Impacts of the Withdrawal Agreement and Political Declaration on the Role of the Energy Market in Climate Policies
Hope regarding the future of climate and other environmental governance has been hard to come by during the process of negotiating Britain’s withdrawal from the European Union. Aside from a vague commitment by Michael Gove that “[The British Government] will not weaken environmental protections when we leave the EU,” (Gabbatiss, 2018) comments on the issue from government have been few and far between.
The draft Withdrawal Agreement does little to rectify this. Article 96 of the Agreement, constituting six sparsely populated pages, covers the UK’s ongoing commitments under EU environmental regulations – and can easily be summarised by saying that existing arrangements continue until the first practical point for their ending. This means that:
- Examinations in co-operation with the Community Plant Variety Office will continue to their conclusion
- Emissions standard for passenger cars and light commercial vehicles will be maintained for the duration of the transition period
- Greenhouse gas emissions reduction targets set at EU level will be enforced until the end of 2020
- EU commitments under the Kyoto Protocol shall apply to the UK until the closure of the second commitment period of the Kyoto Protocol
The UK will also have access to continued data reporting and enforcement measures where relevant until the conclusion of its obligations covered by the Withdrawal Agreement.
Along similar lines, the Political Declaration that accompanies the draft Withdrawal Agreement offers little more than lip service to a few of the ‘big ideas’ of the sustainability agenda:
- “Cooperation, including in international for a, such as in the areas of climate change, sustainable development, cross-border pollution…”
- “Reaffirmation of the Parties’ commitments to international agreements to tackle climate change, including those which implement the United Nations Framework Conventions on Climate Change, such as the Paris Agreement.”
The single area related to climate governance in which these two documents offer slightly more clarity – though by no means anywhere near definitive – is in the energy market. This article will consider, in what detail is possible, particularly given uncertainty surrounding the future of the UK as part of the Internal Energy Market, the implications, opportunities and challenges posed by a variety of energy-related questions. Both the UK and the EU recognize that collaboration would be beneficial for the energy market and for environmental governance, however these goals may not seem compatible with requests of the UK to leave the European Union super-national institutions.
Limited Short-Term Impact of Brexit on Energy Supply and Prices in the UK
In the short run, the Brexit agreement should not cause any disruption in energy supply since critical infrastructure is already in place to mitigate potential risks of energy shortages; in the event of a no-deal scenario, the operation of this infrastructure is extremely likely to be protected by emergency agreements between the UK and EU. Beyond preservation of supply, the Brexit agreement is unlikely to affect energy prices as they are essentially a result of global supply and demand. The price of energy may only be affected should the value of Sterling fall, increasing import costs.
Long-Run Impact of Brexit on the Energy Market
In the long-run on the other hand, the draft withdrawal agreement is much more uncertain. Price will be largely affected if the UK leaves the Internal Energy Market. It guarantees free flow of energy “without any technical or regulatory barriers” in Europe and plays a key role in UK energy security and low wholesale costs. Wholesale prices are likely to increase because of a lack of competitivity and liquidity and because small providers of energy with cheaper plans than the ‘Big 6’ might lack capacity to supply energy in periods of high demand. Prices will also depend on the tariffs imposed on the interconnectors that bring gas from Europe, however the European Union is confident that the UK will be exempted from tariffs from and to other WTO member states and that they will find arrangements to continue energy exchanges. The UK will also lose its decision power in important energy security mechanisms and institutions like the Agency for the Cooperation of Energy Regulators and the European Networks of Transmission System Operators for Electricity and Gas. Costs for households if the UK leaves the Internal Energy Market would depend on the agreement that would take its place, which has not been decided upon yet.
The Northern Ireland Backstop
The UK serves as a transit for energy between Europe and Ireland, which means that the Single Energy Market between Ireland and Northern Ireland will be affected by Brexit. This is source of debate for the UK, which seeks to protect its sovereignty, and the EU, which “does not want to allow the UK to ‘cherry-pick’ parts of the existing acquis in the negotiations” (European Parliament, 2018).
The draft withdrawal agreement states clearly that the UK will exit EURATOM, the European organization for nuclear power. The UK and the EU have agreed that the UK will reimburse the EU for the value of EURATOM equipment on British soil to be able to keep it, and that the UK is solely responsible for nuclear safeguarding and disposal of material such as fissile material safely in accordance with international treaties. Research programs are also a concern: 29 Nobel laureates signed a letter to protect funding and freedom of movement post-Brexit. The future of the Joint European Torus, a plasma physics experiment based in Oxford and 87.5% funded by the European Union (Bruegel 2017), remains uncertain.
