Sept. 23, 2022 — Analysis by Mathew Carr

UK carbon allownces dropped near their lowest for six months as the British government unveiled a package of measures that effectively subsidize fossil fuels by shielding consumers from their high price.

The government is effectively undercutting its markets.

UK carbon dioxide futures for December fell another 2% to £74 a metric ton, as the package of measures, labelled a mini budget, was unveiled.

The government is offering households and businesses a price guarantee. It’s using the taxpayers’ balance sheet to bear the high cost of natural gas in the markets.

While it’s understandable to some extent that the government is helping consumers, the policy choice — and that’s what it is — seems to go against free markets and puts taxpayers at great risk.

On the other hand, carbon pricing offers taxpayers an additional revenue stream.

The British government decision will effectively boost demand for fossil fuels by lowering their cost to the end consumer and so it slows the climate transition. There still should be some demand destruction for fossil fuels because prices are much higher than at the beginning of the year – before Russia’s invasion of Ukraine.

Now, a boost in the use of fossil fuels should, in theory, make carbon prices rise.

But household natgas use isn’t covered by the market. While utilities ARE in the market, buyers and sellers of the futures today appear to be focussed on how the government intervention is eroding Adam Smith’s free hand.

And the policy choice (versus a windfall profit tax on natgas sellers) makes it clear the government is willing to undercut its carbon market in urgent situations. It’s also suspending other green levies.

Together with the Bank of England, UK Treasury today provided a few further details of its £40 billion “Energy Markets Financing Scheme,” to address “extraordinary liquidity requirements faced by energy firms from high and volatile energy prices.”

The Energy Markets Financing Scheme will “improve resilience in energy markets, and the economy,” it said.

“To deliver the scheme, there will be a 100% guarantee to commercial banks covering additional lending extended to firms.”

CarrZee: this is a concern, as taxpayers may be on the hook for bad lending decisions.

The mechanism will open to applications on 17th October, providing “short term financial support and will be designed to be used as a last resort, with pricing and conditions reflecting this,” the government said. [hmmmm mysterious]

“The scheme will ensure that energy firms can continue to operate and manage risk in a cost-effective way in the face of unprecedented volatility. This helps to reduce the eventual cost that businesses and consumers face.” [But what about taxpayers?]

Bottom line? I’m reserving final judgement until I see further details.

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Full doc, unedited:

News story

Energy Markets Financing Scheme Update

An update providing further details on the Energy Markets Financing Scheme.From:HM TreasuryPublished23 September 2022

Together with the Bank of England, HMT is today providing further details of the £40 billion Energy Markets Financing Scheme, to address extraordinary liquidity requirements faced by energy firms from high and volatile energy prices.

The Energy Markets Financing Scheme will improve resilience in energy markets, and the economy. To deliver the scheme, there will be a 100% guarantee to commercial banks covering additional lending extended to firms. The scheme will open to applications on 17th October. The scheme will provide short term financial support and will be designed to be used as a last resort, with pricing and conditions reflecting this.

The scheme will ensure that energy firms can continue to operate and manage risk in a cost-effective way in the face of unprecedented volatility. This helps to reduce the eventual cost that businesses and consumers face.

The EMFS will only be available to firms who are able to meet eligibility requirements, for example that they are otherwise in sound financial health and make a material contribution to the liquidity of UK energy markets. Firms will need to undergo solvency checks.

HMT will convene an advisory committee as part of standing up a robust assessment process.

Further details will be published in due course. To register interest in the scheme, please email EMFS@bankofengland.co.uk.