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Pricing Emissions
What Brexit Means for Europe’s Carbon Market

We’ll be sifting through the myriad effects of Britain’s vote to leave the EU for months, but in the immediate aftermath there’s a big question about the future of Europe’s carbon market. Reuters reports:

Britain is the second-largest emitter of greenhouse gases in Europe and as a result its utilities are among the largest buyers of permits in the EU’s Emission Trading System (ETS), which charges power plants and factories for every tonne of carbon dioxide (CO2) they emit.

With Britain’s continued participation in the scheme under question, EU carbon prices plunged more than 10 percent on Friday morning, and to their lowest level since March.

“We are now faced with the real possibility Britain could leave the ETS, which would be hugely bearish, not just on the supply/demand side but for the wider hopes for strong market reforms post 2020,” a carbon trader said.

Europe’s Emissions Trading System (ETS) wasn’t exactly healthy before Thursday’s referendum, having struggled mightily to find that goldilocks carbon price that’s high enough to incentivize companies to cut emissions, but not so high to send heavy industry packing for friendlier regulatory environments. This delicate balancing act is an unfortunate byproduct of attempting to implement a regional carbon market—the fact that companies have the option to relocate in today’s globalized world makes it very difficult to crack down on them in the ways Europe’s greens would like.

Thus far, Brussels has gone the safe route by over-allocating carbon permits, depressing prices while safeguarding the European economy. The EU plans to slowly remove permits from the market in the coming years, but if the UK—one of the biggest purchasers of carbon credits in Europe—backs out, Eurocrats will be sent scrambling to try and tinker with formulae to put the market back on track towards that perfect median price.

The UK could follow Norway’s example and remain in the ETS, despite not being a part of the union, but it would essentially be a non-voting member of the system if so. None of this will be decided anytime soon, but it adds a cloud of uncertainty over one of the EU’s most audacious green policy mechanisms, and it comes at a time when Brussels was already struggling to fix what was essentially a broken market.

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  • Kevin

    Given the revolt by the old industrial heartland of England against the EU, if I were a Labour politician I would be very reluctant to sign onto anything that would leave English industry at such a comparative disadvantage.

    • Andrew Allison

      It’s not just the old industrial heartland, it’s everywhere except (on the dole) Scotland and (on the make) London.

      • f1b0nacc1

        And I wonder if Scotland isn’t going to solve part of that problem soon by making another attempt at leaving. This would be an ideal time for them, after all…

        • Andrew Allison

          Absolutely. And Sturgeon, who knows full well that an independent Scotland will be required to apply for EU membership and that Scotland will be out of the EU the minute that Article 50 is invoked, is making remaining in the EU the reason for another referendum. I fear that the Scots are going to get the government they deserve.

          • f1b0nacc1

            Scotland is essentially Greece with bad food and lousy weather, so Lady MacBeth’s plan isn’t likely to do much more than separate the Scots from the UK and leave her in charge.

            Which is really all she was likely looking for in the first place….

  • Andrew Allison

    What Brexit (and Trump) mean:
    In other words, we’re mad as hell and not going to take it any more.

    • Nevis07

      lol. thank you for that Andrew…

    • f1b0nacc1

      How utterly delightful! I am typically not a Mr. Bean fan (more of a Blackadder guy myself), but that was absolutely PERFECT!

  • Jacksonian_Libertarian

    *Big Crocodile Tears* “Global Warming” is BS.

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