UK carbon futures plunged over the past two days, pushing the discount to the European Union’s benchmark to its widest level in months as political uncertainty, currency weakness and shifting monetary expectations rattled the market, Bloomberg has reported.
Contracts have fallen roughly 20% to their lowest level since April, according to data from Intercontinental Exchange (ICE). Over the same period, EU carbon prices declined about 1.4%, underscoring a sharp divergence between the two systems.
Analysts at BNP Paribas said the gap is likely to persist until progress is made later this year toward linking the UK and EU emissions trading schemes.
Talks are under way to establish a common framework that would allow mutual recognition of allowances and closer alignment of market rules, though no final agreement has been reached.
Broader macroeconomic forces are driving the UK market’s recent moves. Expectations of looser monetary policy have amplified price declines, particularly when measured against the euro, while sterling weakness has added further pressure.
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“We’re expecting that the Bank of England will cut in March, 25 basis points, so that’s not fully priced into the market yet, and we think that has further to go,” Jason Ying, a commodity strategist at BNP Paribas, was quoted as saying.
Investment funds have begun reducing long positions in UK carbon, ICE data show, as traders unwind bets that UK prices would converge with the EU benchmark. Further currency depreciation could deepen the discount, the bank said.
UK carbon futures for December delivery fell 6.02% on Wednesday to $66.49 (£48.73) per metric ton. The equivalent EU contract declined 1% to $92.57 (€77.92).
The latest selloff highlights the UK market’s sensitivity to domestic political and economic signals, even as policymakers continue negotiations aimed at eventually integrating the two carbon systems.
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