ICE to host new UK carbon emission auctions and futures contracts

Darren Sinden

ICE already offers futures on European Emission Allowances, the European contracts have been rallying strongly over recent weeks posting a series new all-time highs

Factory Europe

Energy Exchange ICE is to further enhance its ESG and low carbon credentials by hosting new UK emission auctions as part of the recently announced UK Emissions Trading Scheme or UK ETS.

The UK’s Department for Business, Energy and Industrial Strategy announced last week that it would launch a new emissions trading scheme that would replace existing arrangements from as soon as January 1st 2021.

The new scheme is part of measures to replace the UK’s current participation in EU Carbon reduction and trading schemes.

ICE won’t be ready to host the auctions and launch associated futures contracts by then but it does intend to have them up and running by no later than the second quarter of 2021.

ICE already offers futures on European Emission Allowances or EUA as they are known each EUA allows the owner to emit one tonne of carbon dioxide or equivalent gases. The European contracts have been rallying strongly over recent weeks posting a series new all-time highs.

A poll by specialist energy markets news site Montel found that analysts believe European carbon emission allowances will trade as high as €39.00 in 2021 some €7.00 above the recent all-time of €32.00 per EUA.

Interest is growing in carbon trading and its perhaps surprising that CFD and FX brokers haven’t been quicker to introduce CFD trading on the EUA and other contracts to their client bases. After all private investors appear to be embracing ESG themes in their savings and investments so why not in their trading?

The UK has some of the most ambitious carbon emission reductions targets in the developed world and has seen the level of carbon emitted into the atmosphere fall by just over 10% in 2020. The government set a new climate-related emissions target recently aiming to achieve a 68% reduction in the level of greenhouse gas production by the end of the decade. When compared to 1990 levels.

The introduction of UK based carbon emission contract will offer energy traders and others the opportunity to create EU/UK carbon spread trades and potentially arbitrage opportunities between the two.

Sterling is seen as an oil-related currency thanks to the legacy of oil and gas production in the North Sea whilst the Euro member states are largely bereft of native oil and gas assets and production. So there may well be some FX opportunities that develop in line with the new carbon markets, once the UK is finally out of the European Union.

Gordon Bennett, Managing Director, Utility Markets at ICE said that: “We congratulate the UK Government for its commitment and vision for a UK emissions trading scheme and are delighted to continue hosting auctions on its behalf,” adding that “market-based mechanisms like carbon cap and trade programs are pivotal in allowing policymakers to control the quantity of carbon to align with their net-zero commitments and consequently put a price on the externality of pollution to reach those goals in the most cost-effective manner.”

ICE has been conducting regular carbon emission auctions on behalf of the UK government under the pre-existing EUA scheme for some 8 years. So it has plenty of expertise in the area.

Current open interest in the EUA futures traded on ICE has risen to a record notional value of €51.40 billion in line with the growth in EUA carbon prices. ICE also offers futures and options over California’s Carbon Allowances or CCA’s and two other emissions initiatives which have also seen growth in open interest over the last year.

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