/ The UK ETS Cost Containment Mechanism
The UK ETS Cost Containment Mechanism
24 Feb 2022
The UK Emissions Trading Scheme (UK ETS) is the carbon emission trading scheme of the United Kingdom.
Government decides not to intervene as UK Emissions Trading Scheme’s Cost Containment Mechanism is triggered again
As a result of Brexit and the UK leaving the European Union, the UK Emissions Trading Scheme (UK ETS) was launched on 1st January 2021 to replace the UK’s participation in the equivalent EU ETS. With the government absolutely focused on achieving carbon neutrality by 2050, the UK ETS has been seen as a critical element to reaching that target.
The scheme was designed to protect the competitiveness of businesses across the UK and, at the same time, increase the climate ambition of its carbon pricing policy; participants in the scheme include heavy industry, aviation and power generation companies. The scheme is based on a cap and trade system where a cap is placed on total allowable greenhouse gas emissions which is then translated to tradable allowances using a combination of auctions and free allocation. Companies participating are allowed to emit one tonne of carbon dioxide (CO₂) for purchasing one allowance.
Part of the scheme’s purpose was to make greener fuels and technologies more economical versus the continued use of ‘dirtier’ fossil fuels such as coal.
Click here to read a full guide about the UK ETS, how it impacts intensive energy users, and what businesses need to do if they were previously subject to the European Union Emissions Trading System.
The UK ETS Cost Containment Mechanism
An important component of the scheme is its Cost Containment Mechanism (CCM) which the UK government has referred to as ‘a powerful tool’. The CCM can be triggered when the cost of allowances over three consecutive months is more than twice the average price of the preceding two-year reference period.
It allows the UK ETS Authority to step in if prices stay inflated for a prolonged period. If the CCM is triggered, it’s up to the UK ETS Authority to decide what intervention it should take; if an agreement about what action to take can’t be reached, the HM Treasury can intervene and make a decision that’s based on three key factors relating to carbon allowances that includes:
- Redistribution between the current year's auctions
- Increasing the number to be auctioned
- Bringing into auction from the flexible share.
Increasing prices trigger the CCM for the first time in December 2021
In September 2021, there was a significant increase in the wholesale prices of gas and electricity; the result was an end of day settlement of more than £55 for one UK allowance. The rise was largely driven by increased demand for allowances as the inflated cost of natural gas forced power generation by coal.
Average prices throughout September, October and November 2021 remained high for these three consecutive months, with allowances staying above the £52.88 trigger level for December. Consequently, when the UK government’s Department for Business, Energy and Industrial Strategy (BEIS) updated its guidance on the scheme on 30 November 2021, the CCM was triggered for December.
However, in accordance with the process, the UK ETS Authority had two weeks to review evidence on the functioning of the UK market and decided not to intervene in the market.
Soaring UK ETS prices continue into January
Due to high monthly averages across October, November and December 2021 - exceeding January’s trigger price of £56.58 per tonne throughout – the cost containment mechanism has been triggered for a second successive month and the ETS Authority is again considering its options for intervention. As it did in December, the government has decided not to take any action.
UK ETS prices
A UK ETS Authority statement read: “The UK ETS Authority recognises the sensitivity of the issues under consideration in the context of concern about energy prices and determination to tackle climate change.
Ministers discussed these issues, acknowledging that any final decision was finely balanced. Following debate on these points the conclusion reached was that the UK ETS Authority should not intervene at this time, having also taken this approach following the December triggering of the CCM”.
Looking forward to the first few months of 2022, the average monthly price of allowances in November and December 2021 were lower than the CCM trigger prices for February and March this year, so the CCM for these months can’t be activated.
Impact of rising UK ETS prices on carbon-intensive industries
There is concern from industries that rely on high energy use for production and operation that the rising costs are putting UK companies at a competitive disadvantage. As a result, there is increased urgency for a positive response to pleas from industry for intervention measures to be initiated.
Those affected are claiming that the continued high energy prices and carbon prices are the causes of a widening gap between UK industry and competitors. These companies have suggested the second triggering of the CCM should be used as a signal to support UK heavy industry who they view as being at a competitive disadvantage compared to their European counterparts.
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