Traders place record bets ahead of UK election on carbon credits price jump

Traders are placing a record level of bets that the price of UK carbon credits will rise, in anticipation that a future Labour government would bring in tougher climate policies making it more expensive to pollute.

The benchmark price for UK carbon market allowances, which give industrial polluters the right to emit CO₂, has climbed 9 per cent since Prime Minister Rishi Sunak last month called a general election.

The benchmark price rose to £47 per tonne of CO₂ on Friday, extending its rally from a low of £31 earlier this year. The price had been depressed by a move by the Conservative government to make more allowances available over the next three years, making it cheaper for polluters to keep emitting.

The most commonly traded contract is for delivery of carbon allowances in December, giving polluters the ability to lock in the price ahead of a deadline for holding permits.

Expectations of a change of government next month have fuelled record amounts of bets that the UK carbon price will rise by the end of the year.

Hedge funds and asset managers were holding net long positions worth £300mn this week, the highest level since the scheme was launched in 2021, according to exchange operator Intercontinental Exchange.

Appetite for allowances has been driven in part by speculation that Labour would take a stricter approach to big polluters, said Tim Atkinson, director of carbon sales and trading at London-based CFP Energy. 

“The view is if the government wants to push the net zero agenda quicker then they could further tighten the targets and remove surplus allowances,” he said of the market speculation. “They’re seen to be a greener government overall.”

Labour has not publicly stated whether it would intervene in the market but told the FT it had a long-term plan to “make Britain a clean energy superpower”.

It added: “Decisions on the UK Emissions Trading Scheme would be something a Labour government would have to carefully consider, in conjunction with the other members of the UK.”

The party leads the Conservatives by about 21 points in the FT’s aggregation of national voting intention polls.

Large polluters have to buy carbon allowances if their greenhouse gas emissions exceed a certain threshold, which is meant to create an incentive to switch to clean energy. 

Yan Qin, lead carbon analyst at data provider LSEG, said the price moves since the election announcement reflected an expectation that a Labour government would have “at least more intention to stick to climate goals and to stick to greener policy”.

Sunak also announced a series of rollbacks last year of planned crackdowns on gas-fired boilers and petrol and diesel cars. 

Another key driver of this month’s price rise is the expectation that permits will become scarcer in the second half of the decade, Atkinson added, given longer-term government plans to reduce the number of allowances available.

Adding to these dynamics, wind speeds have dropped off in recent weeks, forcing some energy users to switch to gas power, which drives up demand for carbon allowances.

The UK carbon price still trades at a steep discount to the price of €71 per tonne (£60) in the equivalent EU-wide trading system.

This spread means that British exporters face hundreds of millions of pounds in EU carbon border taxes within the next decade, and could complicate trade arrangements with the Republic of Ireland, prompting industry groups to call for the two markets to be linked.

Carbon consultancy Veyt said the recent rise in the UK carbon price was linked to market participants anticipating a Labour government “with higher climate integrity and higher probability of linking with the EU [carbon market]”. 

The UK system trades far fewer credits every day and is more volatile. “It is a strange market and it responds to sentiment very strongly,” said Adam Berman, deputy director of Energy UK, the energy industry trade group.