Conservative win casts shadow over EUAs

Thursday’s landslide UK election victory for the Conservative Party has removed some of the Brexit uncertainty facing the EUA and global markets. Following the victory, the British Pound surged to a three-and-a-half year high against the Euro and stock markets also climbed as the threat of no-deal was removed. However, whilst EUAs initially followed the markets higher, those gains have now been reversed and storm clouds continue to gather over the EUA market as we head into 2020.

The implications of the UK election for the EUA market are threefold:

  1. The large downside price risk associated with a no-deal Brexit is averted, as the Conservative Party plan to honour the most recently negotiated withdrawal agreement
  2. UK installations will now be required to comply with the EU ETS for 2019 and 2020 emissions, although the exact mechanism to comply with the latter, considering that the UK is expected to leave the EU by 31st December 2020, is yet to be fully agreed.
  3. The UK auctions can be expected to resume early in Q1 2020 which will result in both 2019’s and 2020’s auction volumes sold at the same time.
Given that the EUA market is so bearish (in turn caused by plummeting gas prices – gas for delivery in January has halved this year, for example) the additional volume casts a cloud over the EUA price going into 2020. The outlook for gas remains bearish.
UK installations will now need to buy to comply, and when combined with FX moves, the recent declines present an opportunity to do so. To discuss how the outlook for the EUA price is shifting and to get more detail of your overall carbon risk, please get in touch with a member of the Redshaw Advisors team on +44 203 637 1055.
For those in need of a more in-depth understanding of the EUA market’s prospects, check out the Carbon Fast Forward regional 1-day conferences. The first will be held in Manchester on Tuesday 25th February 2020, super-early-bird tickets are selling out fast.
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