Splendid isolation

UK carbon prices have not suffered the same sharp declines as the EU

The UK carbon market launched in mid-May 2021. During the first 10 months of trading the price of UK emission allocations (UKA’s) have typically traded at a 10% premium to EU carbon (EUA) futures prices, equivalent to around €7 per tonne.

Three factors - low liquidity, no historical surplus, and more ambitious cuts in emission allowance supply through to 2030 - mean UKA prices should trade at a premium to EUA’s over the long term.

However, during certain periods that premium has ballooned to over 40% - both in late September 2021, and more recently in early March this year.

Investors who hold the KraneShares Global Carbon Allowance ETF (KRBN) should know that they are already invested in the UK carbon market, albeit with less than 5% exposure.

So what’s going on with UK carbon prices?