The UK carbon price hit £50 as Britain’s post-Brexit emissions credit trading scheme debuted on Wednesday, suggesting big polluters will face higher costs than companies in the EU without government intervention.
The long-awaited start of trading in UK carbon allowances, which are designed by the government to put a cost per unit on CO2 emissions and to replace UK companies’ participation in the well-established EU carbon trading system, saw prices trade as high as £50.23 a tonne before falling slightly to £50 a tonne.
That price is almost £5 higher than the EU equivalent, which was trading at 52.40 euros a tonne (£45.25 a tonne) on Wednesday morning.
It is also well above the threshold of £44.74 that the UK government had set for intervention to cool prices should it trade above that level for more than a few weeks.
Ingvild Sorhus, lead analyst at Refinitiv Carbon Research, said that the early “high prices” showed confidence in UK carbon allowances as “an attractive asset”, but cautioned she expected “nervousness” from market participants given “there is so little supply”.
Even if UK prices begin above EU prices, “it will not necessarily stay like this going forward”, she added.
The initial number of futures trades on the Intercontinental Exchange-operated platform in London were relatively small, with only 26 contracts changing hands in the first 30 minutes.
The UK will hold its first auction of the allowances later on Wednesday, but participants in the market have warned that as a smaller market it could be more volatile than the EU equivalent.
Carbon prices have soared in recent months as governments have stepped up their targets for cutting emissions, with the EU Emissions Trading Scheme rallying from near €30 a tonne in December to €55 a tonne last week.
The sharp gains have complicated the launch of the UK’s own carbon scheme after it left the EU in December.
Under the so-called UK ETS, which is closely modelled on its European counterpart, big polluters like power plants and manufacturers are given a set allowance to cover their emissions of CO2 and other greenhouse gases. If they pollute above this level they need to buy more, or if they cut pollution they can sell them for profit.
Many companies, such as steel producers in the EU, have warned that the pace of carbon price increases in recent months has been too high, putting them at a competitive disadvantage against companies outside the scheme.
The EU is considering a carbon border tax that would make sure imported goods from countries without an equivalent carbon price would not put their own manufacturers at a disadvantage.
The EU ETS has played a substantial role in pushing coal off the electricity grid as prices have risen in recent years, as it makes lower carbon fuels and renewables more attractive.