The implications of Brexit on energy and environmental policy

Jun 24, 2016

Voters and financial markets are still reeling from yesterday’s vote to leave the UK. Whilst many recent polls predicted a narrow victory for Leave, few commentators (or bookies) actually predicted it would happen.

The political, economic, legal and constitutional implications of Brexit are already being discussed at length. This blog takes a different tack, focusing on the implications for energy and environmental policy. Energy and environmental themes were hardly mentioned during the referendum campaigns, which focused almost exclusively on the key issues of the economy and immigration.

However, the implications of Brexit for energy and environmental policy are huge – not least because so much of our energy and environmental policy stems from Europe. Much of our energy system is defined by European policy – including carbon and renewables targets, emissions trading, efficiency targets and product standards, pollution control, and State Aid. Central to the European approach is the idea of creating an Energy Union, with increasing cross-border trade in energy achieved through interconnectors and harmonisation of market arrangements. The reach of the EU is even greater when it comes to environmental policy – covering issues as wide-ranging as air pollution, environmental protection, marine conservation, resource efficiency and waste, fishing, agriculture, noise, environmental assessment, and eco-innovation.

There are also many aspects of energy and climate policy where the UK has gone above and beyond EU policies, for example setting unilateral carbon targets under the Climate Change Act, imposing a Carbon Price Floor, and committing last year to phasing out unabated coal by 2025. And there are many policy areas where the UK has argued in Brussels for a change of approach – notably for reforms to the failing EU Emissions Trading Scheme.

The impact of Brexit on energy and environmental policy is therefore very difficult to predict. Policy changes are unlikely in the immediate term, since EU Directives have been transposed into UK law, and therefore do not simply fall away with the Leave vote. However the weakening of the pound will have an immediate impact on commodity prices such as oil and gas, where the UK is reliant on imports. The Leave vote is also bound to create uncertainty while the process and terms of the UK’s exit from the EU are established.

These issues will be felt most acutely by investors, asset owners and supply chain companies involved in the energy sector and the wider green economy. But more broadly, a range of sectors including manufacturing, infrastructure, construction, and services will face uncertainty over energy costs as well as the future direction of energy and environmental policy. David Cameron has already said that the Government will continue to pursue the legislative agenda set out in the Queen’s speech. But given that there will be a leadership contest in the Conservative party, and possibly also the Labour party, the energy and environmental policy agenda over the coming months will be very hard to predict.

That said, some significant policy decisions are looming. The UK will continue to need to manage security of supply through measures such as the Capacity Market. Whether European directives apply or not, air quality in UK cities is a problem which simply cannot be ignored. The UK may need to ratify the Paris climate agreement unilaterally. The Government is legally required to set a 5th Carbon budget by the end of the month (next Thursday), and deliver a Carbon Plan later in the year. DECC was expected to issue consultations on the closure of unabated coal and ‘smart power’ this spring – which have already been delayed.

Beyond the immediate challenges, a great deal of thinking will be required to define a new set of energy and environmental policies for the UK. There are strong arguments for retaining many elements of the current policy framework. Environmentalists argue that the improvements in environmental standards in the UK have in large part been due to European policies. At the same time, some aspects of EU energy and environmental policy have been criticised as costly “red tape”. It will take time for the UK to determine which bits to keep or change. Brexit will certainly create more flexibility for the UK to define its own approach, but this will take time.

Whilst major policy changes are inevitable, it is clear that the UK will need to continue to work with the EU on many aspects of energy and environmental policy. Environmental issues don’t respect national borders, and there will be an ongoing need for a coordinated approach with Europe, whether we are in or out of the EU. The UK will also want to maintain a strong trading relationship with Europe in energy: the gas and electricity interconnectors to the continent provide significant benefits in terms of energy security and affordability, and this will be further increased with the planned construction of several more interconnectors in the coming years. As with other aspects of the Brexit process, the nature of the UK’s trading relationship with Europe is very much still to be defined.

Author

Richard Howard

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

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