EU Drafts Measures to Brexit-Proof Emissions Market

  • Lawmakers to propose rule on use of carbon permits after 2018
  • European Parliament is due to vote on measure on Sept. 13

The Coming Storm of Climate Change

The European Union is preparing to make its emissions-trading system immune to a supply turmoil that may happen if Brexit talks fail and the U.K. leaves the world’s largest carbon market.

The European Parliament will vote on Wednesday on a proposal that would prevent companies and airlines in the EU Emissions Trading System using carbon allowances issued by the U.K. from 2018 if the country falls out of the cap-and-trade program, according to a draft document obtained by Bloomberg News. The provision, to be sponsored by four political groups, will be submitted as part of a revision of the bloc’s carbon market law to update rules on aviation.

Before the vote, the draft law will be discussed by members of the EU Parliament on Monday after the assembly’s plenary session starts at 5 p.m. in Strasbourg, France. The Brexit-related provision will be submitted as a joint amendment sponsored by the Christian Democrat, Socialist, Liberal and Green groups.

The EU carbon market imposes emission quotas on around 12,000 facilities owned by manufacturers and utilities, and forces those that exceed their caps to buy permits from businesses that emit less. It also covers aviation under a law that is being revised following a global deal to cut pollution by airlines.

EU carbon allowances for December fell as much as 3.5 percent on Monday, breaking a five-day winning streak on concerns that the Brexit-related proposal may reduce the willingness of participants to trade with U.K. entities. The contract was at 6.87 euros on the ICE Futures Europe exchange at 12:15 p.m. in London.

Prices in the EU market lost almost 70 percent over the past nine years as an economic crisis cut industrial output and imports of United Nations carbon credits aggravated a surplus of permits. Emitters must hand in allowances to match the previous year’s emissions by the end of each April. Allowances are sold at government auctions throughout the year and permits given for free are handed to emitters usually around February each year.

The revision of the emissions-trading law needs to be approved by the European Parliament and member states to enter into force. The Brexit-related amendment is a contingency plan to avoid a massive sale of allowances issued to the U.K. emitters for free or sold at auctions by the country’s government if its emission-reduction obligations under the ETS expire.

The proposed legislation mandates the European Commission to draft a separate measure in order to implement the provisions. It can be done through an update to the EU regulation on carbon registry, which would spell out the details on how the contingency plan would work.

The deadline for the EU and the U.K. to iron out a Brexit deal is March 29, 2019, a date that can be extended only if there’s a unanimous backing by member states. In practice, an agreement would need to be in place three or four months before then to give the EU Parliament enough time to approve it.

There are currently no provisions to safeguard the ETS in the case negotiators fail to reach a deal on time and the U.K. suddenly finds itself out of the market, becoming a third country to the EU. With the compliance deadline for 2018 emissions falling in April 2019, in the worst-case scenario the market could be flooded by permits issued or sold by the British government while the country’s obligations lapse.

The U.K. hasn’t decided yet on whether it wants to stay in the EU’s ETS after it withdraws from the EU. A British government official with direct knowledge of the matter said in December it would prefer to remain in the cap-and-trade system.

Prime Minister Theresa May’s administration thinks the benefits of being in the EU-ETS outweigh the argument for withdrawing, said the official, who asked not to be named. Should the U.K. remain in the European emissions market, it would shore up demand and prevent spare allowances from exacerbating a glut, according to Bloomberg Intelligence.

— With assistance by Ian Wishart, and Mathew Carr

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