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The impact of Brexit on the UK's climate change policy

Over the last years, the UK has been one of the most active European Union Member States in climate change policy and energy talks and it has often led the way forward. Some policies successfully implemented by the British legislation were later proposed by the European Commission for all the Member States to adopt. But on the 23rd of June 2016, the UK voters declared against the membership in the community and on March 30th Prime minister Theresa May triggered Art. 50. How does this decision affect climate change policy in the UK and in Europe? What could be the outcomes of Brexit in this field?

April 2017
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Executive Summary

According to many observers, the impacts of Brexit will not be seen until the end of negotiations that will redefine the relationship between the UK and the EU. This should take at least two years as the situation is unprecedented – no country has ever left the EU.

By all means, it will take a long time to set up a new relation between the UK and the EU. It is also true, that we shall understand the real impact of Brexit after these talks. But the referendum also had some immediate impacts.

One of the fastest impacts has fallen on the British currency. The pound sterling has experienced a huge drop since the announcement of the result of the referendum. Economically, Britain has already suffered and will still suffer consequences. But consequences may fall onto the EU as well.

Withdrawing from the EU's Emissions Trading System?

The European Union Emissions Trading System (EU ETS) is potentially a powerful tool to combat the climate change and to reduce Greenhouse Gas (GHG) Emissions. But it needs to be efficient. The system is not enough responsive to economic shocks that could affect the price of carbon, which needs to be more or less stable, otherwise companies cannot work with the price of carbon. Uncertainty over time is a nightmare for investors. Due to these shocks, a surplus of emission allowances has built up in the EU ETS since 2009. On 15 July 2015, the Commission presented a second proposal to reform its ETS.

Following the result of the referendum, British MEP Ian Duncan tendered his resignation as rapporteur of the ETS reforms. This should not make negotiations of so needed reform easier.

What is even more serious is that it is still not clear whether or not the UK will be a part of the EU ETS. Britain is the second-largest emitter of greenhouse gases in Europe and the carbon market would not be as efficient without it. Its utilities are among the largest buyers of permits in the EU’s ETS, which charges power plants and factories for every tonne of carbon dioxide (CO2) they emit,” wrote Reuters, quoting a carbon trader: “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.”

Favourably, on 15 February 2017, building on the Commission’s proposal from July 2015, the European Parliament agreed on the changes to strengthen the Market Stability Reserve, a solution that should address the current surplus of allowances and improve the system's resilience to major shocks by adjusting the supply of allowances to be auctioned.

Climate change commitments and the EU membership

Some have suggested that the UK’s vote in June will question EU’s climate change policies that the UK had to implement as a Member State. This might be true. Nevertheless, already since 2008, the UK has implemented the legally binding Climate Change Act on a national level. Furthermore, “the act commits the UK to reducing emissions by at least 80% in 2050 from 1990 levels,” which is the same as the European Commission’s ‘2050 low-carbon economy’ target. The government has also already adopted the “fifth carbon budget” which implies reducing carbon emissions by 57% by 2030 on 1990 levels. That is tougher than the carbon emissions target the UK is signed up to as part of the European Unionwhich requires a 40% cut by 2030 on 1990 levels. The ‘fifth carbon budget’ is an important intermediary step towards the Climate Change Act target for 2050. “To fulfil our carbon commitments, and just as importantly, to make the most of global market opportunities, we need to put strong and stable Government policy on energy efficiency centre stage. The Carbon Plan later this year must provide businesses with the confidence to invest in low carbon technologies and new business models which can deliver a low carbon built environment,” wrote for Blue and Green Tomorrow, John Alker, Policy Director at UK Green Building Council.

Put simply, even if the UK disengages completely from the EU legislation, it would not affect its own climate policy legislation. Moreover, Amber Rudd, Secretary of State for Energy and Climate Change, announced after the vote: “We made a clear commitment to acting on climate change in our manifesto last year. That will continue.” On the other hand, Brexit will make it harder for the UK to play an active role on climate change.

The preoccupations that the UK’s vote will slow down the process of ratification of the Paris Climate Accord also did not prove justified as on Oct. 5th, the threshold for entry into force of the Paris Agreement was achieved. In order to push forward the ratification of the Paris Agreement, the European Commission begun the legislative process needed for its ratification by the Member States even before the referendum.

The ‘fifth carbon budget’ will certainly not be easy to fulfil. “It will oblige the UK to decarbonise its existing electricity output not only very substantially but also much more quickly,” wrote FT analyst Nick Butler on Oct. 3rd 2016. That also might be of the main reason why Theresa May finally moved on the long postponed decision to launch the Hinkley Point project.

The energy security compass

Energy security was at the centre of the Brexit energy debate and this issue frames climate change policies, as much as any international commitment.

Increasing imports from abroad raises more of such questions, with slightly more than 50% gas imports and still some coal imports from Russia. The British are aware of the issue and they try at least avoid putting more at risk the kingdom’s energy security. It was last year when “the UK itself discouraged Russian investors who wanted to trade into North Sea oil and gas assets. The legality of the issue was never tested because the investment plans were withdrawn but the result was important because of the signal it sent,” wrote for the Financial Times Nick Butler on Oct. 3rd.

The new nuclear power project near Somerset, with the major investor EDF, might be very expensive, but it offers more energy security. With increasing concerns about the issue, it will be interesting to observe what will become with the still uncertain Chinese project in Bradwell, Essex.

For many, an energy security argument is the reason why the UK should reconsider the possibility of exploiting its shale gas reserves, especially after the arrival of the first shale gas shipment from the US. Advocates of fracking have accused British and Scottish politicians of hypocrisy, “for relying on US shale gas supplies to keep Grangemouth [a mature oil refinery complex] open while blocking local exploration,” wrote Mure Dickie and Andrew Ward in the FT on Sept. 27th.

By all means, Brexit has raised some more energy security questions that will need to be answered. Considering the impact of energy supply and costs on industrial investment, on the one hand, and a probably windy economic weather in Brexit and post-Brexit years, Great Britain’s climate change policies may become a simple adjustment variable of economic policy.

Jan Svoboda
Energy Analyst