Industry Trend Analysis - Hard Brexit Risks To EU ETS Linger - FEB 2018

BMI View: Whilst the provision of a contingency plan protecting the EU ETS from the threat of a hard Brexit offers some stability , risks to both the UK government revenue and the European carbon price remain. The plan remains contingent on a proposed law being passed , as well as on whether the UK will negotia te to stay within the ETS post-B rexit.

The UK and the European Commission have reached a compromise regarding a contingency plan protecting the European Union (EU) Emissions Trading Scheme (ETS) from a hard Brexit scenario. As part of the ETS, emissions permits are surrendered on April 30th of each year, equal to the amount of emissions the companies participating in the scheme have produced the previous year. Because Brexit is scheduled for March 2019, this means British companies would not need to surrender permits for their emissions in 2018. In a worst case scenario, the operators of UK-based installations would have received allowances that they no longer need for compliance and could sell them into the system, causing renewed oversupply and a drop in the carbon price, before the UK leaves the market after March 29, 2019.

After a successful negotiation, the UK informed the European Committee 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 UK's withdrawal from the EU. Contingent on the law being introduced, allowances issued by the UK for 2018 would not be marked and would be accepted for surrender.

Carbon Price At Risk From Hard Brexit
Front Month EU Allowances, EUR/mt
Source: Bloomberg.

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