Government Changes to UK’s Emissions Trading Scheme: More Evidence of Sunak Abandoning the Green Project

Last July, Rishi Sunak’s Government published what appeared to be an unimportant, routine announcement involving a change to the UK’s Emissions Trading Scheme. 

Hardly anyone knew what the scheme was. It was all but ignored in the media, with the exception of the specialist press. 

In reality, however, this apparently technical adjustment carried profound importance.

It made it cheaper for companies to pollute. It will boost the corporate profits of major polluters, making them much more competitive than companies which respect the environment. This financial incentive for polluters will cost the taxpayer billions every year. 

And it’s the strongest evidence yet that Sunak’s commitments to care for the environment are worthless.

Downing Street insists that Britain “is committed to net zero and to leading international and domestic action to tackle climate change”. 

This latest decision makes that commitment far more difficult to meet.

The Emissions Trading Scheme (ETS) was introduced in 2021 when Britain left the equivalent EU scheme. It is a key driver of the UK’s Net Zero Strategy, published the same year.  

The ETS caps the total amount of greenhouse gases that businesses can produce in a given period. Within that limit, it sells allowances, which should according to the strategy, “incentivise and control the reduction of emissions in a cost-effective way”.

To put it another way, the ETS is a sensible way of using the techniques of capitalism to reduce pollution.

In July, the Department for Energy Security and Net Zero added 53.5 million tonnes of extra carbon allowances into the scheme between 2024 and 2027.

Although the Government insists that the overall number of carbon allowances will still fall, the price action around the decision points to a growing gap in climate ambition between Britain and its neighbours.

The price movements tell a devastating story.

On 1 August 2022, the carbon price in the UK ETS stood at £78.78. The price in the EU ETS – from which the UK’s scheme branched off after Brexit – was slightly lower at €80.58, or £67.45 at then prevailing exchange rates. Over the following year, the EU price was broadly stable, standing at €85.10 on 1 August 2023. 

The UK price oscillated dramatically during Liz Truss’ brief period in Number 10, but still stood at £75.97 when Sunak entered office on 25 October.  By 1 August this year it had crashed to £42.14. This is a disaster for the UK’s low-carbon transition.

The reduced cost means that industrial polluters are now massively more competitive against cleaner rivals, significantly reducing the incentive to decarbonise.

The timing of the fall is extremely interesting – and suspicious.

As late as 31 March this year, the price stood at £73.93 – not much less than when Sunak took office. In the months that followed, it started to plunge.

Coincidence or not, this price plunge took place during the consultation period leading to the Government announcement that it is to add 53.5 million tonnes of extra carbon allowances into the scheme between 2024 and 2027, massively increasing the amount of CO2 that can be released from the UK in that time-frame. 

At the time of writing, the carbon price of the ETS stands at £44.04. Meanwhile, the EU ETS stands at €83.85.

Market analysts have attributed the carbon price decline to the Government’s decision. In July, BNP Paribas analyst James Huckstepp told the Financial Times that changes to the scheme “will have the biggest impact of any policy on the UK’s emissions path”.

While some of the past year’s decline reflects low demand for electricity, changes to the scheme have been decisive in recent months. “In a weak economy, the extra allowances will have made the difference,” co-founder of climate think tank E3G Tom Burke told Byline Times, adding “I can’t see why they were necessary.”

The price fall means that the Treasury will see a significant loss of revenue from UK ETS auctions. One industry insider told this newspaper that it could be as much as £4 billion a year.

The decline may have one unexpected consequence. It could damage UK exports by bringing them within the scope of the EU’s carbon border levy, due in 2026.

“There will be a Carbon Border Adjustment Mechanism (CBAM),” according to Burke. “It’s almost certain to cover steel. The people it matters to most may be the car industry.”

The carbon price collapse is one dimension of a wider Conservative abandonment of the entire green project.

Greenpeace warned earlier this month that Sunak’s Cabinet will go down in history “as the Government that failed us” on climate change.

In June, International Environment and Climate Minister Lord Zac Goldsmith resigned, charging that the Government had “effectively abandoned one of the most widely reported and solemn promises we have made on this issue: our pledge to spend £11.6 billion of our aid on climate and environment”. 

In late July, the Government announced hundreds of new oil and gas licences for the North Sea, a move which former Energy and Climate Change Minister Chris Skidmore denounced as “the wrong decision at precisely the wrong time, when the rest of the world is experiencing record heat waves”.

Last month, Michael Gove announced an amendment to the Levelling Up and Regeneration Bill, abolishing rules that require developers to mitigate water pollution from new housing. The move provided an immediate boost to the share price of major housebuilders, who have traditionally been large Conservative donors, but who have turned off the taps since last year’s backbench revolt against housebuilding targets. 

Like the carbon price crash, this represents another blow to the ‘polluter pays’ principle – and Conservative claims to offer market-based solutions to the climate crisis.