UK readies new carbon market as EU prices top 50 euros for first time

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May the Fourth be with you: This celestial lightsaber does not lie in a galaxy far, far away, but rather inside our home galaxy, the Milky Way. It’s inside a turbulent birthing ground for new stars known as the Orion B molecular cloud complex, located 1,350 light-years away. Image: NASA/ESA.

As the cost of pollution in Europe topped €50 ($60) for the first time Tuesday, Britain announced details of its new cap-and-trade market to open in two weeks, a fourth major carbon market as the cost of polluting finally begins to squeeze corporate budgets.

The UK Emissions Trading Scheme will begin trading on May 19, initially covering pollution from power generators, the aviation industry, and other energy-intensive industries. Britain said last year it would set up its own trading system to compete with the successful EU ETS, and to better regulate carbon emissions within its own sphere of influence post-Brexit.

The UK ETS follows the EU program, a California cap-and-trade system, and comes in advance of one in China later this spring. A spokeswoman for the Intercontinental Exchange, which is running the UK ETS, said that because the UK contracts will be tied to separate emitters from those in Europe, or non-fungible contracts, there is no chance for big traders to arbitrage between the exchanges.

But traders certainly are arbitraging prices on the EU-ETS this year, as they expect costs to continue to rise to the point where some industries, such as steel and chemicals, will find it cheaper to migrate to hydrogen than to use fossil fuels. The cost of carbon on the EU ETS has climbed more than 50% so far this year and some traders see it as high as €100 by the end of the year.

Expect the UK ETS to be a major component of Britain’s pre-COP26 agenda leading up to the big summit in November. And given the City of London’s financial history, a key driver of British attempts to retain financial dominance over Europe as the markets transition over the next decade.

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