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Will Brexit Endanger the U.K.'s Environmental Ambitions?

The U.K.'s Department of Energy and Climate Change (DECC) was disbanded on July 14, 2016. This was part of a major reshuffle launched by new Prime Minister Theresa May, who took up her role following the June 24 referendum vote to leave the EU ("Brexit"). The emerging low carbon sector and renewable energy industry (together worth approximately £46 billion in 2014), along with other U.K. businesses, are poised to see how the axing of DECC and other post-Brexit upheavals might affect them.

The U.K. renewable energy industry has already suffered from high levels of uncertainty over the past few years. The Conservative majority government elected in May 2015 terminated the Renewables Obligation subsidy scheme a year ahead of schedule--a decision that Scottish Power estimated would cost consumers £2 billion-£3 billion solely from the implications for onshore wind, as more expensive technologies have to be deployed in its place. In addition, there was the abrupt termination of a £1 billion carbon capture and storage program and the removal of tax exemptions under the climate change levy for electricity generated by renewable energy sources.

The low carbon sector will be waiting to see how effectively the new Department for Business, Energy and Industrial Strategy (BEIS), which is a combination of both DECC and the former Department for Business, Innovation & Skills (BIS), helps the U.K. achieve its climate change aspirations, including its target to reduce emissions by at least 80% compared with 1990s levels by 2050.

Overview

  • There is much uncertainty over the prospects for the U.K. environmental and low carbon sectors under the watch of the newly established Department for Business, Energy and Industrial Strategy.
  • Statutory legislation in the form of the Climate Change Act means that the U.K. is likely to continue to fulfill its share of the international ambition to keep the rise in global temperature to well below two degrees, as set out in the Paris Agreement.
  • If the U.K. were able to employ a similar model to that of Sweden and Norway, being outside the EU but within the EEA, it would have to retain a lot of EU environmental law.
  • EEA membership prospects are far from certain, and therefore a lot of environmental legislation, such as that on air and water quality, could be weakened.

Brexit Poses Risks As Well As Opportunities

There has been much speculation on the environmental impact of Brexit, and while a lot is still to be clarified over the coming months, S&P Global Ratings has evaluated areas of risk and strength. Overall, we believe that the U.K. can maintain the international momentum created by the Paris Agreement negotiated in December of last year, which saw 195 countries adopt the first ever universal climate deal (see "The Paris Agreement: A New Dawn For Tackling Climate Change, Or More Of The Same?", published on Jan. 18, 2016), and that the economy can still flourish from the growth of green industries.

However, stances taken by the U.K. government in recent years could indicate a willingness to dilute environmental policy post-Brexit. The government sought to block stricter rules limiting imports of tar sands at the European level; was one of the main players involved in watering down the EU energy efficiency directive (U.K. opposition to the original mandatory EU-wide target of 20% efficiency improvements resulted in targets being set individually by each member state, an approach which is expected to achieve a 17% increase); was a strong player in ensuring there were no further mandatory renewable energy targets at a member state level under the EU2030 package (notwithstanding the binding target on the EU to generate at least 27% of final energy consumption from renewable sources by 2030); and has pushed for a weakening of habitat laws at the European level.

If the U.K. were to leave the EU but remain a member of the European Economic Area (EEA), this would reduce the risk of the government adopting a less green environmental policy. However, it's too early to tell what form a Brexit deal might take. Nevertheless, we believe there is reason for optimism as well for U.K. low carbon business, as the country has statutory legislation in the form of the Climate Change Act that does not rely on Brussels.

Does The Demise Of DECC Suggest Lower Environmental Ambitions?

The scrapping of the climate change department may mean that this issue has become a lower priority for the government, but these concerns are somewhat assuaged by the ministerial appointments to BEIS. Its new head Greg Clark, previously the Shadow Secretary of State For Energy and Climate Change in 2008-2010, has a strong track record on climate change, an area about which he is knowledgeable and which he has a long campaigned on. This has given certain players within the U.K. renewable energy space a sense of optimism for the future of U.K. green industries. In our view, the decision to merge DECC with BIS is also much preferable for U.K. green business compared with the possible alternative, merging DECC with the smaller Department for Environment, Food and Rural Affairs (DEFRA).

Mr. Clark emphasized the importance of green policies to a healthy economy in a statement made in 2009, when he was a shadow minister:

"Policies to decarbonise the U.K. economy should never be treated as some sort of sideshow or distraction. Nor should they be seen as an irrelevance during a time of economic downturn. 'Green' policies do a lot more than protect our environment; they create immediate new jobs in construction, manufacturing and services, they reduce energy bills through greater efficiency and they will help reduce our balance of payments deficit in the longer term by reducing our dependence on imported fossil fuels."

The positives he highlighted are starting to show. According to the Office for National Statistics, the low carbon sector generated more than £46.2 billion in turnover for the economy and employed 238,500 full-time equivalent (FTE) workers in 2014 (see chart 1).

