Latest reports show that British businesses are paying way more to produce carbon dioxide than their EU rivals following the government’s refusal to link the UK carbon market to the bigger European market after Brexit.
At a time of soaring energy prices, this difference is said to be putting UK industry at a significant competitive disadvantage to European rivals. It, however, does not result in any additional benefit to the environment.
UK companies are paying more than £75 (€90) a tonne for the carbon they emit, while similar industries in the EU are paying up to about €85 a tonne. The difference has narrowed slightly in recent days but was reaching about €8-9 a tonne of carbon in the past month, equating to a premium of about 10% being paid by UK companies.
Britain’s carbon price is higher because the UK carbon market which was set up last year with the first permit auctions taking place last May, is much smaller and lacks the liquidity of the larger EU emissions trading scheme (EU ETS) that has been operating since 2005 and covers all of the EU’s heavy industries.
Companies buy tradable permits to cover the carbon dioxide they produce, with cleaner companies able to sell spares to laggards, under both schemes. The price acts as an incentive to companies to clean up their operations and is seen as an economically efficient way to help meet the net zero emissions target.
Ministers have a short window in which to reduce UK carbon prices before 18 January, the deadline for the government to release extra permits onto the market, which could reduce some of the price pressure.
But experts said linking to the EU market would provide a better long-term answer and make economic and environmental sense.
Tom Lord, the head of trading at Redshaw Advisors, said: “UK companies are paying substantially more than they are in the EU. The big problem for the UK market is liquidity, and the fact that it is new. The EU has a historic surplus [of permits] to fall back on, but the UK has pent-up demand and only a drip-feed of supply.”
Lawson Steele, joint head of carbon and utility research at Berenberg bank, said: “This is a disadvantage [to UK companies]. The reality is that the UK carbon market is dwarfed by the EU ETS. Given that the UK wants to trade with the EU, and the EU wants to trade with the UK, it would make sense for companies to be on the same carbon footing.”
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Joe Morris of UK Steel, which represents the steel industry said that British companies already paid higher prices for energy than their EU counterparts, amounting to about £35 a megawatt-hour more.
He said “This is a long-running bugbear for the steel sector, and something that continues to hamper our international competitiveness, adding that the effect of both higher carbon prices and higher energy prices than the EU, as well as the lack of a post-Brexit deal with the US, which recently dropped its tariffs on EU steel, was to deter investment.
“This affects the competitiveness of steel companies, which links to investment in these companies” he further noted. “It affects our members’ confidence and does not help people who work in the sector.”
