UK carbon allowances diverged from Europe across 2023

Following the introduction of the UK ETS mechanism in 2021, UK carbon certificates initially traded at a premium to the EU equivalent. However, across 2023, we saw a significant divergence from this historical pattern. UK ETS prices have collapsed across the year, falling to an all time low of around £ 40/ton.

In the summer of 2023, the government announced a tightening of the emissions cap to 931 million tons of CO2 equivalent between 2021 and 2030. In order to ‘soften the blow’ of this reduction in the cap, 53 million unallocated allowances will be released into the market between 2024 and 2027 and the level of free allocation of allowances available to industry will be increased from 37% to 40%. These measures have contributed to the collapse of UK carbon prices across 2023.

Carbon prices are likely to remain in the news across the next few months as the EU begins to introduce CBAM, with the UK potentially having to pay a climate levy to export products to the EU, if the combined UK carbon price falls below European benchmarks.