Brexit Vote Threatens Europe’s Carbon Market With Worsening Glut

  • Britain is second-biggest emitter in EU emissions program
  • U.K. departure seen handing more control to coal-based nations

European Union pollution permit prices are poised to plunge should voters in the U.K., the carbon market’s second-biggest emitter, opt to leave the European Union.

A Brexit where Britain quits the world’s largest greenhouse-gas market, a worst-case scenario, could push prices down as much as 50 percent as factories dump the permits they hold, according to Louis Redshaw, founder of London-based Redshaw Advisors, which trades carbon on behalf of companies. How Europe would adjust its cap-and-trade system is unclear, making it difficult to predict prices for the rest of Europe, he said.

Britain is a key player in the EU emissions market. Its companies demand more carbon permits than any other nation after Germany, and the ICE Futures Europe exchange in London handles almost all trading of the emission rights. In Brussels, U.K. lawmakers are driving EU market reforms aimed at soaking up a glut that has already driven prices down 80 percent from their peaks in 2008, eroding incentives to invest in clean technology.

“It would really weaken the emissions trading system if the U.K. leaves,” Fredrick Federley, a Swedish lawmaker on carbon-market reform in the European Parliament’s industry committee, said by phone. “Coal-based nations would assume more influence over the market’s rules.”

Britain used a third of the coal that was consumed by Germany last year, and half that of Poland, the carbon market’s third-biggest emitter, according to data from BP Plc.

Price Drop

The EU cap-and-trade program gives away or auctions allowances to about 13,000 factories, utilities and airlines, which need the permits to match their carbon dioxide output or pay fines. Benchmark allowances dropped 32 percent this year to 5.60 euros ($6.30) a metric ton on ICE, near the lowest levels in two months.

Any decision to stop participating in the EU program will probably take about two years, according to Trevor Sikorski, an analyst at consultants Energy Aspects Ltd. in London. British emitters hold permits covering as many as 75 million metric tons of emissions and would probably sell them. 

“With the fate of U.K. installations unlikely to be known until 2018, any immediate downward pressure on prices from a leave vote is likely to be limited, with a breach of 5 euros a ton doubtful in the initial aftermath,” Sikorski said.

Britain will probably stick with the EU market even after a Brexit vote, Sweden’s Federley said. That would put it on a footing with Norway, Iceland and Liechtenstein, which already participate from outside.

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