Sunak’s Climate Change U-Turn Makes Polluting in the UK Cheap

In a surprising and transformative turn of events, the United Kingdom has emerged as an attractive destination for industrial cities like Manchester and Birmingham, offering companies an unprecedented discount on carbon emissions. The cost for British industries to emit a ton of CO₂ has plummeted to just £35 ($43), a stark contrast to the £100 ($122) price tag just a year ago and double the current rate within the European Union. This seismic shift is poised to have far-reaching consequences, particularly as it negatively impacts sustainable investments.

At the heart of this pricing disparity lies the UK’s decisive withdrawal from the European Emissions Trading Scheme following Brexit, which gave birth to its own UK Emissions Trading Scheme (UK ETS) in May 2021. The incongruity between UK and EU allowances has resulted in a market where prices exhibit significant variance.

Initially, the discrepancy in CO₂ prices between the UK and the EU was relatively subtle, with both markets exhibiting comparable trends. However, the smaller scale of the UK economy and its fewer CO₂ emitters led to lower liquidity in the UK ETS, contributing to a structural pricing gap between UK and European allowances. Moreover, differences in climate ambition between the UK and the EU may have played a pivotal role. Under the leadership of Prime Minister Boris Johnson, the UK made significant strides in climate commitments, potentially influencing the higher CO₂ prices. Interestingly, as Johnson’s tenure came to a close in the fall of 2022, the UK’s carbon pricing began to align more closely with that of the EU.

Political shifts have further compounded the complexities of the UK’s carbon pricing landscape, with Boris Johnson succeeded by Lizz Truss and, most recently, Rishi Sunak. Sunak’s approach to climate policy diverges significantly from his predecessor’s, as he perceives it as a less politically advantageous issue. Consequently, green initiatives have been scaled back and delayed, with Sunak emphasizing the importance of “achievable and affordable” targets, often translating into a lack of action on climate policy.

Nonetheless, political decisions are not the sole driving force behind the UK’s relatively inexpensive carbon allowances. The surge in gas prices across Europe, particularly in Germany, has ushered in a resurgence of coal, particularly lignite, for electricity generation. The burning of coal emits significantly more CO₂, necessitating more allowances. This phenomenon has bolstered the EU ETS price, while in the UK, the impact is less severe due to a lower share of non-fossil electricity generation.

The repercussions of the UK’s cost-efficient carbon allowances extend well beyond its borders. On October 1, the European Carbon Border Adjustment Mechanism (CBAM) came into effect, imposing additional taxes on exports to the EU from countries with low or no CO₂ prices. UK exporters now grapple with a substantial carbon tax burden, a direct outcome of the UK’s weakened climate policies under Sunak’s leadership.

Within this unfolding narrative lies a crucial lesson for policymakers on a global scale. The effectiveness of emissions trading schemes is intrinsically tied to the unwavering political will to combat climate change. When climate commitments vacillate, it undermines the stability of such systems. If markets anticipate that politicians may backtrack on climate policies during periods of high inflation or shifting public opinion, it fosters uncertainty and discourages investments in sustainability. Ultimately, the very integrity of carbon pricing mechanisms hangs in the balance, and similar challenges could emerge within the EU or any other region should political resolve waver.

As the UK grapples with the repercussions of its evolving carbon pricing dynamics, policymakers face an urgent challenge: striking a delicate balance between economic interests and environmental responsibilities, ensuring that industry gains do not come at the expense of a sustainable future. The world watches closely, recognizing that the outcomes of these choices will undeniably reverberate on a global scale.

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