The UK government responded to consultations on the post-2030 continuation of the UK ETS and the long-awaited future markets policy. No supply adjustment mechanism will be introduced, pending technical negotiations with the EU ETS. Otherwise, little change resulted from the policy decisions. Overall, recent UK government positioning seems to be directly aimed at easing the path towards linking carbon markets with the EU.

Yesterday (4 December) the UK government released the final government responses on both the Future Markets Policy consultation and the consultation on Extending the UK Emissions Trading Scheme cap beyond 2030.

The future markets policy decisions have been sought after for some time. During 2023 and 2024, low prices on a structural oversupply of UKAs prompted discussions on the need to introduce an MSR-like supply adjustment mechanism (SAM) within the UK system. The consultation response shows that the UK Authority does not intend to pursue the introduction of this market instrument. The policy decisions reached through this consultation show no substantial change from the current market set-up, maintaining both the Auction Reserve Price (ARP) and the Cost Containment Reserve (CCR). The sole adjustment is the upward revision of the ARP to account for inflation (from GBP 22/t to GBP 28/t).

The consultation on extending the UK ETS beyond 2030 resulted in little unexpected policy outcomes. DESNZ concluded that the UK ETS cap should extend to a new phase beyond 2030 (phase II) and that UKAs from phase I should remain valid in the next period. The decision to extend the trading scheme sets the stage for a new consultation on a new cap trajectory, which will take place ‘as soon as possible.’

Market impact

The market impact of these responses should be minimal, if at all leading to a slight narrowing of the EUA-UKA spread as it confirms the intention by the UK government to pragmatically remove obstacles from the process. The response to the post-2030 cap extension had no unexpected decisions.

The future markets policy also resulted in very little change to the current setup. The decision to not pursue a Supply Adjustment Mechanism is based on the rationale that “the Authority has sought to avoid making large and complex changes to the UK ETS in the short term” but also that these decisions “do not preclude any changes that may need to be made in the event that the UK and EU agree to link their schemes.”

Overall, the decisions build on last week’s free allocation response that aligns the market framework with that of the EU ETS. In the past two weeks, the UK government has 1) aligned free allocation with the EU, 2) opened a consultation on aligning sectoral coverage (international shipping) with the EU, and 3) declined to implement the SAM, leaving the decision open to be changed during negotiations if need be.

The proposed changes ensure continuity of the system beyond 2030, which is important for market participants. At the same time the proposed changes display a great level of political pragmatism to keep the market framework as close to the EU ETS as possible in view of the ongoing linkage negotiation between the UK and the EU ETS.