In this analysis, Swan Energy’s Carbon & Energy Analyst, Joe Youldon, discusses possible future civil penalty prices where you exceed your opt-out target. He explores three key points: EUA Prices have risen sharply in the recent past, it is predicted EUA and UKA prices will rise further, and UK ETS Carbon Price trajectory may steepen compared to EU ETS.
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1. EUA Prices have risen sharply in the recent past.
Figure 1 (click here) shows the price of EU Allowances (EUAs) since the early days of the EU ETS.
It is evident that the price of carbon has risen drastically during the latter part of Phase III (2013-2020). The recent fall in prices has been attributed to the effects of Covid-19. It is believed that this is a temporary deviation and prices will continue to rise into Phase IV of EU ETS (Zero Carbon Commission, 2020).
It should however be noted that if Europe experiences a second Covid-19 wave, or enters a recession deeper than anticipated, this downward trend may hold further into the early years of Phase IV. Indeed some forecasts have been revised downwards in the last few weeks compared to figures given earlier in 2020. (Refinitiv Carbon Research, 2020; Berenberg, 2020). However, most forecasters agree that prices will continue to rise once the impacts of Covid-19 are reduced, with the squeeze being felt most tightly towards the end of Phase IV.
As Figure 2 (click here) shows, the Civil Penalty Price has increased in-line with EUAs. The UK Civil Penalty Price is calculated using the average EUA clearing price and the average Euro-Sterling Exchange rate in the November-November period of the previous year.
For example, the 2020 Carbon Price was calculated using the average December 2020 EUA price traded between 12 November 2018 and 11 November 2019 and the average Euro-Sterling Exchange rate of the Bank of England between 12 November 2018 and 11 November 2019 (BEIS, 2019).
2. It is predicted EUA and UKA prices will rise further.
The International Emissions Trading Association (IETA) have predicted the average price of EU carbon will be €32/tonne of CO2e through the 2020s (IETA, 2020; edie, 2020). At present, the UK is trying to negotiate a link between the UK ETS and EU ETS and if such a link is put in place, UK prices would effectively mirror EU prices.
Nevertheless, some believe that to meet the European Green Deal target of climate neutrality by 2050, EU carbon prices during the 2030s should be up around the €60/tonne mark (Lewis, 2018).
3. UK ETS Carbon Price trajectory may steepen compared to EU ETS.
Currently a stated aim of the UK ETS is to have 5% fewer allowances in the market than the UK’s current notional share of the EU ETS Cap (HM Government, 2020). It is also a stated aim that UK ETS policy will align by 2023 (if possible) with a 2050 net zero carbon trajectory. This indicates a more ambitious approach to reducing CO2 emissions than the rest of Europe.
Therefore, a standalone UK ETS with no links to Europe may have to have a more aggressive carbon pricing structure and overall higher prices than Europe. Additionally, according to the Zero Carbon Commission (2020), alignment with the zero-carbon trajectory will require a UK prices to hit £55/tonne by 2025.
Further to this, the UK ETS has a proposed Auction Reserve Price of £15 to ensure price continuity during the initial years of UK ETS (HM Government, 2020) and therefore it unlikely the Civil Penalty Price will drop lower than this level even if the UK market is initially volatile. The Carbon Price for the first year of the UK ETS (2021) will be calculated using the average UKA auction clearing price from 1st January to 11 November 2021. Consequently, a finalised price will not be known until late in 2021. In 2022, once the previous year’s prices for UKAs are available, the system will then revert to a similar method to the EU ETS as described above (with the obvious omission of conversion from Euro to Sterling).
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