With Britain as a major player in the European Union, it was expected from the get-go that the Brexit vote was going to make a big impact on a number of things in Europe. For the carbon market, it was evident that things would not be right if the British voted to leave.
The most evident indicators of harsh time to come for carbon were the binary options. Even before the vote, the options had started taking a deep and when the vote was complete, we saw a slump like never before in carbon options.
Speculators believe that this is only the beginning and the worst is yet to come
Optimists have been hoping for a recovery and they thought that with the pound gaining slightly a few days after the vote, that was an indication that things may get better but we are now seeing differently.
When you look at the markets it is clear, options show just how badly Brexit may hurt EU carbon market. So far we have seen the largest surge in options for trade in licenses for the carbon market. According to data on record, the cost of wagers of carbon are at the highest in the last six months.
With such figures, it will be no surprise if Britain is the first to throw in the towel in the carbon market given its problems even before the vote on 23rd June.
Analysts are reading into the indicators on the option trade and getting the sense that the traders are being cautious or are outright scared that prices are likely to fall even further as the UK kick starts the process of effecting the exit vote.
German, France and other EU members are already calling for the UK to hasten their exit and at such a rate it could be as early as the end of this year that we see the worst in the carbon market.
A lot of the traders recognise that Britain has been a key figure in the climate talks and has been pushing a lot of the carbon trade decisions so with Britain out of the EU it is very likely that the pressure on the EU to purchase more permits and fines for factories and airlines that emit carbon dioxide will be diminished.
Peter Turner and analyst in London says you just have to look at the figures for 2014 to know what impact the UK has on the carbon market.
“Britain in 2014 bought over 47 million metric tons of allowances and if it is not around to make such purchases, naturally the price of carbon is going to go down like we are already seeing,” Mr. Turner said.
What we are seeing right now is obviously not the full negative impact that the exit may have on the European Carbon market. For now, the options trade is at a speculative level but once the divorce proceedings kick into high gear we are more than likely to see even worse.
Louis Redshaw a consultant in the carbon market says wise companies are already looking for alternatives to manage the risk associated with Brexit. He elaborates that Put Options are a safe risk management option and many companies will be looking in that direction.
The experts, however, say that it is not a doomsday for the carbon markets but we should brace ourselves for tough times ahead before we can see the light at the end of the tunnel.