Since global agreement of the Kyoto Protocol in 1997, Governments around the world have introduced ‘Cap and Trade’ emissions trading schemes as a key policy tool to reduce a country’s carbon emissions. A cap-and-trade system, sets a limit on the total emissions allowed within the scheme and then allows participants to buy and sell allowances as required through a carbon market.
The EU Emissions Trading Scheme (EU ETS)
The EU ETS is the largest international carbon trading scheme, covering more than 11,000 power stations and manufacturing plants. Since its inception in 2005, the EU ETS has seen many policy changes but now more than ever binds European industry to tougher emissions targets over the next decade at a time of rising EU Allowance (EUA) prices.
Phase 3 (2013-2020) saw several new policy measures introduced, such as a reduction in free allocations and the Market Stability Reserve (MSR) in 2019, which significantly reduced the allowance surplus created by the financial crisis during Phase 2 (2008-2012). As such EU Allowance (EUA) prices have risen 600% since the lows of €5 in 2017 to highs of €31 in 2020.
Phase 4 (2021-2030) will see a further reduction in the EU ETS cap (2.2% annual reduction), continued functioning of the MSR mechanism, more auctioning, tighter benchmarks and a reduction in free allocations to many industry sectors. These reforms combined with increased ambition expected under the EU 2030 Green Deal proposals are expected to support EUA prices over the next 10 years.
The EU Carbon Market
The EU carbon market is split into the benchmark ‘wholesale market’, dominated by forward trades of EUAs involving Energy, Large Industrial, Financial and Commodity Trading companies, and the compliance market where operators enter the market periodically to trade specific EU ETS compliance needs.
2020 has been another volatile year for EUA prices which have ranged from a post COVID low in March of EUR 14 per EUA to a high of EUR 31 in September. The market remains volatile and susceptible to sharp price swings but appears well supported by market participants, particularly investors who feel an increase in 2030 targets (40% to 55% vs 1990 baseline) under the EU Green Deal package will push the market higher.
Proposals for the UK Emissions Trading Scheme (UK ETS)
With the UK’s departure from the EU set for 31 Dec 2020, the UK Government consulted in May 2019 on the future of carbon pricing in the UK. A proposal released in June 2020 sets out the framework for design and operation of a UK Emissions Trading System (UK ETS).
The message from Government is that a UK ETS linked with the EU ETS is the preferred option but presents an ambitious timescale to be ready by 1 Jan 2021. The UK government also kept the possibility of a carbon tax as a contingency plan.
On 14th Dec 2020, as part of its Energy White Paper announcement, the UK Government confirmed it would be establishing a UK ETS from 1 Jan 2021. The basic rules for a UK ETS have been laid before parliament but we await final details on any link to the EU ETS as well as auctioning and free allocations of allowances.
The UK ETS proposals broadly follow the current EU ETS rules and applies to energy intensive industries, power generation and aviation. Phase I runs from 2021-2030 and the overall cap will initially be set 5% below the UK’s notional share of the EU ETS cap for Phase IV of the EU ETS.
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CF Partners’ award winning carbon trading and risk management team can help you understand the market and manage your ETS compliance objectives. We provide regular market updates to keep you up to date with policy and carbon prices and can help you develop an appropriate trading strategy to meet the requirements of your organisation.
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CF Partners provides clients with access to the full suite of carbon and compliance products, including:
- EU Allowances (EUAs)
- Aviation sector EU Allowances (EUAAs)
- Certified Emission Reductions (CERs) for exchange
We trade vanilla products, including Spot, Futures, Forwards within an EU and global client base. We also offer options and structured solutions to larger more sophisticated clients looking to purchase below market price, access elevated returns on existing assets, and seek value from varied solutions.
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Our social responsibility
CF Partners is strongly committed to continuously reducing its carbon footprint and taking responsibility for its impact on the environment by partnering with, supporting and advising for-profit and non-profit organisations.
Actions taken include:
- Ensuring all power and gas supplied by Brook Green and So Energy is 100% green.
- Our CDM Portfolio: We have invested in 34 renewable energy projects.
- Membership of the Institutional Investors Group on Climate Change; a forum for collaboration on climate change for European investors.
- Bikin Tiger Project: CF Partners has contributed to the conservation of the Amur Tiger through participation in the Bikin Tiger Project by advising and investing in a unique WWF and German Ministry of Environment carbon credit project to save half a million hectares of virgin forest in Russia
CF Partners provides clients with access to a range of commodities, covering the physical and financial supply of natural gas, power, emissions, crude oil, refined products, biodiesel petrochemicals markets, agriculture and green certificates.