The Implications of Brexit on energy and environmental policy – Part 2

Jul 1, 2016

Following our blog on the implications of Brexit on energy and environmental policy last week, we decided to dig a little further, in particular to explore how the nature of the UK’s relationship with the EU could impact on energy and environment policy going forward.

Much of the UK’s energy and environmental policy and regulation stems from Europe. Indeed, energy has always been at the heart of the European project: the European Coal and Steel Community paved the way for what would later become the European Union as we know it today. Many energy and environmental challenges such as energy security, climate change and air quality are trans-boundary issues which require a collaborative response, and this has been used as a justification for taking action at European level. European energy markets are also becoming ever more inter-twined – both due to the rollout of physical infrastructure such as interconnectors, and the harmonisation of market rules under the ‘Energy Union’ and creation of an Internal Energy Market.

As such, the implications of Brexit on energy and environmental policy could potentially be very significant, although there is considerable uncertainty. It is clear that the precise nature of post-Brexit UK energy and environment policy will be influenced very significantly by the relationship between the UK and EU more broadly. Over the past few days, many politicians and commentators have described what sort of relationship they would like the UK to have with the EU going forward, with many competing and divergent models suggested.  Will we follow one of the existing models adopted by the wider family of European countries such as Norway or Switzerland? Or a looser arrangement only concerning trade – such as the EU’s arrangements with Canada and Turkey? Or will the UK negotiate a bespoke arrangement with the EU? These examples and precedents provide some insights into the possible relationship between the UK and the EU, and what this might mean for energy and environmental policy going forward.

impact-of-brexit-energy

European Economic Area (EEA) membership – the ‘Norway model’

The European Economic Area Agreement brings together the EU and three members of the European Free Trade Area – namely Norway, Iceland and Liechtenstein. Membership of the EEA grants access to the EU’s Single Market for goods and services.

However this comes with significant strings attached. EEA Members contribute financially to EU-wide initiatives on almost an equal basis as EU Member States. EEA Members are also required to accept the ‘four freedoms’ at the heart of the EU – namely free movement of goods, capital, services, and people. In addition, members must implement ‘flanking and horizontal policies’ which include laws governing the environment as well as health and safety, consumer protection, and competition rules for example. Most energy related policy is considered ‘EEA-relevant’ so members are subject to the vast majority of EU legislation in this area, such as motor vehicle standards, the Industrial Emissions Directive, the Renewable Energy Directive and the Energy Efficiency Directive, as well as taking part in in the EU Emissions Trading System. Whilst this is true, there are significant policy areas which fall outside the EEA agreement, such as agriculture, fisheries, foreign policy, trade and regional policy.

Under this model, EEA members have a minimal level of influence in the development of EU laws and have to implement them almost unconditionally once they passed – a situation that is described as ‘regulation without representation.’  Norway recently carried out a review of its EEA membership and concluded that although it was positive overall, it had weakened political debate and created a ‘democratic deficit’.

Bilateral Agreements – the ‘Swiss Model’

Switzerland has a rather more bespoke relationship with the EU – which has not been without its issues. Switzerland is part of the European Free Trade Association (EFTA) but not a member of the EEA agreement. Instead, the Swiss-EU relationship rests on over a hundred bilateral trade agreements that were negotiated in blocks and on a sector by sector basis since 1992 (with the bulk of the agreements taking 12 years to agree). As a consequence, Switzerland’s participation in the Single Market is less advanced than Norway’s. It has free trade in goods (like Norway and other EEA countries) but not services. But similar to Norway, the agreement is built on the principles of free movement of people.

However, Switzerland is not automatically bound by EU laws – these are instead negotiated as part of each agreement. As it stands Switzerland is not bound by most policies concerning energy and climate, agriculture, fisheries, or environment. However, Switzerland is still physically integrated into Europe’s energy market and infrastructure, and has been negotiating an agreement over electricity trading with the EU since 2007. In 2010 the negotiation was expanded to include other energy matters such as the rules concerning Europe’s Internal Energy Market, with a desire to agree a more comprehensive energy agreement with the EU. An agreement concerning Switzerland’s participation in the European Emissions Trading Scheme also seems to have been reached, but took over five years to agree and is not yet ratified. If the UK-EU relationship was modelled on the existing EU-Swiss relationship then it appears likely that the UK would be required to follow a relatively small proportion of European energy and environmental policy, perhaps limited to rules governing energy markets and carbon trading.

