On 19 May 2021, the United Kingdom ETS (UK ETS) held its first allowance auction. Approximately 6 million UK allowances (UKAs) were offered for sale and the auction cleared at a price of GBP 43.99 (USD 62.12/EUR 51.14). There were 15 participants placing bids for 29.3 million permits, with 14 out of 15 bidders successfully procuring UKAs.

The UK government has scheduled auctions on the ICE Futures exchange every other Wednesday afternoon until 15 December 2021, with the bidding window open from 12:00-14:00 London time. The government plans to sell a total of 83 million UKAs this year in auctions, which can clear even if the total bids fall short of the number of UKAs on offer. Unsold allowances are carried over to the next four auctions, up to 125% of those originally intended for sale at that auction. If all four subsequent auctions have reached the 125% limit, the remaining unsold allowances are transferred into a reserve in the Market Stability Mechanism Account.

UK ETS auctions also feature a transitional auction reserve price (ARP) of GBP 22 (USD 31.06/EUR 25.55) to ensure a minimum level of ambition as the country transitions from participating in the EU ETS to operating its own scheme. After formally exiting the EU on 31 January 2020, the UK continued to participate in the EU ETS during the transition period that lasted until the end of 2020 and developed the UK ETS. The scheme, which is largely modeled after the EU ETS, officially launched at the start of 2021.

The first UKA auction clearing price was slightly below the EU ETS allowance (EUA) auction on the same day, which cleared at EUR 52.12. In recent months European carbon prices have increased significantly as participants expect a tightening cap under a higher 2030 EU emissions reduction target, among other factors. In secondary market trading, UKA and EUA December 2021 futures ended the day at GBP 45.25 (EUR 52.59/USD 64.29) and EUR 49.68 (GBP 42.75/USD 60.73) respectively.

Covered entities can use the auctioned UKAs and any free allocations they may receive for the 2021 compliance period and have until 30 April the following year to surrender allowances. Though auctioning is the main form of allowance allocation, a share of allowances is freely allocated to emissions-intensive, trade-exposed (EITE) sectors to safeguard competitiveness and minimize the risk of carbon leakage. Much like the EU ETS, the UK ETS covers energy-intensive industries, the power sector, and aviation within the UK and European Economic Area (EEA), together making up about one third of the UK’s GHG emissions. The scheme’s cap is 5% below the UK’s notional share of the EU ETS cap (i.e., the EUAs that would have been available to the UK government for allocation) and will decline by 4.2 Mt per year initially. In addition to the ARP, the UK ETS features a Cost Containment Mechanism (CCM), and the government is considering a Supply Adjustment Mechanism (SAM).

The UK government is also exploring the possibility of establishing a Fund for Industrial Decarbonisation, to which UK ETS auction revenues would contribute, and has indicated its openness to linking its scheme internationally in the future. Further details regarding the UK ETS design can be found on ICAP’s UK factsheet.