European Union carbon allowances closed at their lowest level in almost three months on Friday and a further delay to Brexit into next year could send prices even lower.
That’s because such a delay would mean British factories, power stations and airlines stay in the programme for an extra year. An additional chunk of UK allowances, worth about €1.5bn ($1.65bn), could hit the market at some point in the first half of next year, according to Emily Jackson, an analyst for BloombergNEF in London. The timing of that supply is a big question.
“It would weigh down the price, but we’re not anticipating a crash,” Jackson said. “Big companies have seen this coming and some are preparing to comply.”
Still, any delay could be temporarily bullish as British emitters realise they need to buy for 2019 before the extra allowances arrive, she said.
Futures fell a further 0.2% yesterday to €25.04 a metric ton on ICE Futures Europe in London. Only a few weeks ago, traders and analysts were speculating that prices would soon hit €30.
The risk of a no-deal Brexit and a global recession alongside weak factory output have weighed on the market since the start of August. Before that, allowances were trading at their highest in a decade, after politicians dealt with a glut that’s damped prices for years.
Britain’s parliamentarians last week voted in favour of forcing Prime Minister Boris Johnson to delay Brexit by three months to January 31 if he can’t get a deal agreed. He said he would rather be dead than ask for a third extension.
Some UK emitters have boosted demand for permits in 2019 by continuing to buy carbon in advance, because of the uncertainty surrounding the timing of the UK’s exit from the market, according to BloombergNEF.
Should the UK want to sell and give away allowances before the risk of a no-deal Brexit is eliminated, it would probably need to “mark” its allowances – introducing a country code could create a two-tier market and harm trading, BNEF said.
On top of the €1.5bn of sold allowances, the British government would give away about €1.3bn of permits to emitters under the program’s rules, adding further supply to match extra demand.
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