Some commentators have suggested that the EU would be reluctant to offer the UK membership along the lines of the current arrangement with Switzerland. It is a complex set of agreements which has created compromises and tensions on both sides. At times the EU has sought to move the agreement in line with the EEA-style agreement with Norway. Significant tensions emerged in 2014 when Switzerland voted to introduce curbs on immigration, thus revoking the principle of free movement of people. The EU has firmly resisted this, and a ‘guillotine clause’ in the EU-Swiss agreements means that terminating the agreement over free movement of people could trigger the termination of other EU-Swiss agreements.

A Free Trade Agreement with the EU – the ‘Canada model’

The UK could alternatively negotiate its own free trade agreement with the EU similar to the recently signed EU–Canada Comprehensive Economic and Trade Agreement (which is currently awaiting ratification after seven years of negotiation). This model would create a trading arrangement between the UK and Europe, but unlike the Swiss model does not presume free movement of labour. It would provide the UK a level of access to the European market, but not on the same basis as members of the Single Market.

Under this model, the vast majority of EU laws and policies would no longer apply to the UK. One exception to this might come in the form of energy market rules. Unlike Canada, the UK is physically connected into European gas and electricity markets, and is highly dependent on gas imports from the Continent in particular. In order to maintain these cross-border flows it is likely that the UK would still need to follow European energy market rules and codes (which it would have little or no say in formulating).

Customs Union – the ‘Turkish Model’ 

The UK could negotiate a Customs Union as Turkey has had with the EU since 1995. The agreement includes a Common Customs Tariff on goods imported from outside the EU. As Turkey has applied to join the EU it is also being encouraged to adopt EU regulatory standards, including on energy and environment. The Turkish and European power grids were connected in 2015, allowing trading of electricity. At present power flows only from Europe to Turkey, but Turkey aims to export electricity to the EU in the future. It is not yet clear whether the EU will insist that electricity imported from Turkey is generated in a way that meets EU environmental standards.

In summary, our analysis confirms our hypothesis that future UK energy and environmental policy rests very heavily on the wider debate about the nature of the relationship with the EU. At one extreme, the Norwegian model implies relatively little change from the status quo: the UK would still have to implement most energy and environment policy (with the exception of fisheries and agriculture) although the UK would have far less say in the development of policy. At the other extreme, under the Canadian or Turkish model, very little EU energy and environment policy would apply to the UK. The Swiss model is somewhere in between but appears to be a difficult and unstable compromise between the other models. Under all scenarios considered here the UK would regain control of policies concerning fishing and agriculture, but may or may not take control of other energy and environment policy. Given that the UK would still be linked in to the European energy system, and reliant on imports of gas and electricity, it appears likely that energy market arrangements would still need to be harmonised with the EU in order to facilitate cross-border trading.

It is also clear that it will take considerable time to work through these issues. The UK and EU will both need to determine what sort of relationship they would like, and then negotiations will commence to identify common ground. This may follow one of the models set out above, or may be different again. Invoking Article 50 sets a time limit of 2 years to conclude negotiations for the UK’s exit from the EU, but based on the above examples it appears likely that negotiations could take far longer….

 

Sources & further reading:

Booth, S. et al (2015) What if…? The consequences, challenges & opportunities facing Britain outside EU. https://2ihmoy1d3v7630ar9h2rsglp.wpengine.netdna-cdn.com/wp-content/uploads/2015/03/150507-Open-Europe-What-If-Report-Final-Digital-Copy.pdf

Buchan, D. (2012) Outsiders on the inside: Swiss and Norwegian lessons for the UK. https://www.cer.org.uk/sites/default/files/publications/attachments/pdf/2012/buchan_swiss_norway_11oct12-6427.pdf

European Commission (2015) State of the Energy Union 2015. https://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1449767367230&uri=CELEX:52015DC0572

Froggatt, A et al (2016) UK Unplugged ? The Impacts of Brexit on Energy and Climate Policy.  https://www.chathamhouse.org/sites/files/chathamhouse/publications/research/2016-05-26-uk-unplugged-brexit-energy-froggatt-raines-tomlinson.pdf

Grubb, M. and Tindale, S. (2016) Brexit and Energy: Cost, security and climate policy implications. https://www.bartlett.ucl.ac.uk/sustainable/documents-news-events/brexit-and-energy

Author

Richard Howard

Richard Howard
Director of Development & Head of Environment & Energy Read Full Bio

Zoe Bengherbi

Zoe Bengherbi
Energy and Environment Research Fellow Read Full Bio

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