EU Carbon Drops as U.K. Resignations Stoke Selloff Concern

By Mathew Carr and Marine Strauss
(Bloomberg) — European Union carbon allowances extended declines as resignations in the U.K. government raised the prospect of a no-deal Brexit, which could boost selling in the market by British emitters.

After Brexit, the U.K. will implement a system of carbon pricing of “at least the same effectiveness and scope” as that provided by the EU’s emissions trading system, according to a draft withdrawal agreement published by the European Commission late Wednesday. Thursday, British ministers including Brexit Secretary Dominic Raab resigned, citing disagreement with elements of the wider deal.

The U.K. hasn’t ruled out leaving the EU’s carbon-trading program and is considering its options. Allowances are falling on the risk of a no-deal Brexit, which could include a “massive selloff” as factories, power stations and airlines in Britain offload spare contracts, said Louis Redshaw, founder of Redshaw Advisors, an emissions trading outfit in

Yet the draft agreement, which keeps Britain in the system through 2020 and linked to it beyond that, “comes as a relief because emitters are better able to understand and manage their risks,” Redshaw said by phone. “It’s a form of business as usual.”

Bidding in almost-daily auctions of allowances has languished as the Brexit negotiations come to a head. Britain will leave the bloc on March 29.

December allowances dropped as much as 7.5 percent to 18.25 euros ($20.63) a metric ton, before trading at 19.15 euros at 2:49 p.m. in London on the ICE Futures Europe exchange in London, paring this year’s gain to 134 percent. They’ve fallen after rising above 25 euros a ton in September because EU lawmakers are dealing with a glut in the market built up since 2008. German power for 2019 fell a third day.

The draft Brexit deal will be considered by the U.K.’s parliament after further negotiations about the future relationship between the nation and the bloc, including a potential trade deal.

Allowances covering emissions in 2019 would normally be issued in February, but the U.K. may delay that process. “Assuming there’s a Brexit deal and the U.K stays in the EU emissions trading system until the end of December 2020, it’s possible that a domestic, linked U.K. market could replace the EU ETS from 2021 onward,” said Simon Henry, director of EU policy at the International Emissions Trading Association, an industry group in Geneva.