Climate Governance: The EU Emissions Trading Scheme
While the UK has, largely, committed itself to strong EU-wide climate targets that regulate emissions historically, the impact of Brexit on whether the strength of these targets is to be maintained remains in question. With no confirmation of targets beyond the transition period offered by the draft Withdrawal Agreement or Political Declaration, the public will likely be forced to wait for the publication of a draft of the Department for Environment, Food & Rural Affairs’ Environmental Principles and Governance Bill, or release of similar items, such as Nationally Determined Contributions under the Paris Agreement, that the UK will presumably be required to introduce. The 2008 Climate Change Act provides something of a ‘backstop’ to these pledges, requiring the UK’s net emissions to be reduced by 80% by 2050 – though the Act itself does not provide any concrete enforcement mechanism for ensuring that these targets are met. The IPCC Special Report on 1.5 Degrees would also appear to suggest that this ‘backstop’ would, in and of itself, prove insufficient.
As those familiar with the industry will no doubt be aware, a key plank of the EU’s climate policies governing emissions to date, and thus a key plank of existing EU climate pledges, has been the operation of an Emissions Trading System – a system which firms in the UK are subject to.
The ETS is a system of ‘cap-and-trade’: the central regulator issues a fixed number of ‘emission permits’, which are either issued to or bought by companies that emit CO2 or similar greenhouse gases. This effectively harnesses the power of markets in reducing total CO2 emissions: as the regulator lowers the total number of permits issued, companies are forced to improve the carbon efficiency, or lower the carbon intensity, of their operations, or buy surplus permits from companies that are more easily able to do so – meaning that the total emissions generated by covered firms are reduced in volume.
Covering more than 1,500 institutions (calculation from European Union Transaction Log records) across a variety of sectors in the UK, the ETS forms a cornerstone of current UK climate policy. It is underpinned by a national Carbon Price Floor designed to improve its effectiveness by adding a fixed charge, originally planned to rise to £30/tCO2 when introduced in 2011, but ultimately capped at £18/tCO2 by the 2014 Budget – a measure lauded by many environmental groups to improve the effectiveness of the ETS at encouraging shifts to less carbon-intensive or carbon-neutral technologies.
Brexit poses serious uncertainty for the future of this market mechanism for fighting climate change. The ETS is underpinned by the EU’s regulatory authorities, including the European Commission and the European Court of Justice; according to Brexiteers’ “red lines”, two institutions that the UK should not accept the jurisdiction of post-withdrawal. While the Department for Business, Energy and Industrial Strategy Committee concluded earlier this Parliament that the Government should seek to retain membership of the ETS until its current phase concludes in 2020, the draft Withdrawal Agreement lacks any references to the ETS.
The Political Declaration, outlining goals for the future relationship between the UK and EU, sets the integration of a UK ETS into the existing EU ETS as a negotiating goal – whether this will be a feasible regulatory or political reality remains to be seen. The potential lack of EC and ECJ jurisdiction would create challenges in ensuring that all parties are content with regulation and enforcement on both sides of the English Channel, while a divergence in system operation, or indeed in fundamental carbon prices – a potential outcome given the Government’s apparent commitment to a “future approach… at least as ambitious as the existing scheme” (Lord Brampton, 2017) – would likely create political challenges for the Government in defending the likely consequent impact on the competitiveness of British generating or manufacturing firms operating in international markets.
So, the future is…?
As a critical industry to governance for climate change, the huge uncertainties around the future of strategic factors affecting the energy market pose a serious question for the future of UK, and to an extent EU, climate policies – will further seamless integration be on the agenda, allowing for improvements in climate policies governing energy use across the vast majority of Europe, or will fragmentation occur between EU and UK policy, affecting the world’s ability to combat what this publication has argued is potentially the greatest contemporary threat facing mankind (Olive, 2018a; Olive, 2018b)?
Beyond this, will fears or objections about the future role of European Union institutions in the UK block the continuation of the largest Emissions Trading Scheme in the world, creating a further roadblock to coherent environmentally-conscious economic policy?
Only time – or, perhaps, this weekend’s Brexit summit – will tell.
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