Brexit and the EU Emissions Trading Scheme: What Next?

Brexit has become a major concern for companies involved in the EU Emissions Trading Scheme (EU ETS), as the implications of the UK’s exit from the program could have far-reaching effects. Redshaw Advisors has analysed the risks and impacts of Brexit on carbon risk management and reached conclusions based on the most likely scenario.

The impact of Brexit on companies can be categorized into three main areas:

UK companies in the ETS may face challenges in managing their carbon exposure, potentially leading to allowance invalidations and registry lockouts.
EU companies with installations in the UK face similar risks as UK companies but will also have to navigate additional climate protection rules set by the UK.
All EU ETS participants are exposed to potential price volatility resulting from Brexit, with the greatest risk being a significant decrease in prices. This makes long-term carbon risk management planning more complex.
One of the key concerns is determining what will replace the EU ETS in the UK after Brexit. Although the UK is likely to continue pricing carbon, its participation in the EU ETS is uncertain. The EU ETS has faced challenges related to oversupply, low coverage, competitiveness issues, and complexity. The UK’s options after Brexit include staying in the EU ETS, creating a UK ETS, adopting a hybrid approach, or implementing carbon taxes.

The impact of Brexit on EUA (European Union Allowance) prices in the EU ETS affects all participants. While there is a risk of significant price drops if UK installations sell their excess EUAs en masse, the actual outcome is more complex. Factors such as the type of Brexit (hard or soft), the decision-making processes of market participants, the validity of existing EUAs after Brexit, and the behaviour of UK utilities all influence supply and demand dynamics.

Overall, the impact of Brexit on carbon risk management varies depending on each company’s circumstances. Power companies, for example, may have lower exposure due to passing carbon costs to consumers, while short industrials risk not hedging Phase III exposure. Long companies may face the challenge of stranded EUAs in UK registry accounts. Understanding the influence of the Market Stability Reserve (MSR) and Phase IV free allocation is crucial for managing carbon risk effectively.

Redshaw Advisors assists companies across Europe in understanding and addressing their carbon risks. They provide unbiased advice by combining independent carbon price forecasts with practical market experience. Companies seeking to assess their exposure to the cost of carbon considering Brexit or determine optimal carbon trading strategies can reach out to Redshaw Advisors for guidance.

To receive the full version of the article analysing Brexit’s impact on carbon risk, interested parties can contact Redshaw Advisors via email at info@redshawadvisors.com.

twitterlinkedin