Brexit ruined one of the most reliable bets in the energy world

Carbon prices have risen every August for a dozen years as the volume put up for auctions is reduced because of the summer holidays. But this year concern that UK emitters will flood the market if Brexit causes them to crash out of the system contributed to a 5.9% price decline.

That meant traders probably had to unwind unprofitable trades and make new bets, driving the volume to record levels for the July and August months, said Per Lekander, a fund manager at Lansdowne Partners UK LLP. Concern about slow levels of economic output in Europe and the US-China trade war added to the carbon market’s gloom.

“I don’t see much else bad that can happen,” said Lekander, who’s been following the market for almost two decades and correctly called price drops in 2009 and 2011. He’s also bet on the market’s recovery -- Landsdowne has been a buyer of carbon as it surged the past three years.. “From here, I am bullish into the year end and super-super bullish into 2021, when carbon will double at least.”

But Brexit thwarted gains during the past six weeks.

Political risk means price swings in the market will probably continue for many weeks yet -- until London and Brussels sort out the UK’s exit from the trading bloc, Lekander said. Yet price drops in the market will probably now be limited because the same forces driving the market to triple in value last year will come back into play once the Brexit outcome is known, he said.

The EU established a reserve of allowances this year to soak up a glut in the market by cutting supply.

Even under a no-deal Brexit, selling by British emitters may be smaller than predicted because many of the UK-based factories, power stations and airlines in the market have operations on mainland Europe that might use the spares instead, Lekander said.

“It’s a storm in a teacup,” he said.

Carbon allowances rose 1.4% by 4:04 p.m. London time Wednesday, after British lawmakers on Tuesday night rose up against Prime Minister Boris Johnson to prevent a no-deal exit. Johnson’s Brexit strategy is in tatters, his ruling Conservative party is disintegrating and he’s clinging on to power by a thread.

Most analysts are predicting additional gains in the market, assuming there’s no recession in Europe. Bank of America estimated last week allowances can almost double to 50 euros a ton by the end of next year. BloombergNEF expects prices as high as 30 euros by the end of this year and as low as 23 euros. 

Disclaimer: This article first appeared on Bloomberg.com, and is published by special syndication arrangement."