UK Carbon Price Drops to Record Low, Sparking Clean Energy Investment Concerns

By Irina Slav - Feb 02, 2024

The price of a ton of CO2 in the UK this week fell to a record low, giving rise to concerns about the immediate prospects of investments in alternative energy sources.

Per the Financial Times, the price for a so-called carbon permit, equal to one ton of CO2, fell to some $40 (31.48 pounds) this week due to lower industrial energy consumption and lower demand for heating due to the mild winter. Analysts also attributed the decline to an abundance of available permits.

Yet the UK’s net-zero transition plans require high carbon permit prices to motivate investment in decarbonization efforts, the report noted. Indeed, high carbon permit prices discourage businesses from emitting and compromise their competitiveness, motivating such investments.

With low carbon permit prices, however, that discouragement is not there, even though some might argue that the price drop—and permit availability—actually suggests industrial consumers are emitting less carbon dioxide, which should be good news for the net-zero planners in London.

“We need a strong, stable and predictable carbon price signal to ensure that investment heads in the right direction,” Adam Berman, deputy policy director at trade body Energy UK, told the FT. “A low carbon price sends absolutely the wrong signal about the UK’s commitment to net zero.”

“If we want to electrify transport and heat, and power them with renewables, then it’s going to be very difficult to do that without the higher carbon price to fund and incentivise it,” BNP Paribas analyst James Huckstepp told the FT.

Indeed, carbon pricing has emerged as an important tool in enforcing the transition by simultaneously discouraging businesses from generating CO2 emissions and providing funds that could be invested in alternative energy sources and net-zero technology.

Yet while the governments using carbon pricing to fund the transition have signaled they see this as a free market, they do need the price to keep going one way only—up. A free market precludes such a consistent price trend, giving cause for worry to transition advocates.