The UK carbon price has nosedived to historic lows over recent months, dropping from a high of nearly £100 per tonne of CO2 to below £40 per tonne of CO2 just a year later.
Analysis by Energy UK has revealed that between April and the beginning of October this year, the UK ETS raised over £1bn less for the treasury than if prices had remained at 2022/23 levels.
If prices continue at their current low levels, lost revenue will total £3bn annually.
Meanwhile, British companies face paying over half a billion pounds per year from 2026 to EU coffers for exports due to the EU’s incoming Carbon Border Adjustment Mechanism (CBAM), if the carbon price is left unchecked.
However, linking the UK ETS to its European counterpart would exempt UK companies from the EU’s CBAM, removing the need for complex carbon declarations to be summitted, says the trade body.
Linking the two schemes would also send a stronger signal for clean investment in the UK, as weak and volatile carbon prices are having a detrimental effect on low carbon investment “at precisely the moment in which the UK’s investability is being called into question.”
The UK was one of the first countries to introduce an ETS in 2002, with the mechanism being a key driver of the UK’s reduction in carbon emissions since 1990 levels.
The ETS works by placing an overall cap on emissions and auctioning allowances to companies that produce emissions. Over time, the number of auctioned allowances is reduced, providing a market-based incentive to invest in low-carbon alternatives.
The UK reintroduced its own scheme in 2021 following its exit from Europe.
Energy UK said that in light of growing competition from other key markets such as the US, supply chain cost increases of up to 40% and disappointing results from recent renewables auction, unpredictable carbon prices send the “wrong signal” about the rapid expansion of low-carbon energy needed in the UK.
The introduction of the CBAM would be a further blow as it would see 100% homegrown clean energy forced to pay a 40% carbon tax to export to the EU.
Energy UK said that the “only solution which neatly solves both these problems is for the UK to link our ETS with the EU ETS”.
The UK has already committed to giving ‘serious consideration’ to linkage as part of the UK-EU trade Cooperation Agreement, but the trade body is urging the government to “press ahead” given the likely repercussions.
The two schemes are almost identical, meaning no two schemes should be easier to link, says Energy UK. ETS schemes have been linked before, such as between California and Quebec, and the EU and Switzerland.
Adam Berman, Energy UK’s deputy director, said: “The UK has led the way internationally on pricing polluting carbon emissions. But a falling and volatile domestic carbon price threatens to deter clean investment at the very moment we need it most and could end up costing British companies billions of pounds simply for trading with their largest export market.
“Linking our carbon pricing regime with the EU’s would exempt UK companies from these costs and remove the problems caused by the disparity between the two schemes. It would also stabilise and strengthen our carbon price, sending a powerful signal to bring forward investments in homegrown clean energy that can cut bills, reduce emissions, and bolster our energy security.
“We strongly believe that both sides would benefit from linkage, so we urge the government and the EU to get round the table before UK companies start paying the price.”