New analysis from Thomson Reuters’ Point Carbon suggests UK exit from trading scheme could spark a surge in UK firms offloading emissions allowances
The prospect of a UK exit from the EU Emissions Trading System (ETS) could increase the supply glut already plaguing Europe’s carbon market, according to new research from Thomson Reuters’ energy analysts Point Carbon.
Initial research by the Point Carbon team – shared with BusinessGreen ahead of its publication later this month – suggest UK firms will look to offload their unused allowances over the next few years in anticipation of a UK exit from the EU ETS in 2020, when the market’s third trading period is set to end.
Meanwhile, utility companies are likely to change their hedging patterns to accommodate the prospects a UK exit from the scheme, the researchers said.
“In the short term, from now until 2020, we expect Britain leaving the EU ETS to have a bearish impact on prices,” Anders Nordeng, senior analyst on emissions markets at Point Carbon, told BusinessGreen. “We expect UK utilities to reduce their hedging demand in the order of 80 million tonnes (Mt) in the years 2017-2020, and we expect UK industrial installations to offload some 150Mt from their surplus in the same period. So, some 230Mt worth of additional allowances coming to an already glutted market.”
However, in the longer-term a UK exit from the trading system could actually prompt carbon prices to rise, Point Carbon suggested.
Beyond 2020 the researchers foresee Brexit – and a full break from the ETS – having a modestly bullish effect on prices, thanks to the removal of excess allowances not needed by UK emitters. “The UK, by being so good in reducing emissions, is responsible for a relatively high share of the aggregate surplus of allowances – more that you would assume by just looking at its share of annual emissions,” Nordeng explained. “If we assume that trend to continue in the years 2021 to 2030, the fact of taking the UK out of the EU ETS means the aggregate surplus will be smaller than it would be with the UK still part of the system.”
Around 1,400 UK installations are subject to the EU ETS. Emissions from these plants – which include power plants and heavy industry sites – have been falling steadily for several years, hitting 145Mt in 2015 as the UK’s reliance on coal power slumped.
The UK government has offered no indication of its plans for the EU ETS, but many experts believe continuing as a full member beyond 2020 could be politically incompatible with Prime Minister Theresa May’s pledge to “take back control” and remove the UK from the jurisdiction of the European Court of Justice.
However,the European Parliament has signalled it regards an on-going UK commitment to environmental policies as a red line in any post-Brexit EU-UK trade deal, and a number of non-EU countries are currently participants in the ETS.
Experts last month warned MPs a “hard exit” from the ETS could undermine global climate efforts. As an alternative, the UK could set up a parallel trading scheme that links into the EU ETS, it was suggested.
The news comes as a package of methods designed to reform the EU ETS are making their way through the European Union’s legislative channels. The measures, which include a €12bn innovation fund and speedier reductions in the number of excess allowances in the market, have been approved by EU countries but must now win full backing from EU bodies.
The most recent data on the effect of the EU ETS on European emissions suggest it is driving down pollution across the trading bloc. Research published last week by Point Carbon indicates greenhouse gas emissions from stationary installations regulated under the EU ETS dropped by 2.7 per cent last year – the fifth consecutive year to see a fall.
The analysis, based on emission data from the European Commission, found a slump in coal use and rising renewables deployment was responsible for the lion’s share of the reductions, but industrial manufacturers also cut their CO2 output due to plant closures and lower output in the metals sector.
Worryingly however, EU aviation – which is also regulated under the EU ETS – saw emissions rise eight per cent last year to 61.6 Mt, analysts found.
Meanwhile, critics of the EU’s management of the market maintain that low carbon prices are doing little to drive investment in clean technologies and infrastructure, arguing recent reductions in emissions across the bloc are the result of other policies.
