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Energy Traders Urge Johnson to Link U.K. Carbon Market to EU

Groups representing traders and the biggest industrial and energy companies in the U.K. and Europe called on British Prime Minister Boris Johnson to establish a link between the country’s nascent emissions trading program and that run by Brussels.

Cap-and-trade systems are at the heart of both British and European efforts to reduce carbon emissions in the coming decades. But with parallel markets post-Brexit, companies and traders worry that both systems will suffer.

Until the end of last year, U.K. emitters were covered by the EU emissions trading system, the largest in the world. As part of its exit from the bloc, the U.K. decided to launch its own market modeled on Europe’s. If politicians create a link between the two systems, permits could be used in both.

The U.K. market will start next month, with ICE Futures Europe starting futures contracts and auctions.

“The advantages of linkage are clear in terms of liquidity, price discovery, and the ability to attract abatement from across Europe rather than just the U.K.,” the groups said in a letter to Johnson. “It would also create a level playing field in terms of carbon pricing, avoiding competitive distortions, and leading to aligned cost implications.”

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More than three dozen groups including the European Federation of Energy Traders, the Confederation of British Industry, the International Emissions Trading Association and the Institutional Investors Group on Climate Change signed a letter to Johnson and his ministers and a similar one to European Commission President Ursula von der Leyen. The groups represent virtually every industry covered by the emissions trading system.

“A U.K. only emissions trading system risks exposing U.K. manufacturers to much higher costs than those in other European countries,” said Steve Elliott, chief executive officer of the Chemical Industries Association. “This causes two problems, the potential loss of jobs and no improvement – possibly even worsening – of the global fight against climate change.”

Relations between London and Brussels are fractured, but as both the U.K. and EU have ambitious climate policies, the carbon market could be a potential area of cooperation.

So far, there has been little public indication that Britain plans to request a link. When the U.K. announced its system, they wrote they could link to another carbon market in the future without giving any names. Then in the trade deal that sealed the post-Brexit relationship the two parties agreed to “give serious consideration” to a link.

A government spokesman declined to say if the government plans to work to establish a link with the EU market.

“As part of the Trade and Cooperation Agreement, the U.K. and the EU agreed to co-operate on carbon pricing and to give consideration to linking their respective systems,” he said by email, adding that the nation is looking at a range of options to work with other carbon markets.

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