The third phase of the European Union Emissions Trading Scheme (EU ETS) is nearing its culmination (2020) and ambitious plans for Phase IV (2021-2030) are well underway. The EU ETS is the flagship climate policy of the European Union, covering around 11,000 installations with 1,000 of those situated in the UK. The EU ETS has been dogged by systematic over-supply from generous free allocations and low prices for the last 10 years. However, the emergence of the Phase IV rule book and creation of the Market Stability Reserve (MSR) has seen prices more than double since the end of 2017. Analyst forecasts suggest prices will continue to rise substantially over the coming years as the MSR fundamentally alters the demand-supply balance with one analyst suggesting price spikes to €100/tonne are a real possibility. Falling free allocations, rising prices and Brexit mean installations have never faced greater EU ETS risk. With no expectation of a sustained EUA price dip, all installations must begin to plan and budget for future compliance costs and determine how this may affect their core business going forward. Understanding financial exposure and implementing purchasing strategies to control costs is crucial to ensure business can survive and thrive.

Simon Watson, Redshaw Advisors Ltd