Shakes European Carbon Market, UK Exports Threatened by Carbon Levy Risk

The British Government recently made a splash in European soil by imposing looser environmental policies thereby reducing the cost of industry compliance with the environment.

The financial burden on British industry now is considered lighter as the impact of government reforms on environmental policies is looser when compared to the policies set by the European Union.

The UKs Emission Trading Scheme (ETS) sets limits on the amount of emissions that can be generated by a sector or group of sectors. This scheme creates a carbon allowance for companies that can reduce the cost of carbon offsets purchased by companies for every metric ton of CO2 emitted.

Over time, these allowances will be cut so that emitting companies are forced to reduce pollution or choose to pay for their emissions.

However, this year the UK government said it would distribute an additional 53.5 tonnes of carbon allowance between 2024 and 2027 for UK industries.

Since that announcement, UK carbon prices have fallen drastically. Reforms made by the UK government earlier this year have seen carbon prices fall by nearly half since early April.

The UK carbon price is £47 per tonne, compared to €88.50 (£75.86) in the EU. Previously, the two prices have been close to equivalent value. Brexit seems to make the policy linkages between the UK and the EU more complicated.

As a result of changes to the UKs carbon trading scheme, carbon prices are traded at a significant difference compared to the European Union. This then raises the alarm that reforms undertaken by the UK government will undermine green investment and increase the use of fossil fuels.

The threat to the UK is levied on their steel exports to the EU market. EU industry is preparing to impose import levies on heavy goods including steel, aluminum, and cement - unless the exporting country has a CO2 equivalent pricing policy.

The plunge in prices on the UK carbon market raises the possibility that UK steel exports will be slapped with an additional carbon levy when accessing the European Union market after the policy is fully implemented in 2026.

Britain exported more than 2.5 million tonnes of steel to Europe last year, according to UK Steel. That trade will face CO2 levies unless the UK adjusts its EU carbon pricing policies or links its carbon markets with the bloc. The UK risks facing financial trade barriers and administrative trade barriers when exporting to the EU.