The European Union and the United Kingdom have agreed to work on merging their emissions trading systems (ETS) – the EU ETS and the UK ETS.
This was announced by European Commission President Ursula von der Leyen in her speech at a joint press conference with European Council President Antonio Costa and British Prime Minister Keir Starmer following the EU-UK Summit.
Why there is a need for unification
Brexit has led to the separation of about 10% of emissions from the EU ETS, Europe's main climate change instrument, which it covered. They became regulated under the UK ETS in early 2021. Despite being politically necessary, this has created additional complexity for businesses and introduced additional administrative tasks for those operating in both the UK and the EU.
To add to this complexity, both the bloc and the UK are currently implementing carbon-based import adjustment mechanisms (CBAMs). They are aimed at preventing carbon leakage by imposing additional duties on imports from countries with less stringent emission reduction policies. It is this shared ambition for CBAM that has reignited discussions around the reunification of the EU and UK ETSs.
What are the advantages and disadvantages noted by experts
The main advantage of combining the UK and EU ETSs is the expansion and increase of market liquidity, according to the British consulting company Redshaw Advisors. Analysts are confident that the merger of these schemes will significantly increase the trading pool and offer improved price stability, reduced volatility, and increased market efficiency.
For multinationals, the combined scheme will simplify compliance by reducing administrative costs and complexity associated with managing two separate trading systems, Redshaw Advisors said.
Despite the potential benefits, key differences between the UK and EU systems are a problem. In particular, the UK ETS lacks a Market Stability Reserve (MSR), an important component of the EU ETS that helps manage the oversupply of emission allowances.
Without such a tool, the UK ETS has accumulated an excess of allowances. This has led to consistently low prices for UK allowances (UKA). To solve this problem, the UK government is considering the introduction of a Supply Adjustment Mechanism (SAM), similar to the MSR.
According to analysts at Redshaw Advisors, consultations on SAM ended on March 11, 2024, and the market was eagerly awaiting the government's final decision.
What will change
For businesses, especially those currently subject to the UK ETS, the merger of the UK ETS and EU ETS will have significant consequences, experts say. It will bring UK allowance prices, which are currently sold at a €11 discount, to parity with EU allowance prices (EUAs) and may also put less downward pressure on EUAs.
Analysts say that such price changes will have a significant impact on costs. However, price parity will help protect UK exporters in sectors covered by the EU CBAM from the costs associated with its full implementation next year.
Furthermore, the agreement underscores the EU and the UK's shared commitment to achieving ambitious climate goals and actively tackling climate change. The agreement also demonstrates leadership on the international stage. It demonstrates the effectiveness and importance of emissions trading as a key tool in global efforts to mitigate climate change.
Earlier, EcoPolitic wrote about the recommendations given by experts to maintain the effectiveness of the EU emissions trading system.
We also reported that the European Parliament's Committee on the Environment, Climate Change and Food Safety approved the European Commission's proposal to simplify CBAM. Another potential innovation could be the introduction of standardized carbon prices for countries, sectors and commodities, which the European Commission is currently working on.
