Five Years Later, Brexit’s Still Set to Roil Europe’s Carbon Market (1)

By Mathew Carr

Feb. 24, 2021: LONDON — As utilities with U.K. coal and natural gas generation switch to new British carbon allowances during the next few months, the value of those permits and the European Union ones are set to fluctuate wildly, according to traders.

The U.K. carbon price seems likely to be higher than that in the EU following Brexit, based on current indications.

The expected implementation of the post-Brexit U.K. market by June will be complicated by the country’s floor support. Adding the U.K. floor of 18 pounds a ton to the U.K’s upgraded auction reserve of 22 pounds gives an indicated minimum level of 40 pounds a ton.

Source: ICE Futures Europe, U.K. government data

That’s about 46 euros a ton, or 7.40 euros, 19%, more than current prices for EU carbon futures on the ICE Futures Europe exchange.

According to my survey of traders, some are expecting prices for the traded U.K. allowances near the 22 pound a ton level, yet demand in the secondary market could be strong initially if supplies in the first few auctions — the primary market — are not high.

EU carbon allowances have surged through 40 euros a ton during the past few weeks after breaking through 30 euros for the first time only back in December.

Debate about how Brexit will roil the EU’s carbon market has caused fluctuation in prices ever since the British vote to leave in the middle of 2016.

Photo by Anthony Beck on Pexels.com

Since the end of the transition period in December, some coal and gas generators in Britain have used EU allowances as a proxy for U.K. carbon because the new British contracts are not yet available.

A 19% price difference is certainly wide enough to boost demand in Britain for EU-generated power, which could be a boon for mainland Europe generators, according to a trader at a big bank.

British fossil-fuel generators have had a great start to 2021, because the winter cold snap and low levels of wind generation caused demand for power and gas to surge.

When these utilities switch into U.K. allowances by selling the EU permits they have built up, that will probably still shift prices.

See this:
https://carrzee.org/2021/02/10/u-k-utilities-get-huge-4000-quid-mwh-windfall-as-low-wind-winter-demand-means-fossil-fuels-win/

(Updates with chart)

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