Brexit move left UK companies to pay 10% more than their European competitors for emissions | Emissions trading
British companies pay significantly more to produce carbon dioxide than their EU rivals due to the government’s refusal to link the UK carbon market to the largest European market after Brexit.
The difference puts UK industry at a significant competitive disadvantage vis-Ã -vis its European competitors at a time of soaring energy prices, but brings no additional environmental benefits.
UK companies pay more than Â£ 75 (â¬ 90) per tonne for the carbon they emit, while similar industries in the EU pay up to around â¬ 85 per tonne. The difference has narrowed slightly in recent days, but reached around â¬ 8-9 a tonne of carbon last month, which equates to a premium of around 10% paid by UK companies.
The price of carbon in Britain is higher because the UK carbon market, set up last year with the first permit auctions which took place last May, is much smaller and lacking in liquidity from the most large EU Emissions Trading System (EU ETS) which has been in operation since 2005 and covers all heavy industries in the EU.
Under both programs, companies buy tradable permits to cover the carbon dioxide they produce, with cleaner companies able to sell spare parts to laggards. The award provides an incentive for companies to clean up their operations and is seen as an economically efficient way to help achieve the goal of net zero emissions.
Ministers have a short window to reduce UK carbon prices before the January 18 deadline for the government to release additional permits into the market, which could ease some of the price pressure. But experts said the link to the EU market would provide a better long-term response and make economic and environmental sense.
Tom Lord, Head of Trading at Redshaw Advisors, said: âUK companies pay a lot more than they pay in the EU. The big problem with the UK market is liquidity and the fact that it is new. The EU has a historic surplus [of permits] to fall back on, but the UK has pent-up demand and only drip supply. “
Lawson Steele, co-head of carbon and utilities research at Berenberg Bank, said: âIt’s a downside. [to UK companies]. The reality is that the UK carbon market is eclipsed by the EU ETS. Given that the UK wants to trade with the EU and the EU wants to trade with the UK, it would make sense for companies to be on the same carbon footing. “
British companies have already paid higher energy prices than their EU counterparts, amounting to around Â£ 35 per megawatt hour more, added Joe Morris of UK Steel, who represents the steel industry. âIt’s a long-standing scarecrow for the steel industry, and something that continues to hamper our international competitiveness,â he said.
The effect of higher than EU carbon and energy prices, as well as the lack of a post-Brexit deal with the United States, which recently lowered its steel tariffs from the ‘EU, have deterred investment, he said. âThis affects the competitiveness of steel companies, which is linked to investments in these companies. It affects the confidence of our members and does not help the people who work in the sector.
The steel companies were firmly behind the net zero strategy, Morris added, seeing the push for decarbonization as providing a competitive advantage. âThere is an opportunity to be the world leader in green steel and net zero steel,â he said.
Politicians tempted by high energy prices to dismantle net zero policies were wrong, added Steele de Berenberg. âBlaming the carbon price is nonsense. The increase in energy prices over the past year has been 85% due to the price of gas. Carbon is not the problem, âhe said.
The government has not explained why it has so far rejected a link to the EU system, but many suspect it is part of the drive for a ‘clean break’ of hard Brexit, maintaining the least. regulatory links possible.
The Liberal Democrats and the Green Party called on the government to tie the UK ETS to the EU system. If the EU agreed, the link could probably be done quite easily, as the UK system is modeled on the EU market, of which the UK was an integral part and played a leading role in the design and update as a member of the EU.
Liberal Democrat leader Ed Davey said: âThe UK needs ambitious climate policies, but they will always be better if we work with international partners. The Conservatives’ failure to do so is now hitting UK businesses at the worst possible time, as energy-hungry companies grapple with sky-high gas prices. “
Molly Scott Cato, of the Green Party, said: âIt is clearly irrational, inefficient and the result of the destructive Brexit ideology to try to run an independent UK carbon trading system with all its additional costs, its inevitable inconsistencies and its opportunities to play in the market. “
For years after the 2008 financial crisis, the EU’s carbon market suffered from a permit glut and was largely inefficient as the price of carbon plummeted. In recent years, however, reforms and the renewed need to cut emissions have driven prices up and it is now working as expected, spurring investment in low-carbon technologies.
The ministers do not intend to seek a link with the EU ETS, but apparently did not completely rule out this possibility. A spokesperson for the Department for Business, Energy and Industrial Strategy said: âThe UK authority ETS is considering taking appropriate action under the cost containment mechanism. [to release more permits on the market] and will announce its decision no later than January 18 to bring certainty to the market. “