Oh Brexit—the topic that promises to keep on injecting volatility into the carbon market, at least over the next few months. Last week, the UK parliament rejected the Brexit deal that had been negotiated by Theresa May’s government and the EU. While the carbon market surged after the vote, appearing to discount a hard Brexit at the end of March, this seems premature. Given the scale of the rejection on the existing deal, the May government must now try to identify an alternative the House of Commons would approve before holding further negotiations with Brussels. The government has set 29 January as the date when the UK Parliament will vote on a revised ‘Plan B’, which if accepted would start a period of dialogue with the EU. But the May government already seems to be cooling on a short-lived effort to achieve cross-party consensus because of the risk of splitting the ruling Conservative party. Instead, the emerging ‘Plan B’ appears to rest on renegotiating the Irish backstop, which Brussels has already ruled out. Meanwhile, various groups of British members of parliament (MPs) are attempting to give the UK parliament more control of the Brexit process, including requiring May’s government to request an extension to the Article 50 timeline unless a revised deal is finalised in the coming weeks. The numerous obstacles that still need to be overcome to arrive at a deal suggest more time will be required, through an extension to the Article 50 deadline. The UK is reluctant to request an extension because it believes the threat of ‘no deal’ is the only negotiating card the UK has left to play. Any weakening of this threat is likely to be viewed as removing some of the pressure on the EU to offer new compromises. On the EU side, given European Parliament elections in May, there is resistance to extending the deadline by much more than three months. So even the seemingly logical next step, to extend the Article 50 deadline, remains far from certain.
|Fig 1: Scheduled EUA auctions per week, Mt||Fig 2: UK based emissions and EUA supply, Mt|
|Source: Source: EEX, ICE, Energy Aspects||Note: Supply = free allocation + UK government auctions
Source: EUTL, ICE, Energy Aspects
EU price action
We did argue last week that the Brexit vote was more likely to amplify uncertainty than deliver clarity. While that did happen, EUA prices gained some 9.3% w/w to close at 24.4 €/t on Friday. Most of those gains came after the Brexit vote, although last week was generally a bit more supportive of EUAs then the previous weeks had been. Temperatures in Europe are dipping, and while weather forecasts have been variable, the next few weeks are generally looking like colder than normal winter weather will be around. This will support power sector demand for thermal generation (and emissions) and should push the fuels complex, particularly gas, back up. Also, the previous week (w/b 7 Jan) had seen the market testing technical lows, but having found support, the time was ripe to test upside resistance. With such upside resistance sitting at 25.7 €/t, there could be another session or two of buying before the downside starts appealing more to technical traders. Despite some supportive developments, there are some downside risks approaching. German EUA auctions will restart on 1 February after a suspension for two and a half months, adding some 3.2 Mt per week more auction supply than in January. Before then, however, the 29 January Brexit vote on ‘Plan B’ will drive short-term market positioning. If ‘Plan B’ gets rejected, then the market could be more bearish unless UK MPs work out exactly how they will stop a no-deal Brexit from occurring. For the coming week, EUA price development will continue to be largely technically driven but with one eye on political developments in the UK. We still expect prices to trade in a 21.0–25.8 €/t range over the remainder of January and through the period when Brexit uncertainty remains.