On 12 February, the London Stock Exchange Group (LSEG) published its ‘Carbon Market Year in Review 2023’. The report highlights a year’s worth of trends in the carbon market and what we might expect to see in 2024 as a result.
Roughly 12.5 billion metric tons of carbon permits were exchanged throughout 2023, which is similar to 2022. The major difference, the report says, is that high prices in markets such as Europe and North American increased the overall value. Looking at the UK Emissions Trading Scheme (UK ETS), its value fell by 22% to 36.4 billion euros, which is roughly 35% lower than its 2022 average.
For full definitions of the carbon-related terminology seen throughout this article, check out our Energy & Carbon Dictionary.
Understanding the UK Emissions Trading Scheme
The aim of the UK ETS (and, generally, emissions trading schemes around the world) is to incentivise high CO2 emitters to decarbonise by imposing a cost on carbon emissions. To comply with the UK ETS, businesses operating in energy intensive industries, power generation, and aviation sectors have a maximum amount of carbon emissions they cannot exceed.
These carbon emissions come at a cost, via auctions and trading within the carbon market, which aim to incentivise the transition to low carbon energy sources in CO2 intensive industry. Many other countries and regions also have an emissions trading system in place, such as the European Union.
For a deeper dive into the UK ETS, check out the Hub’s frequently asked questions.
What do fallen carbon prices mean for UK business?
Last year’s rollback of key net-zero policies by Prime Minister Rishi Sunak negatively impacted carbon prices within the UK market in the latter part of the year. Resulting in a negative downward trend, this means there is a considerable depreciation of UK carbon allowances (UKAs) relative to EU counterparts.
One of the major concerns for this impact is the EU’s Carbon Border Adjustment Mechanism (CBAM), which ensures that exporters of carbon-intensive goods must pay a tariff for their carbon emissions when exporting to the EU. This mechanism is important because it helps prevent EU industries from being undercut by cheaper, less environmentally friendly products from other countries.
Businesses in the UK exporting carbon intensive goods to the EU may face additional taxes on their exports if the UK’s carbon prices are lower than those in the EU. From 2026, exporters within the scope of new rules (including imports of steel, cement, iron, electricity and aluminium) will have to pay the difference in carbon pricing.
In the meantime, the first reporting period for the EU CBAM is open until 31 January 2024. This period is set to serve as a transitional period, where exporters to the EU only have to report the greenhouse gas emissions embedded in their exports.
The UK government is set to launch its own CABM in 2027, with the finer details subject to consultation.
The Energy Advice Hub will continue to keep you up to date on the EU and UK CBAMs, and what it means for businesses in scope.