UK Prime Minister Keir Starmer announced June 22 that he will step down as Labour leader and prime minister. He is expected to remain in office until Labour selects a successor, with nominations opening on July 9 and a new leader due before Parliament returns in September.
UKA Dec-26 fell as much as 2.23% to a session low before recovering part of the move to trade just under 1% lower, as the market weighed the risk of a delay to the July 22 UK-EU summit in Brussels.
The move in UKAs is mainly about summit timing, not the resignation itself. UK political risk had already weighed on UKAs since the spring, meaning much of Starmer’s exit was already priced in. Confirmation therefore added limited new downside, but it increased uncertainty over whether a binding UK-EU agreement can still be signed on July 22.
The summit is the main near-term event for UKAs. ETS linkage would allow UKAs and EUAs to be mutually recognised for compliance across both systems and would create the conditions for mutual exemptions from each side’s Carbon Border Adjustment Mechanism. The price relevance is mainly through the UKA-EUA spread. Optimism of linking has pushed UKA price higher and earlier news reports of a potential agreement on linking at the upcoming UK-EU summit has resulted in a further narrowing of UKA-EUA spread. UKAs have also found additional support from tight UK ETS fundamentals and the planned removal of the GBP 18 Carbon Price Support from April 2028. The two front-December contracts have remained tightly correlated into the summit, with the 10-day rolling correlation around 82%. A delayed summit therefore means delayed convergence, which is what pushed UKAs lower this morning.
ClearBlue continues to expect UK-EU ETS linkage to become operational by 2028 and sees the leadership change as a low risk to that path. The agreement itself is still expected earlier, with the UK likely to aim for a deal before year-end to secure the basis for mutual CBAM exemptions, before moving into detailed talks on the technical and legal implementation of linkage. Andy Burnham, the frontrunner to succeed Starmer, backs a closer European relationship and has kept linkage inside his red lines, ruling out rejoining the EU, the single market or the customs union.
The risk sits in the summit’s timing. A leadership contest running from July into September raises the chance that the summit is delayed, or that a caretaker government leaves a binding agreement for the incoming prime minister to sign. That would postpone the next step toward convergence, weigh on UKAs and widen the UKA-EUA spread again, even if the 2028 operational linkage timeline remains intact.
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