Speculators are hoping to reap a windfall by shorting the EU carbon market as traders bet that prices will be hit in the event of a no-deal Brexit.
Carbon credits, introduced by the EU to combat pollution by companies in the bloc, rallied last month to a 10-year high of nearly €30 a tonne after European policymakers moved to tighten supplies to boost a broad environmental push. But since Boris Johnson became UK prime minister, the price of one credit has slid to €26.
Analysts say that as the prospect of a no-deal Brexit has grown under Mr Johnson, so have bets that the carbon price could slump. Some warn that the price could fall to €15 or less if UK participants in the scheme dump their credits, as a no-deal Brexit would spell the end of Britain’s direct involvement in Europe’s carbon market.
“The trading community is saying now’s the time to go short,” said Trevor Sikorski at consultancy Energy Aspects.
The prime minister’s latest move to suspend parliament in order to prevent MPs from blocking a no-deal Brexit has fuelled short interest, with Mr Sikorski saying the market was starting to “price this in”.
If the UK crashes out of the EU without a deal, British companies holding carbon credits would be pulled out of the bloc’s Emissions Trading System. Under the system, member companies such as power groups and oil majors, are allocated a number of free credits. Many members end up with a surplus of allowances — if, for example, they reduce how much they pollute — which they can sell on in the secondary market.
Nicolas Girod, managing director at ClearBlue Markets, said the EU’s carbon scheme had attracted speculative bets both among constituent companies and financial groups such as hedge funds.
“It’s a pretty liquid market and there’s quite a few traders who speculate,” Mr Girod said, adding that credit dumping could be “a really last-minute thing” as the UK could still stay in the scheme if Brussels and Westminster reach a deal.
But if no agreement is reached, a fixed £16-a-tonne carbon tax will be levied instead on polluting companies in the UK.
British Steel was caught out earlier this year. The metal business could have avoided a £100m taxpayer bailout, the Financial Times reported in April, if it had saved carbon allowances instead of cashing in before prices rallied to 10-year highs.
Interest in carbon has been rising. The number of open positions — the total amount of long and short bets in the market — has increased by 23 per cent since January, according to data from the Intercontinental Exchange.
Tom Lord, head of risk management at Redshaw Advisors, said there were “speculators shorting the market” in the belief that UK utilities companies “will dump” their allowances once they become unusable.
Not all UK companies would ditch credits. Many have global operations that allow them to transfer their existing allowances. Energy companies Shell and EDF, as well as third-party traders including Barclays and JPMorgan, have opened carbon trading accounts in the Netherlands, enabling them to continue taking part in the EU ETS.
Additional reporting by David Sheppard