UK election result: What does a Labour government mean for ETS prices?
The polls were correct, and the Labour Party has set up camp in 10 Downing Street with an overwhelming majority in Parliament and a promise to deliver change.
Two standout themes for UK ETS participants and observers in the run-up to the election were:
This speculation drove a sustained, investor-led, UKA price recovery all the way to an eight-month high of ￡50.45 before the bubble burst.
So, has the election boost already fizzled out? Maybe…
A reset for beleaguered UKA values
UK carbon prices have actually dropped as much as ￡4.16 (9%) since the election result became known and are now trading around ￡43.
In the short-term at least, the change in government hasn’t had enough of an immediate, relevant, policy impact to distract from the fact that carbon fundamentals are nothing but bearish.
The market is simply too well supplied, including 53 Mt of reserve allowances being released between 2024-27, to justify a bullish or even balanced fundamental picture. With 2023 emissions falling by 12.5%, the industrial outlook still shaky, and renewables capacity growing, demand for allowances is also falling.
Bearish fundamentals are here to stay unless we see a meaningful structural shift to either the supply or demand sides.
Reintegration with the EU market
In the longer-term, the hot topic of conversation is UK-EU ETS linking. There is a lot of support for the move from industry and trade bodies, and many potential benefits of doing so from a market perspective (especially in order to avoid UK exporters needing to comply with the EU’s Carbon Border Adjustment Mechanism (CBAM) from 2026), but the path won’t be straightforward.
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Keir Starmer has already said his government "can get a much better deal than the botched deal that Boris Johnson saddled the UK with” when it comes to trade, while the new foreign secretary is touring Europe on a charm offensive ahead of the next European Political Community meeting at Blenheim Palace on July 18. There, “the new spirit of co-operation will be on show”.
However, greater collaboration on climate change and closer trade ties aren’t a guarantee of any goodwill from the EU to welcome the UK ETS back with open arms. In all likelihood the policy gaps, pricing dynamics, and diverging political agendas are now too wide to consider a full reintegration in a post-Brexit world, let alone the complications involved. Long negotiations and notice periods mean the decision wouldn’t be implemented for several years, even if motives were aligned.
We therefore don’t anticipate an EU ETS-driven price recovery to begin in the near future, if at all.
In the meantime, one of the first ETS policy reforms requiring attention from Ed Miliband, the new Secretary of State for Energy Security and Net Zero, and the UK ETS Authority, is the proposed Supply Adjustment Mechanism (SAM) to address the risk of falling UKA demand and establish a method for reducing the ongoing market surplus.
Included in the Future Markets Policy consultation which ran from Dec. 18, 2023, to March 11, 2024, a response and firm plan on a possible SAM launch is needed to reduce some of the oversupply risk and help balance the supply and demand picture.
One reason why surplus UKA management will be so critical in the coming years is because Labour is also aiming to achieve 100% clean power by 2030, potentially dramatically changing the fossil power generation demand profile.
New government incentives and public ownership of ‘Great British Energy’ with a first-term budget of ￡8.3 billion will be used to attempt to phase out gas generation twice as fast as coal’s demise between 2012 and 2024.
Carbon prices aren’t currently high enough to provide a powerful decarbonisation incentive (an intentional move by the previous regime to protect British industry during tough economic times) and they won’t get that high if government energy policy doesn’t include ETS reforms.
At the moment the two are disconnected, and the ETS is being under-utilised as a climate tool.
Generally, we view Labour’s wider, more far-reaching, and aggressive manifesto policies as bearish for carbon prices unless drastic measures are put in place to address structural ETS imbalances and restore purpose and confidence to the market.?
If you'd like more information or to speak with one of our experts, get in touch at [email protected] or visit our website at carltoncarbon.co.uk
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