EU Carbon Eases From 21-Month High After Brexit-Shield Deal

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  • Negotiators are said to agree on plan to avert supply turmoil
  • Provisional deal extends exemption on foreign flights in ETS

The Coming Storm of Climate Change

European Union emission allowances dropped from their highest since January last year after policy makers reached a provisional deal to extend an exemption on foreign flights in the region’s carbon market and make the cap-and-trade system resistant to a potential turmoil should Brexit talks fail.

Representatives of EU governments and the European Parliament conditionally agreed late Wednesday on a revision of the Emissions Trading System law to spare flights into and out of the region from the program until the end of 2023. As part of the draft legislation, policy makers approved a provision designed to prevent companies and airlines using carbon allowances issued by the U.K. if the country falls out of emissions market.

Emission permits for delivery in December rose as much as 3.1 percent to 8.05 euros a metric ton on the ICE Futures Europe Exchange earlier today before falling 0.8 percent to 7.75 euros as of 12:37 p.m. in London. The aviation-linked revision of the EU carbon law is separate from a wider reform that aims to adjust the cap-and-trade market to more ambitious climate targets in the fourth trading phase in 2021-2030 and to alleviate oversupply of permits.

Peter Liese, a German member of the EU Parliament representing the European People’s Party in the negotiations, said lawmakers hope they will reach a “good agreement” with the British government and that the best option would be continued U.K. participation in EU climate policies.

Industry’s Support

“I welcome the British industry’s support for this solution, but hardliners in London could make such an agreement impossible,” he said on his website. “For this reason, we are forced to prepare ourselves for a hard Brexit, because we need to protect the environment and the competitiveness of the EU-27.”

The provisional deal on aviation is stricter than the original proposal by the European Commission earlier this year, which specified no deadline for the exemption of foreign flights. The European Parliament was pushing for allowing it only until the end of 2020. Negotiators also supported the commission’s plan to gradually tighten the cap on airlines starting in 2021.

The agreement needs to be endorsed by ambassadors representing national governments to the EU before it is submitted for approval to the European Parliament’s plenary and to ministers from member states.

The Brexit-related amendment mandates the European Commission to propose measures that will prevent the use of carbon allowances issued by a member state in respect of which there are “obligations lapsing.” The negotiators agreed that such limitations on the use of permits would be introduced "where necessary" and "as long as necessary," according to two EU officials, who asked not to be identified because the talks were private.

Next Step

In the next step the commission, the EU’s regulatory arm, will put forward a revision of the bloc’s regulation on the carbon registry. It may propose marking allowances sold by the British government at auctions or given to companies for free from January 2018 in order to make them distiguishable.

The contingency plan aims to avoid a massive sale of allowances originating in the U.K. which would otherwise remain valid even if the nation’s emission-reduction obligations under the ETS expire. 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 is 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 case negotiators fail to reach a deal on time and the U.K. suddenly finds itself out of the market, becoming a so-called 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.

Some analysts and lobbies have expressed concerns that the Brexit-related law will reduce the willingness of participants to trade with U.K. companies. The International Emissions Trading Association said on Wednesday that its preferred solution would be that the EU and the U.K. agree on a continued participation by British companies in the ETS until the end of 2020 at a minimum.

In a separate legal process, EU governments and the European Parliament continue talks on a broader reform of the carbon market that would strengthen a special reserve absorbing surplus permits from the market. The next round of negotiations in a format known as trilogue, which also includes the commission, is tentatively set for Nov. 8.

— With assistance by Brian Parkin

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