(Bloomberg) -- The European Union and the U.K. reached the first compromise on Brexit in vote on a contingency plan for the world's biggest emissions market.
EU nations endorsed a measure to prevent the worst-case Brexit scenario for the Emissions Trading System, where the market would be flooded by British carbon permits no longer needed by U.K. companies in the event negotiations for the country's orderly withdrawal from the bloc crash. The plan offers Britain an option to avoid having its allowances made distinguishable while protecting the EU's flagship climate program from a supply turmoil, according to the European Commission.
EU carbon allowances for December closed 2.2 percent down at 7.53 euros a metric ton on the ICE Futures Europe exchange in London, extending losses posted earlier on Thursday in reaction to a draft plan not to mark U.K. permits restricted for use. Making the U.K. permits second-class assets would have implied the overall volume of allowances eligible for surrender would shrink, traders have said.
“This compromise provides breathing room for negotiators to develop workable solutions for the long-term,” said Stuart Evans, senior economist at Vivid Economics consultancy in London. “It builds trust, and provides a degree of certainty, both for Europeans in the stability of the carbon market, and for British firms trying to manage their compliance obligations.”
The U.K. is officially a full member of the EU until the end of March 2019, remaining subject to all measures taken by the bloc until then. Negotiations on the terms of its withdrawal have been sluggish, with the EU refusing to enter into talks about the two sides' future trading relationship until the U.K. agrees to cover financial commitments stemming from its membership in the bloc, and makes assurances over the protection of EU citizens and the Irish border.
British and European officials say there's a good chance the deadlock will be broken on Monday if Prime Minister Theresa May presents a financial offer and a proposal on Ireland to Commission President Jean-Claude Juncker when they meet in Brussels. That would pave the way for the EU's other 27 leaders to give the go-ahead to the start of trade talks at a summit later in December.
No Safeguards
For investors and emitters in the EU ETS, time and certainty are essential. Before the deal on Thursday there had been no provisions to safeguard the program in case negotiators fail to reach a deal on time and the U.K. suddenly finds itself out of the carbon market, becoming a so-called third country to the EU. With the compliance deadline for 2018 emissions falling in at the end of April 2019, in the worst-case scenario the market was at risk of being flooded by permits issued or sold to companies by the British government while the country's obligations expire.
Allowances are sold at government auctions throughout the year and permits given for free are handed to emitters usually around February each year. The European Commission, the EU's regulatory arm, originally proposed marking and restricting U.K. allowances from the start of 2018. The measure envisaged that companies in the ETS would not be able to use such permits for compliance if Britain falls out of the emissions market.
Marking Permits
Under the compromise regulation approved by member states, marking permits for restricted use remains the basic scenario but the U.K. got an option to avoid it if the EU law doesn't cease to apply in Britain by April 30, 2019, or if it's “sufficiently ensured” that the surrender of permits must take place no later than March 15, 2019.
The new text addresses the concerns by the British government and European traders' lobbies, who warned policy makers that introducing a country code could create a two-tier market and harm trading. Because numerous companies headquartered in mainland Europe have their trading arms based in London, marking permits issued by the U.K. could hit them by a ricochet.
The U.K. informed member states “of its intention to adopt a law by the end of 2017 by which the compliance deadline for 2018 emissions would be advanced to before the date of the United Kingdom's withdrawal from the EU and in accordance with the amendment to the EU ETS Registry Regulation,” the commission said. “Should that be confirmed allowances issued by the United Kingdom for 2018 would not be marked and would be accepted for surrender.”
While the draft compromise is likely to provide certainty in the short-term, it only delays addressing the deeper doubts on whether the U.K. will remain in the EU ETS or how its exit will be managed, said Evans of Vivid Economics.
“Losing access to the EU ETS may cost the U.K. government and firms in the range of 800 million pounds per year by 2030 in lost revenue from the carbon trade, so it's essential that long term arrangements are settled as soon as possible,” he said.
To contact the reporters on this story: Ewa Krukowska in Brussels at ekrukowska@bloomberg.net, Mathew Carr in London at m.carr@bloomberg.net, Ian Wishart in Brussels at iwishart@bloomberg.net.
To contact the editors responsible for this story: Reed Landberg at landberg@bloomberg.net, Nikos Chrysoloras
©2017 Bloomberg L.P.
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