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UK carbon trading to start with auctions, futures

Further guidance on participation and this year’s free carbon allowance allocation quotas released ahead of launch

13 May 2021

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The UK is poised to launch its own carbon market on 19 May with the first auction of carbon allowances and the listing of futures on ICE Futures Europe.

The move comes as the EU carbon price extended a record-breaking rally to jump above €55 a tonne for the first time on 12 May, making carbon one of the world’s hottest commodities.

The UK Emissions Trading Scheme, as the new carbon market is formally known, became legally effective on 1 January after the UK pulled out of the EU and severed its links with the EU Emission Trading Scheme, the world's oldest and most successful carbon market.

The UK ETS will function in a similar way, with a primary market based on auctions and a secondary market for futures on the allowances. 

With just days to go until the launch, the UK scheme has issued 39.1 million free carbon allowances this year to industrial companies, the Department for Business, Energy and Industrial Strategy (BEIS) said in an update on 11 May.

The BEIS has also this month updated its guidance on the eligibility criteria for those wishing to participate in the auctions for the UK ETS.

These include not only industrial companies located in the UK but also their parent companies and subsidiaries located outside the country. The eligibility criteria also include financial firms in the UK as well as foreign banking organizations and investment firms that have regulatory permission to access UK markets under the Part 4A FSMA regime. All auction participants will need to register with ICE.

ICE was appointed to host emissions auctions on behalf of BEIS following the government's decision to set up a domestic ETS. ICE had previously hosted auctions of UK-issued allowances under the EU ETS.

The first auction of UK emission allowances will be held on the ICE platform on Wednesday and will continue to take place on alternate Wednesdays until the final sale of the year on 15 December. The bidding window for the auctions will be 12.00-14.00 UK time.

The UK ETS will have a transitional Auction Reserve Price of £22, which establishes a minimum price for which allowances can be sold at auctions.

In addition, ICE is launching UK Allowance (UKA) Futures contracts on 19 May, to coincide with the launch of the first auction, with UKA Daily Futures following on 21 May. The futures contracts will clear at ICE Clear Europe alongside ICE’s other environmental contracts, including European Union Allowances, California Carbon Allowances and California Carbon Offsets.

Gordon Bennett, managing director of utility markets at ICE, said the UK ETS will be pivotal in supporting the climate ambitions of the UK.

“Reliable and liquid carbon and energy benchmarks are critical for markets to deliver an efficient transition from high to low carbon energy generation and carbon cap-and-trade programs have proved to be an incredibly successful policy tool in abating emissions,” he said.

While the UK ETS closely follows the EU ETS, it is a standalone scheme, established by the Greenhouse Gas Emissions Trading Scheme Order 2020. The scheme is intended to provide continuity with how the EU ETS works in regulating the carbon emissions of the UK’s most energy-intensive industries while helping the UK to achieve its target of net zero emissions by 2050.

As with the current EU ETS, the UK ETS provides a cap-and-trade market-based approach to incentivize the reduction of emissions from industrial activity. A cap is set on the greenhouse gases that businesses can emit via the total number of allowances in circulation, which will decrease over time. Businesses then buy and sell emissions allowances through the auctions or secondary markets managed by ICE.

The UK ETS will initially apply to energy-intensive industries, electricity generation and aviation. In a white paper, published in December, the BEIS says it is “committed to exploring expanding the UK ETS to the two-thirds of uncovered emissions”.

While the UK ETS commits to a similar approach to the EU ETS that most operators will be familiar with, it is still not clear if the UK ETS will in the future link with the EU ETS.

A coalition of more than 40 major industry associations from Europe and the UK, including FIA, recently urged leaders from both regions to link the systems before the COP26 United Nations climate summit in November.

The advantages of linking include greater liquidity, better price discovery and the ability to attract CO2 emissions abatement from across Europe rather than just in the UK, the associations said.

It would also create a level playing field in terms of carbon pricing, avoiding competitive distortions and leading to aligned cost implications for industry across the UK and Europe.

The EU and the UK have both stated they are formally committed to giving "serious" consideration to linking their respective systems as part of their trade and cooperation agreement.

Updated guidance on participating in the UK ETS, can be found here.

Full details of the UK Allowance auction, including the auction calendar, can be found here.

Registration Process
for the UK ETS

Auction participants must register with ICE, the appointed auction platform. Market participants interested in bidding in the auction should contact: sales-utilities@theice.com.

To trade UK allowances, participants will also need to register with the UK Emissions Trading Registry.

  • Once registered, traders can request to open a UK Registry trading account. Two authorised representatives must register from each company in the UK Registry to open a trading account.
  • Traders will subsequently have their application processed by the Registry administrator which will involve background personal and company checks.
  • Full guidance, including details of the documentation companies must provide to open an account, is available at: Participating in the UK Emissions Trading Scheme  
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