The benchmark European Union carbon price hit a more than 10-year high on Wednesday, on expectations Britain will get a delayed exit from the EU which will mean it stays in the bloc's emissions trading system for longer.
The price had risen to an intraday peak of 26.89 euros ($30.22) a tonne as of 1349 GMT, its highest since July 2008.
Traders said the move was mostly due to expectations the EU will give Britain an extension to when it will leave the 28-nation bloc, which would avoid a flood of permits hitting the Emissions Trading System (ETS) from the second-largest emitter of greenhouse gases in Europe.
‘Speculators are buying; (the chance of) a Brexit extension has definitely increased that. Coal has also fallen,’ a carbon trader said, referring to the relatively low price of coal compared to gas which has made coal-fired generation more competitive.
The carbon price rise also pushed up British gas prices and European power prices.
Britain's utilities and industry are among the largest buyers of permits in the ETS, which is a scheme to cut carbon emissions and charges power plants and factories for every tonne of carbon dioxide they emit.
EXTENSION?
The British government has said if it left the EU without a deal, it would immediately withdraw from the ETS and companies would be subject to a domestic carbon tax. This could lead to a sudden sell-off of EU permits.
If it secures a Brexit deal, Britain would remain in the scheme until 2020 and resume allocating and auctioning permits after the first quarter.
‘When (participation) will resume depends on the UK government. In principle it could decide already at the end of April,’ Refinitiv carbon analysts wrote.
‘Allowing some time for the paperwork; to inform compliance companies and set an auction calendar with the ICE platform - and bar any surprises - our qualified guess is that we could maybe expect to see allocation resuming by June 2019.’
Relatively low coal prices compared to gas have also made high-emission coal-fired power generation more competitive, some analysts said.
Added to that, there is buying ahead of EU preliminary data on May 2 which will show the number of carbon permits surrendered by each installation in the ETS in 2018.
Currently, there is a permit shortage in the EU carbon market, which is forecast to grow. This could raise the average price of permits to 30 euros/tonne this year and 65 euros/tonne by 2020, according to Bernstein analysts.
‘If companies do not have enough permits to match their emissions, they pay a 107 euro/tonne penalty (or they cut their emissions),’ they wrote.