(Montel) The UK is more likely to leave the EU without a withdrawal agreement after the appointment of Boris Johnson as prime minister, which while bearish for carbon might not be as marked as initially expected, analysts told Montel.
Players had initially predicted in the scenario of a so-called no-deal Brexit that there would be a sharp decrease in carbon prices, as Britain would no longer be a member of the EU ETS and UK-based installations would likely sell any surplus EUAs before “Brexit day”.
However, repeated delays to the country’s scheduled withdrawal from the bloc had given UK players enough time to make arrangements to move their EUAs to accounts in other EU countries or to transfer them to affiliate companies abroad, the analysts said.
The Dec 19 EUA contract was last seen up EUR 0.50 at EUR 29.49/t, after hitting a fresh 11-year high of EUR 29.64/t earlier.
“British installations are well prepared. Most of them have transferred surplus EUAs to continental Europe,” said Bernadett Papp of Vertis Environmental Finance.
But there was still a chance EUA prices could drop, Papp said.
“There might still be installations that have allowances on their accounts, either because they did not believe in a hard Brexit and kept the old surplus or because they have continued to hedge their emissions exposure in 2019.”
“[It’s] all been written about. Whoever is not yet prepared for a hard Brexit will likely never be prepared,” added Marcus Ferdinand of Icis.
No immediate reaction
Players certainly did not expect an immediate reaction to Johnson’s appointment and said the market would wait on the progress of reaching a withdrawal agreement with Brussels, with Britain due to leave the EU by 31 October deal or no deal, "do or die", according to the new prime minister.
“I’m not sure anyone [wants] to go short just yet,” said Trevor Sikorski of Energy Aspects. “No one wants a big position before the holidays and August is usually supported, so the market selling off on Brexit might have to wait a month or two.”
EUA prices have risen in every August since 2008, due mainly to the annual 50% cut in auction volumes during the peak holiday month.
“For ETS participants it is more about pricing the sentiment than any fundamental considerations at the moment, given that all of this will depend on a final hard/soft/no Brexit decision,” said Ferdinand.
“[But] there will likely be some price reaction [to Johnson’s appointment] and [the likely resignations] of key ministers. The sentiment will likely turn bearish,” he added.
Earlier this week, finance minister Philip Hammond had threatened to resign if Johnson was victorious as he said he could not support a possible no-deal Brexit and a host of other ministers may follow suit, with foreign office minister Alan Duncan quitting on Monday, along with education minister Anne Milton this morning.
Energy policy impact?
The leadership of Johnson – who beat foreign secretary Jeremy Hunt in a final run-off – is unlikely to impact the country’s existing climate and energy legislation, however.
Last month, the UK became the first major economy to pass laws to bring all greenhouse gas emissions to net zero by 2050, compared with a previous target of at least an 80% reduction from 1990 levels. The move was in response to the 2015 Paris climate pact to keep the increase in global average temperature to well below 2C above pre-industrial levels and to limit the increase to 1.5C.
Energy minister Claire Perry’s job could be in the balance though, with reports she is one of the ministers that could quit over Johnson’s failure to rule out a no-deal Brexit.