Plummeting prices in the UK’s carbon market have increased the likelihood that exports of steel will be slapped with additional CO2 levies to access the European Union market, unless London matches EU carbon policies.
Industries are bracing for the European Union’s carbon border levy, which from 2026 will impose fees on imports of emissions-heavy goods including steel, aluminium and cement – unless the exporting country has equal CO2 pricing policies.
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The UK, which has its own emissions trading scheme (ETS), had looked likely to meet that criteria. But changes made by the UK government earlier this year have seen the British CO2 price almost half since the beginning of April and UK allowances are now around 40% below the EU’s.
An ETS sets a cap on the amount of emissions that a sector, or group of sectors, can produce. It creates “carbon allowances” for those emissions, which companies can buy for each metric tonne of CO2 they emit.
“If the government doesn’t do anything…. 75% of our trade would be at risk of facing a financial trade barrier and administrative trade barrier when exporting to the EU,” said Frank Aaskov, energy and climate change policy manager at industry group UK Steel.
Britain exported more than 2.5 million tonnes of steel to Europe last year, UK Steel said. That trade would face the CO2 levy, unless Britain matched the EU’s carbon pricing policies or linked its carbon market to the bloc’s.
Energy Aspects analyst Benjamin Lee said linking the two carbon markets appeared unlikely in the short term.
“Post-Brexit politics make linkage tricky,” he said.
Without a market link, Energy Aspects expects UK carbon prices to trade below EU CO2 prices until the late 2020s – exposing UK firms to the EU’s border levy.
In 2026, when the EU carbon border levy will kick in, Energy Aspects expects the UK CO2 price to be around 55 pounds (63.71 euros), versus an expected EU CO2 price of 108 euros.
The EU’s carbon market charges domestic industries when they emit CO2. Its upcoming carbon border levy will slap an equivalent CO2 cost on imports, aiming to avoid EU industry being undercut by cheaper goods from countries with weaker green policies.
The UK launched its own carbon market in 2021 to replace the EU’s after it left the bloc. Prices in the UK scheme had been trading above those in the EU or around similar levels until the second quarter of the year when a large discount began to emerge.
UK prices fell as lower gas use in the power sector curbed permit demand and with the changes announced by the government signalling a boost to allowance supply.
A spokesperson for Britain’s Department for Energy Security and Net Zero said it has recently tightened the cap under its ETS and releasing the additional allowances would ensure there is no sudden drop in supply.
The UK government ran a public consultation earlier this year on policies to support British industries as they decarbonise, including a possible UK carbon border levy.
(1 euro = 0.8633 pounds)
Reporting By Susanna Twidale, Kate Abnett; Editing by Sharon Singleton