EU Carbon Allowances Drop to Lowest Level in Two Years on Brexit

(Bloomberg) -- Carbon allowances fell to their lowest in more than two years amid speculation that U.K. utilities may trim demand after U.K. voters opted to leave the European Union, placing the nation's continuing participation in the market at risk.

Benchmark contracts have dropped 6.9 percent this week, following declines in the prior two periods, according to data from ICE Futures Europe in London. The U.K. will decide whether it stays in the 11-year-old market as it seeks to strike trade agreements with the EU during the next years, said Jahn Olsen, an analyst at Bloomberg New Energy Finance in London. Should the nation decide to abandon the market, demand from British utilities will ease, he said.

Factories that get most of their contracts for free from governments “will no longer need those surplus allowances if the U.K. leaves the EU emissions trading system and will seek to liquidate them,” Olsen said by e-mail. “Uncertainty regarding the U.K.'s future in the emissions trading system means that the price will probably stay depressed until the situation is cleared up.”

EU carbon has fallen 44 percent this year as lawmakers grapple with an accumulated oversupply in the market that's the equivalent of a full year of allowances. It dropped 18 percent since the Brexit vote on June 23, compared with a 0.7 percent decline in German power for next year and a 5.9 percent gain in U.K. natural gas for summer 2017.

On Wednesday, Sharon Dijksma, the Dutch environment minister, said she hoped the U.K. would persist with the carbon market as Europe ultimately seeks to link with cap-and-trade systems planned in China and Canada.

‘No Brainer'

It's a “no brainer that the EU will try to find allies for its emissions trading system beyond its borders; let's look at our closest friends then, because we are still friends,” Dijksma said in an interview at the Business and Climate Summit 2016 in London.

Trading in put options rose this week to 12.5 million metric tons, the highest since the week ended January 22, ICE data show. December allowances rose 3.4 percent Friday to 4.62 euros a ton by 4:31 p.m. They earlier dropped to 4.28 euros a ton, the lowest since March 2014.

To contact the reporter on this story: Mathew Carr in London at m.carr@bloomberg.net. To contact the editors responsible for this story: Lars Paulsson at lpaulsson@bloomberg.net, Rob Verdonck, Andrew Reierson