Proposed UK Changes to ETS Aim to Improve Market Efficiency
Proposed changes to the UK’s ETS are set to place pressure on businesses to reduce their carbon emissions by reinforcing the mechanisms that incentivise emission reductions, mitigate market risks, and promote sustainable practices. Proposed policy and regulatory changes released by the UK ETS Authority on markets future policy aim to enhance the effectiveness, stability, and transparency of the UK’s emissions trading scheme.
Among the changes is the introduction of a Supply Adjustment Mechanism (SAM) to address the risk of demand shifts with long-term impacts in the market. This would enable the adjustment of allowance supply based on pre-determined criteria and market conditions, providing greater certainty and encouraging emission reductions. A SAM aims to create a more responsive and balanced market that supports decarbonisation efforts and maintains market stability over the long term.
Another significant policy change involves retaining the Auction Reserve Price (ARP) as a mechanism to mitigate the risk of sudden, significant, and sustained price decreases in the ETS market. This sets a minimum price for auctioned allowances, preventing prices from falling below a certain threshold and providing a safety net against excessive price decreases. The objective aims to protect market participants from price volatility.
In a consultation document released for discussion, the Cost Containment Mechanism (CCM), which has had a tricky start, would also be retained as a tool to mitigate the risk of sudden, significant, and sustained price increases in the ETS market. It sets trigger thresholds for adjusting the supply of allowances in response to price movements.
The authority is also exploring design elements of the CCM, such as trigger thresholds and trigger level methodology, to optimize its effectiveness.
Overall, the proposed policy changes seek to enhance market mechanisms. They also come at a time the UK is introducing a Carbon Border Adjustment Mechanism. This changes and the changes to the ETS aim to address the problem of carbon leakage, which undermines the UK’s efforts to reduce its carbon output and meet its reduction targets.
The proposed policy changes are likely to place greater pressure on businesses to reduce their carbon emissions and invest in cleaner technologies and sustainable practices.
The consultation document on markets future policy, available here, provides detailed information on the existing markets policy, risks to market stability, and proposed policy options to mitigate the identified risks. Stakeholders are invited to make submissions here.