Brexit Delay Could Make Rout in European Carbon Even Worse

(Bloomberg) -- 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 program for an extra year. An additional chunk of U.K. allowances, worth about 1.5 billion euros ($1.65 billion), 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 realize they need to buy for 2019 before the extra allowances arrive, she said.

Futures fell a further 0.2% on Monday to 25.04 euros 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 euros.

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 favor of forcing Prime Minister Boris Johnson to delay Brexit by three months to Jan. 31 if he can’t get a deal agreed. He said he would rather be dead than ask for a third extension.

Deal or No-Deal Doesn’t Matter to EUA Prices : BNEF

Some U.K. emitters have boosted demand for permits in 2019 by continuing to buy carbon in advance, because of the uncertainty surrounding the timing of the U.K.’s exit from the market, according to BloombergNEF.

Should the U.K. 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 1.5 billion euros of sold allowances, the British government would give away about 1.3 billion euros of permits to emitters under the program’s rules, adding further supply to match extra demand.

To contact the reporter on this story: Mathew Carr in London at m.carr@bloomberg.net

To contact the editors responsible for this story: Reed Landberg at landberg@bloomberg.net, Lars Paulsson, Rob Verdonck

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