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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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