June 24, 2016 / 8:25 AM / 3 years ago

UPDATE 2-Brexit leaves uncertain future for Europe's carbon market

* Traders say future of EU ETS uncertain if UK pulls out

* British MEP resigns as ETS reforms rapporteur

* EU carbon falls to lowest level since March (Updates throughout, adds comments)

By Susanna Twidale and Nina Chestney

LONDON, June 24 (Reuters) - Britain’s decision to leave the European Union has raised a critical question about the future of the world’s biggest carbon market and fears that it could also quit the scheme sent prices tumbling.

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.

EU lawmakers are currently working on reforms of the market that will reduce the share of free carbon permits handed out after 2020 as part of an effort to fix the oversupply in the system and boost prices.

In the past Britain has been a champion of measures to drive up prices, but will no longer have influence to shape the market’s future regulations.

For example, Britain, along with Germany, led efforts to broker a deal with member states last year to get ETS reforms started in 2019, two years earlier than countries such as Poland had wanted.

British MEP Ian Duncan, who was shepherding the changes through the European Parliament, tendered his resignation as rapporteur of the ETS reforms.

“His draft report is a good basis for further discussions towards a successful reform (of the market) and we hope, in case Mr Duncan gives back the rapporteurship, that whoever takes over will work in the spirit of the work done,” said Dirk Gotink, spokesman for the EPP group in the EU Parliament.

Ian Duncan was not available for comment.

Most analysts believe Britain will remain in the EU ETS even though it has voted to leave the European Union, and follow a similar path to Norway whose companies participate in the scheme despite not being an EU member.

“Logic says that the UK will try and negotiate an agreement which still gives them access to freedom of movement of goods and capital but not people. That will require the UK to keep a huge range of EU policies and it is likely that the EU ETS would be one of them,” said Trevor Sikorski, analyst at UK-based consultancy Energy Aspects.

“However, you could see a world where it pulls out of the EU ETS and just keeps the carbon tax and argues it’s an equivalent measure. Really, all we have now is uncertainty,” he added.

Britain needs a high carbon price to justify its investment in building new nuclear plants, which generate energy without producing CO2, and has imposed a carbon tax of 18.08 pounds ($24.77) per tonne that users must pay in addition to buying allowances on the EU ETS, around 5 euros a tonne. ($1 = 0.7300 pounds) (Editing by Alexander Smith/Ruth Pitchford, additional reporting by Alissa de Carbonnel in Brussels)

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