By Mathew Carr
Nov. 26-28, 2020 — LONDON: The U.K.’s threat to walk away from carbon markets may simply be a negotiation stance.
Fairly ridiculous negotiation stances have become part and parcel of Brexit negotiations.
See this for some context:
One person who has not given up on the notion that Britain may actually remain in the European Union’s carbon market after the end of the Brexit transition next month is Ken Schneider, president of Grey Epoch LLC, an environmental markets options outfit near Chicago and key participant in the market.
“If we find that out by the end of the year or early next year, then that will be a very bullish catalyst, because it will remove a giant question mark from the system,” Schneider said Wednesday by phone.
The European Commission declined to comment because “EU-UK negotiations are ongoing,” according to an official in Brussels.
Providing EU carbon traders with certainty on Brexit will boost prices because an uplift from the end of the coronavirus pandemic is already factored into market levels, Schneider said. Should the U.K. opt to create its own emissions market or set a carbon tax, that wouldn’t be as bullish for EU carbon prices, he said.
Carbon prices may average 40 euros or more in the 10 years from next year, according to a survey published by Commerzbank. That’s an upside of 44% from Thursday’s close of 27.87 euros a ton on ICE Futures Europe.
Volkswagen Group said Thursday it’s “committed to a minimum price of 60 euro per ton starting 2023” and is looking for 100 euros in six years.
The EU carbon market has allowed the bloc to cut emissions much faster than the U.S. The region is set to easily exceed its 2020 emissions reduction target of 20% below 1990 levels, especially after the coronavirus pandemic slashed emissions. U.S. emissions are flat in that time period.
Should the U.K. create its own carbon market, it would be small and traders would probably move prices just by entering and exiting market positions. That will make it less attractive.
Liquidity in the EU market may also suffer because much of the trading and risk management is currently handled in London. One influential trader in mainland Europe countered that notion, saying the bigger system would be able to ride out Britain’s exit without too much trouble, they said by phone, preferring to stay anonymous.
A carbon tax may be simpler and make more sense for Britain, which is already well on the way to decarbonising its power market, said Laurent Segalen, managing partner at Megawatt-X, a platform for selling and buying renewable energy assets.
“In order for a market to be efficient in terms of price discovery, you need liquidity,” Segalen said on LinkedIn. “Only power traders bring liquidity. So either you continue the EU emissions trading system, or you do a U.K. tax.” A British domestic carbon market is never going to work, he said.
Carbon trading also makes taking on ambitious, science-based targets less risky, because a country like Britain will have more options open to it as it complies with its voluntary limits under the Paris climate deal.
Remember: This Brexit adviser left U.K.-government office earlier this month:
(Updated Friday morning, Saturday evening with science-based targets)