The EU ETS faces an extensive re-wiring next year as Brussels prepares contingency plans to guard against an un-coordinated Brexit, wrapping a new layer of uncertainty around the market just as lawmakers near completion of an extensive, years-long reform process.
Carbon Pulse is gathering carbon traders, analysts, regulators and other experts in London on Sep. 26-28 for the second annual Carbon Forward conference, an event aimed at helping emitters, traders and investors navigate the quickly evolving European and global carbon market landscape.
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EU carbon prices jumped to a 20-month high of €7.72 last week after lawmakers surprised the market with their Brexit-proofing proposal, sparking concerns that trade will be disrupted if companies attempt to weed out UK-issued allowances well ahead of the start of Britain’s scheduled divorce from the EU in Mar. 2019.
While gains in wider energy prices have also contributed to EUAs rallying by more than 30% this summer, observers say it’s the supply and liquidity concerns linked to the possibility of UK EUAs being voided amid a hard Brexit that were playing most on the minds of market participants over the past week.
“We can safely say that this climate of uncertainty on the ETS will prevail for a while yet, at least until year-end,” said UK consultant Richard Folland of Climate and Energy Associates, who will convene a panel to discuss Brexit and the EU ETS at Carbon Forward 2017.
The amendment, which was formally backed by the European Parliament last week, will kick in from Jan. 2018 if approved by member states, who are due to take up the issue later this month.
EU nations are understood to be broadly supportive of the measure but will likely seek changes and further debate before adopting it.
LAUDABLE BUT RISKY
Some observers pointed out that the amendment represents an understandable effort to protect the market against a sell-off from departing UK companies, though most experts agreed that it could severely hamper liquidity and breed legal challenges if not implemented carefully.
“Both the co-legislators and the Commission will have to be wary of unintended market effects and potential legal implications when clarifying the detailed rules,” said Hæge Fjellheim, head of carbon analysis at Thomson Reuters Point Carbon, who is also speaking at Carbon Forward 2017.
“[We] expect the European carbon market to diverge if such a provision is adopted, with UK-marked allowances trading at a discount compared to EU27-issued EUAs.”
Europe’s main emissions exchanges – including ICE Futures Europe, which hosts the UK’s fortnightly CO2 allowance auctions – are also understood to be scrambling to come up with solutions to protect their lion’s share of the more-than €100 million in daily EUA trade, as any bifurcation of the market would likely prove a boon for brokers.
And to make matters worse, account holders in the EU’s emissions registry are currently unable to see the country of origin of the EUAs they’re holding, meaning that if the measure passes it would likely require a re-write of the regulations that govern the online trading hub, as well as its underlying software – efforts that could take many months to complete.
Several experts have pointed out UK emitters might be able to initially side-step the regulations by surrendering the 2018 EUAs they receive for free or buy early next year ahead of the Apr. 30 compliance deadline for 2017 emissions, while storing allowances with vintages of 2017 or earlier for future use.
However, this may also not be possible if market participants are unable to see the vintages of the EUAs held in their registry accounts, meaning that emitters could start to flock to the EU-27 auctions on EEX and shun the UK ones.
“We have calculated that in case all UK auctions were cancelled as a result of low demand, the average EUA-27 price would increase by approximately €1.70/tonne over 2018 compared to full auctions,” said analysts at ICIS, who will also speak on several panels at Carbon Forward 2017.
They added that as a result, EUAs could become a vehicle for speculators to bet on the odds of a hard Brexit versus a soft one.
Reflecting these looming risks, the Carbon Forward 2017 team have put together a comprehensive programme examining the implications of Brexit for the EU ETS and assessing the impact of the ever-growing swathe of other complementary measures – both at EU and member state levels – on the 13-year old carbon market.
Carbon market analysts will also present their forecasts for EUA prices over the next decade, providing their perspectives on how quickly 2019’s MSR launch and the post-2020 reforms will bite.
**Click here for the Carbon Forward 2017 agenda or to book your tickets.**
CARBON FORWARD FACTFILE
- Speakers are confirmed from the European Commission, an unprecedented line-up of at least eight carbon market analysts, leading participants from utilities, industrials, banks, exchanges and trading houses, and the governments of Brazil and Norway – the latter the world’s biggest sovereign buyer of carbon credits. Click here to see the full speaker list.
- The two-day conference (Sep. 27-28) is being held at London’s 5-star Canary Riverside Plaza Hotel, while the venue for the pre-conference Training Day (Sep. 26) is just down the street at the Citigroup Centre, 25 Canada Square.
- It is shaping up to be Europe’s premier event for companies affected by the growing carbon markets. There is still time participate – RESERVE YOUR PLACE NOW
- Last year’s inaugural Carbon Forward 2016 conference attracted more than 180 delegates & speakers from 27 countries, and this year’s event will be even bigger. Participants, decision-makers, and top-flight speakers are drawn from industry, utilities, brokers / trading houses, government, and trade organisations.
By Ben Garside and Mike Szabo – email@example.com