The government could cut the amount carbon-intensive industries pay amount pay for each tonne of carbon they emit into the atmosphere.
Ministers are considering intervening in the market after consistently high carbon prices triggered the cost containment mechanism for the second time in two months.
A government spokesperson told City A.M.: “The UK ETS Authority is considering whether to take any appropriate action under the Cost Containment Mechanism and will announce its decision no later than the 18 January to provide certainty to the market.”
Last month, Downing Street ultimately decided not to step in when the mechanism was first triggered, but did not rule out slashing carbon costs in the future.
Companies covered by the UK’s Emissions Trading Scheme (ETS) must pay allowances for each tonne of carbon they emit into the atmosphere.
This includes key UK businesses such as heavy industries, airlines and the power sector.
The levy adds extra costs to dirty fuels such as coal, and makes cleaner fuels, including natural gas, or fully green technologies more economical and consequently more appealing.
Prices have risen to unexpected highs, causing the carbon price to be consistently above expectations, and activating the review for the second time in a matter of weeks.
The spike in prices has been driven by increased demand for ETS allowances, with record natural gas prices making coal more attractive, even when including the cost of the extra carbon that is emitted
Consequently, this has increased the trading price of carbon allowances, which would ultimately be passed on to consumers.
The ETS was set up after Brexit to replace a comparable system that operated when the UK was part of the EU.
Despite the similarities, the UK’s ETS has remained between 5-10 per cent more expensive than its European counterpart since it came into operation – largely due to the smaller size of its market compared to the EU.
Spiralling carbon costs puts more pressure on government to protect consumers this winter
The situation places even more pressure on Downing Street this winter, with the government already looking for solutions to skyrocketing wholesale gas prices and supply chain turbulence.
The soaring carbon costs also follow the UK’s pledges at the COP 26 climate conference in Glasgow in October last year.
The UK joined forces with the G20 nations to pledge to ‘phase down’ coal over the decade and has also pledged to reach net zero carbon emissions by 2050.
One of the key methods for incentivising businesses towards the climate targets, pushed by the European Union (EU), has been carbon pricing.
This means any interventions to support a fossil fuel market on behalf of businesses will be contentious.
However, the government has shown preparedness to wade in to industry crises – with doomed energy supplier Bulb entering special administration and de-facto nationalisation this winter.
Business secretary Kwasi Kwarteng has also been engaged in talks with industry leaders across the UK energy sector to try and find ways to minimise rising costs for consumers.