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London — Carbon dioxide allowance prices in Europe have rebounded strongly in November, boosted by a drop in coal prices which has made the emissions-intensive fuel more competitive against natural gas for electricity generation.

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EU Allowance futures contracts for December 2018 delivery on the ICE Futures Europe exchange rose as high as Eur20.40/mt ($23.28/mt) Wednesday, from as low as Eur18.40/mt on Monday and from Eur15.10/mt on November 1, on an intra-day basis.

The sharp rebound in carbon came as coal prices fell from as high as $98.75/mt on October 19 to as low as $83.75/mt at the close Tuesday, on a year-ahead CIF ARA basis. The jump in carbon prices was all the more notable against a backdrop of sharply lower crude and natural gas prices in November than October.

Lower gas prices would ordinarily weigh on carbon prices by reducing the coal-to-gas fuel switching price.

The weaker coal prices in November increased the clean dark spread -- the profit margin for coal-fired power generation, taking into account the cost of coal and carbon.

This was particularly visible in the German quarter-ahead CDS, which moved higher in November, highlighting improved profitability for coal-fired plants.

The quarter-ahead CDS rose as high as Eur9.94/MWh for 35% efficiency coal-fired plants in November, compared with a range of Eur2.65/MWh to Eur5.42/MWh in October, according to S&P Global Platts data.

That means coal-fired profits widened their premium over equivalent gas-fired margins in November, increasing forward hedging demand for EUAs among the utilities.

The carbon market is also grappling with ongoing uncertainty over the Brexit process, which will determine whether the UK stays in the EU ETS.

UK Prime Minister Theresa May reportedly travelled to Brussels Wednesday in a bid to find a way forward in the Brexit negotiations amid political turmoil in the UK over the issue.

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Any UK-EU exit deal would be expected to see the UK stay in the EU ETS until the end of the current third trading phase on December 31, 2020, under an informal transitional arrangement.

However, a no-deal exit would see UK-based plant operators lose access to the EU's emissions registry after March 29, 2019. Until a deal is reached, this leaves uncertainty over whether UK operators will need to buy EUAs to cover CO2 emissions from January 1.

A no-deal outcome would potentially prompt selling of existing holdings of EUAs and unwinding of forward hedges.

Prime Minister May is fighting to find common ground between factions of her ruling Conservative party that want to sever ties with the EU and those who want to ensure a continued close trading relationship with the bloc. May and the EU last week agreed a withdrawal deal in principle.

Any final Brexit deal would need the backing of the UK parliament as well as approval by a majority of the other EU 27 nations and the European Parliament.

Until further clarity emerges, the UK government would be expected to hold off from auctioning carbon allowances from January 1.

The EU in late 2017 passed legislation that protects the EU ETS from a UK exit by invalidating allowances issued by any country leaving the EU, without prejudice to the possibility of agreement on a transitional deal.

The uncertainty relates only to 2019 CO2 emissions because the UK has already agreed to enforce the EU ETS compliance obligations for calendar 2018 CO2 emissions ahead of Brexit day in March.

--Frank Watson, frank.watson@spglobal.com

--Edited by Jonathan Fox, newsdesk@spglobal.com