYQ&utm_content=126504446&utm_source=hs_email