Industrial companies in the UK now face less strict financial burdens for polluting after the government “watered down” reforms compared with those set by the EU, the Financial Times reported last week.
The new reforms offer more allowances than expected to polluting industries, says the report.
Because of the changes in the UK’s carbon trading scheme, carbon prices are trading at a steep discount compared to Europe. This has resulted in warnings that the reforms will “undermine” green investments and increase fossil fuel use.
James Huckstepp, an analyst at BNP Paribas, said: “The changes to the carbon market have largely passed under the radar in the UK but will have the biggest impact of any policy on the UK’s emissions path.”
The UK Emissions Trading Scheme put a price on the emission of one ton of CO2, similar to a plan created by the EU. Some companies, such as electricity generators, get allowances to cover some of their necessary emissions.
As time goes on, the allowances are cut, thereby encouraging companies to pollute less – or be forced to pay up. However, this year the UK government said it was handing out an additional 53.5 tons of extra allowances between 2024 and 2027.
Following the announcement, UK carbon prices have been trading at a steep discount to European prices. UK carbon prices are 47 pounds a ton compared to 75.86 pounds (88.5 Euro) in the EU. Previously, the two prices were near parity.
Adam Berman, Energy UK deputy director of advocacy, said: “A robust carbon price is critical to attracting investment in clean energy that can bring down prices, reduce emissions and bolster our energy security.”
“Swapping lower prices in the long run for a short period of low prices today is the definition of a penny-wise, pound-foolish approach,” he added, declaring that the carbon market was the “cornerstone of the UK’s decarbonization strategy”.
“While there are short-term benefits to energy-intensive industries, the discount that has emerged versus the EU will make it much more challenging for the UK to meet its climate goals, from disincentivizing wind farms to encouraging power generators to burn more gas,” Huckstepp concluded.