On 4 December, the UK ETS authority published responses to two key consultations concerning the design of ETS: the future market policy and extending the UK ETS cap beyond 2030.
The highlights include:
- The UK will NOT implement a quantity-triggered Supply Adjustment Mechanism (SAM) for a standalone UK ETS, and will only keep the current market stability mechanisms, including inflation-proof Auction Reserve Price (ARP) and Cost Containment Mechanism (CCM)
- The UK ETS Phase II will run from 1 January 2031 to 31 December 2040, a phase length of 10 years. Banking from Phase I will be allowed.
ClearBlue’s take
The decision not to implement a SAM aligns with expectations and reflects ongoing linking negotiations with the EU, making it a logical policy move. ClearBlue has recently removed SAM assumptions from the main S&D scenarios, too, anticipating that the EU-UK ETS linkage will be finalized by 2028.
However, some participants may be disappointed, and this could cause a slight bearish shift in UKA prices in the short term - particularly as some profit-taking is expected by year's end. On 5 December, the UKA Dec-25 contract edged down 1% to GBP 56.33. On the other hand, certainty about the post-2030 scheme and optimism surrounding ETS linking are likely to help stabilize UKA prices. This is reflected in the Commitments of Traders data for UKAs, which demonstrates that investment funds continue to hold 21.06 Mt in net long positions.
ClearBlue Markets team recently released the UK ETS supply and demand forecast through 2030 with UKA price projections. Contact us for more information about this report.
Summary of the response to ‘the future market policy’ consultation
This response concluded the review of existing UK ETS policies and put forward final decisions, the major one being ‘Discount the implementation of a quantity-triggered Supply Adjustment Mechanism (SAM) for a standalone UK ETS’.
The Authority has concluded that both the ARP and CCM are effective for continued mitigation against demand shifts, and sudden, significant, and sustained price decreases and increases. It made decisions in the context of the stated intention to work towards linking the UK ETS to the EU ETS. The Authority has avoided the implementation of larger or more complex changes to allow for negotiations to take place.
Thus, the existing market stability mechanisms, CCM and ARP, will be maintained, and the authority will not make changes to the size or structure of the reserve at this moment in time:
- The Authority has decided to retain the ARP and maintain its real value, thus implementing an inflation-based increase since its introduction (i.e., from GBP 22 to GBP 28) in 2026 and increasing the value yearly by inflation from 2027.
- The CCM will be activated and release additional allowances into the market if, for six consecutive months, the average secondary-market futures price for one allowance exceeds three times the average price from the previous two years.
Summary of the response to ‘extending the UK ETS cap beyond 2030’ consultation
The authority confirmed its commitment to the UK ETS scheme and extending it beyond 2030. The Authority has decided to extend the UK ETS into a Phase II from 2031 onwards. The Phase II will run for 10 years, and banking of allowances from Phase I (2021-2030) to Phase II will be allowed.
As for the next steps, the Authority will seek to consult again on a specific trajectory for a Phase II cap as soon as possible, alongside or soon after publication of the delivery plan for the Carbon Budget 7 period. The proposed Phase II cap trajectory will need to be aligned with cross-economy decarbonisation plans across all four nations, and with UK carbon budgets and the net zero goal.
ClearBlue Markets will continue to closely monitor UK ETS developments and keep clients informed accordingly.