London Finance Takes Another Hit as Carbon Market Goes to EU

(Bloomberg) — Intercontinental Exchange Inc. plans to move its 1 billion-euro ($1.2 billion) daily market for European carbon emissions contracts to the Netherlands from London in a blow to the U.K.’s attempts to build a green finance powerhouse after Brexit.

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A pedestrian walks across the Millennium Bridge in view of skyscrapers in the City of London, U.K., on Thursday, Nov. 5, 2020. The Bank of England boosted its bond-buying program by a bigger-than-expected 150 billion pounds ($195 billion) in another round of stimulus to help the economy through a second wave of coronavirus restrictions.

Stuart Williams, president of ICE Futures Europe, said the decision to shift the business into the European Union will help traders and investors “manage climate price risk in the most cost-effective and seamless manner.”

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The market is a key plank of the EU’s efforts to combat climate change. Volumes for futures and options contracts have more than doubled since 2015, ICE said in a statement Monday. The trades will continue to be cleared through ICE’s London business.

The shift comes after the Brexit transition period ended on Dec. 31, cutting off access to most London trading from the bloc and jolting several major markets. European equities have moved to Amsterdam and Paris from London, while some derivatives contracts have shifted out of Europe altogether in favor of Wall Street platforms.

The development is a setback for the U.K.’s government’s bid to become a center for sustainable finance. In his vision for financial services after Brexit, Chancellor of the Exchequer Rishi Sunak has said he wants the U.K. to be a “world leader in the use of green finance,” and that Britain is preparing to issue its first green gilts.

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Tower Bridge and skyscrapers in the City of London in London, U.K., on Monday, Jan. 18, 2021. Britain’s divorce deal barely touches banking and trading, and Europe is eager to develop its own financial center.

Read more on the U.K.’s plans for green finance

At issue for the carbon market is the lack of an “equivalence” decisions from the EU that would have made it cheaper and easier for traders to continue dealing in London. Lobby groups for energy firms pressed Brussels at the end of last year to take urgent action to resolve the matter, arguing they would face a “stark choice” of paying more in collateral to do business in London or else restrict their ability to manage risks.

While EU and U.K. policy makers are discussing how to cooperate on financial services going forward, Brussels has signaled it’s in no rush to grant broad access to London through equivalence decisions. The realities of leaving the EU have “come home to roost” for Britain, Mairead McGuinness, the EU’s financial services commissioner, said on Bloomberg TV last month.

The U.K. is launching its own emissions trading system to cover polluters now that it’s out of the EU. Nominally launched at the beginning of this year, ICE is set to begin auctions by the second quarter, along with the trading of futures contracts.

There is an expectation in the market that the U.K. and EU could link the two systems so that permits in one could be used in the other, boosting liquidity.

(Updates with plan for green gilts in fifth paragraph. An earlier version of this story corrected the spelling of ICE in the first paragraph.)

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