EU Carbon Slumps Most Since 2014 as Brexit Sparks Doubts

  • Most emissions trade handled by ICE Futures Europe in London
  • ‘World of uncertainty’ seen as U.K. decides on climate policy

Carbon prices in the European Union’s emissions market, the world’s biggest, plunged the most in 27 months as the U.K. vote to leave the 28-nation bloc triggered uncertainty about the future of the cap-and-trade program.

Benchmark permits to discharge carbon dioxide dropped as much as 17 percent after the referendum, in which voters backed “Leave” by 52 percent to 48 percent. The U.K. is the EU’s second-biggest emitter after Germany.

“I can’t believe we jumped off the bridge,” Trevor Sikorski, an analyst in London at Energy Aspects Ltd., said by telephone. “There’s some really big decisions about which policies the U.K keeps and which ones it ditches. There’s a world of uncertainty ahead of us.”

Britain’s capital hosts the ICE Futures Europe exchange, which handles almost all the trading of EU emission allowances. Permits for December in the EU Emissions Trading System, Europe’s key policy tool to fight climate change, fell as low as 4.69 euros ($5.19) a metric ton on ICE, before trading at 5.04 euros a ton at 3:11 p.m. in London. They have declined 40 percent this year.

Norway Deal

Britain may opt to stick with the ETS, depending on political agreements it decides to pursue with the EU, Sikorski said. That might put it on a footing with Norway, Iceland and Liechtenstein, which are a part of the EU carbon market without membership in the bloc.
Tomas Wyns, a researcher at the Institute of European Studies at the Brussels Free University, also said that would be the easiest scenario for the U.K. to avoid starting its own instruments to achieve domestic climate goals.

“If there’s political will to stay in the ETS, it can be done through an agreement similar to the one with Norway,” he said in an interview. “The carbon market falls under environmental legislation, so that shouldn’t be overly complicated.”

Exit talks with the EU will start once a new U.K. leader has been chosen, Prime Minister David Cameron said on Friday. Legal discussions on the thousands of EU rules binding on national governments may take around two years. Until the details have been settled and the U.K. formally exits, it will remain a member state with all its rights and obligations, EU President Donald Tusk said.

Britain “remains a member of the European Emissions Trading System for the time being,” said German Environment Ministry spokesman Michael Schroeren. “What happens after that will have to be seen. On principle it doesn’t seem impossible for non-EU states to take part in ETS, as the example of Norway shows.”

At the same time as the British negotiations progress, the EU’s governments and the European Parliament will be discussing a post-2020 reform of the market. The U.K. has been in a group of nations calling for more ambitious policies to help boost the price of carbon after it fell around 80 percent in the past eight years. Current levels are not enough to stimulate investment in low-emission technologies, according to policy makers and analysts.

Duncan Resigns

Ian Duncan, a British member of the European Conservatives and Reformists group in the EU Parliament, resigned from his role as the lead lawmaker for the ETS reform. Representatives of political groups in the assembly’s environment committee will now need to decide whether the file should remain in the hands of the Conservatives or whether a potentially broader reshuffle of responsibilities is needed.

“What’s important is that the foundations of the report that Ian Duncan’s built are solid and we expect that whoever takes over will continue in that spirit,” said Dirk Gotink, spokesman for the European People’s Party, the biggest political faction.

It’s also not certain yet what impact the U.K.’s decision will have on the headline EU climate target. In October 2014, EU leaders endorsed cutting emissions by at least 40 percent by 2030 compared with 1990 levels and the bloc’s regulator is due to propose individual goals for member states next month. The EU-wide plan has been submitted as the region’s contribution under a global climate agreement reached in Paris in December.

Paris Deal

Once the U.K. leaves the EU, it will need to define its own national plan as a part of the Paris deal. The 27 member states that stay in the EU will have to decide whether their individual ambitions should be raised so that the group can compensate for Brexit and stick to the 40 percent target, or whether the headline goal should be looser, according to Wyns. A weaker target would mean the EU submits a new contribution to the global agreement that may not be consistent with the deal’s requirement to increase the level of ambition over time, he said.

“In an unlikely situation where the U.K. would set up its own emissions-trading system, it would still want to link to the EU ETS as a bigger market with higher liquidity,” said Long Lam, an analyst at Ecofys Investments BV in Utrecht, the Netherlands.

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