Brexit Turmoil Unsettles Europe’s Carbon Market

(Bloomberg) -- Britain’s maneuvering on how to leave the European Union is starting to unsettle the region’s carbon market.

The European Commission on Monday vowed to “do its utmost” to protect the integrity of the emissions trading system, which could be flooded with unneeded permits if the U.K. crashed out of the EU without a deal leaving companies there holding carbon credits they no longer need.

Twice in the past few weeks, Parliament in London has rejected Prime Minister Theresa May’s proposal for leaving the EU, raising the risks of a disorderly Brexit. On Monday, House of Commons Speaker John Bercow said May can’t put her deal for another vote in this parliamentary session if it remains unchanged. Carbon allowances for December fell as much as 6.1 percent, the most since Feb. 21.

The latest ripple in the market followed an announcement from the U.K. last week it would extend by 11 days the compliance date for its emitters in the EU cap-and-trade program. That breaches a deadline under a deal the EU struck in November 2017 that was designed to insulate the carbon market from a no-deal Brexit -- a pact that itself required several weeks of heated political debate.

“The Commission has been made aware that the United Kingdom has decided to put forward legislation postponing on short notice the EU Emission Trading System compliance deadline for U.K. companies from 15 March to 26 March 2019,” it said in an e-mailed reply to questions from Bloomberg News.

“Full compliance with the ETS is essential to deliver on climate and environmental objectives under international agreements, as well as to maintain a level playing field.”

Deadlines for compliance are essential for both investors and polluters in the EU ETS. Britain’s move to breach the regulation that it endorsed in 2017 increases the anxiety in the market and risks political mistrust in future relations between the 27 remaining EU member states and Britain.

Brexit negotiations to date have bogged down over what kind of deal the U.K. Parliament is willing to endorse. May has already conceded that the U.K. isn’t ready to leave the union by the current deadline of March 29 that is enshrined in law. She’s signaled she may seek a much longer delay before exiting if Parliament refuses to back her agreement before Thursday’s meeting of EU leaders in Brussels.

The EU has enacted rules meant to shield the ETS from Brexit. They aim to avoid the market being flooded by permits issued or sold to companies by the British government when the country’s obligations expire.

The measure envisages marking allowances issued by a country that notified the EU about its intention to leave the bloc. That mark would distinguish the securities from those used in the rest of the system and may allow investors to discount their value.

Britain got an exemption for allowances it created covering 2018 emissions. The U.K. got an option to avoid marking if the EU law continues to apply in Britain by April 30, 2019 or if the British government ensures that the surrender of permits would happen by March 15 -- last Friday.

That date was fixed by EU member states as one that would provide enough time before the planned Brexit date and the regular compliance deadline for 2018 emissions at the end of April 2019. Delaying that date means the EU may be left with three days to act should Britain head for a no-deal Brexit.

Allowances for 2019 are not subject to the exemption. That suggests the European Commission may start marking them if there’s no agreement on Brexit. The U.K. hasn’t yet issued emissions allowances for 2019 and hasn’t scheduled auctions. The British government has said it will halt participation in the EU ETS in the event of a no-deal Brexit.

The U.K. is continuing to seek a resolution on how the EU will treat its 2019 allowances. The main way of providing certainty would be to agree a Brexit deal.

Claire Perry, the U.K. energy minister, said last week that the government’s decision to extend the date of surrender of 2018 allowances will “allow all U.K. operators additional time to meet their EU emissions trading system compliance requirements.”

Her statement followed a push by some British emitters to extend the deadline. British Steel Ltd. may face a financial hit of 100 million pounds ($133 million) or more by March 15 if the government is unable to secure a Brexit deal, two people familiar with the matter said in February.

To contact the reporters on this story: Ewa Krukowska in Brussels at ekrukowska@bloomberg.net;Mathew Carr in London at m.carr@bloomberg.net

To contact the editors responsible for this story: Reed Landberg at landberg@bloomberg.net, Andrew Reierson

©2019 Bloomberg L.P.