The U.K. Will Remain Committed To Global Emissions Reduction Goals

The EU negotiated a joint target for its 28 member states in December of last year to reduce their total annual emissions of greenhouse gases to 40% below 1990 levels by 2030. Whether a post-Brexit U.K. will remain committed to this target, known as a Nationally Determined Contribution (NDC), is unclear but perhaps unlikely. The U.K.'s fifth carbon budget, mandated under the 2008 Climate Change Act (see chart 2), outlines targets for the period 2028-2032 that equate to emissions reductions to roughly 57% below what they were in 1990, which is considerably more ambitious than the EU NDC. Any NDC submitted by the U.K. after Brexit is likely to use this target as a backbone.

However, achieving this ambition may require more effort. The government's advisory Committee on Climate Change (CCC)--an independent body established under the Climate Change Act that comprises some of the world's leading climate scientists and climate economists--has warned the targets will be missed unless policies are improved. In order to hit the fourth carbon budget target of a 50% reduction using 1990 as a base year, the U.K. would need to cut emissions by 31% between 2013 and 2025. However, the U.K. is currently only on course to make reductions of 21%-23%.

The U.K.'s potential removal from the EU NDC target also means that the 27 other member states will need to increase their efforts toward the emissions reductions targets to compensate. The U.K. has been exceeding the EU NDC emissions target to date and is therefore a useful contributor to the EU goal. Figures show that without the U.K., the emissions of the 27 member states were 22.8% lower in 2014 than in 1990, compared with 24.4% including the U.K. (see chart 3). This also applies to the recently proposed 2030 effort-sharing regulation, which looks at how to set binding annual targets on member states to cover sectors not covered by the EU emissions trading scheme (ETS), Currently the U.K. is included in the estimates, but with much uncertainty. If the U.K. were to leave, the other member states, plus Norway and Iceland who are also included, would on average need to increase their reduction targets by just over one percentage point if the emissions gap left by the U.K. was shared equally. On the other hand, if Brexit damages EU growth, this will likely reduce emissions due to lower productivity.

Will Environmental Policies Be Watered Down?

The U.K. legal system comprises common and statutory law, both of which adhere to EU legislation as the European courts are superior to national courts. This means that there are a number of important EU directives that have had a material impact on the U.K.'s environmental standards, and some of these could be threatened by Brexit if the government decided to weaken national law once the U.K. has exited.

A lot of EU environmental policy would be protected if the U.K. were able to remain in the EEA, but this is uncertain at present. Membership of the EEA would mean preferential access to the Single European Market, but this means members have to abide by rules permitting free movement of labor across the EU--something of major concern to leave voters. Continued membership of the EEA would also mean that the U.K. would have to abide by the "acquis communautaire"--the rules and regulations governing the operation of the single market, with no input into any future changes to the legislation. The acquis covers most environmental laws, including air quality legislation, most of the Water Framework Directive, and the three main legal mechanisms controlling pollution emissions.

EEA members do not participate in the Justice and Home Affairs, Common, Foreign and Security Policy, the Common Agricultural Policy, and the Common Fisheries Policy. Other environmental exceptions to rules covered by the EEA acquis are: the Bathing Water Directive, the Birds and Habitats Directives, and some aspects of the Water Framework Directive, which means the U.K. could implement legislative changes in these areas even if it negotiates membership of the EEA (see table 1). The implications for industries of any changes to the applicability of this legislation will differ depending on the sector. Two directives that could no longer apply once the U.K. leaves the EU are considered briefly in the below sidebar.

Selected EU Environmental Legislation
Included in the EEA (would therefore apply to a post-Brexit U.K. within the EEA) Not included in the EEA (would therefore not apply to a post-Brexit U.K. within the EEA)
Urban Waste Water Directive Birds Directive
Treatment Directive Habitats Directive
Nitrates Directive Bathing Water Directive
Groundwater Directive Some aspects of the Water Framework Directive
Priority Substances Directive
Air Framework Directive
Industrial Emissions Directive
Emissions Trading Directive
Directive on Carbon Capture and Storage Seveso Directive
Directives on Contained Use and Deliberate Release of GMOs
Waste Framework Directive
Sewage Sludge Directive
Waste Shipment Regulation Landfill Directive
End of Life Vehicles Directive WEEE Directive
Mining Waste Directive
Reach (Registration, Evaluation, Authorisation and Restriction of Chemicals)
Ambient Noise Directive
Some aspects of the Water Framework Directive
Source: Institute for European Environmental Policy, March 2016.

EU Directives And Their Impact On The U.K. Environment

Bathing Water Directive
This directive, to which the U.K. will no longer be accountable post Brexit, caused the U.K. to change its approach to sewage treatment--essentially, stopping the practice of pumping raw sewage into the sea. This considerably improved the quality of beaches and bathing waters. It is important for the U.K. tourism industry that similar national legislation is maintained in order to secure the existing standard of British beaches and bathing waters.

Ambient Air Quality Directive
This is a very serious issue for the U.K. The World Health Organization estimates that the U.K. suffers as much as £54 billion per year (around 2.5% of GDP in 2015) in economic costs associated with air pollution (due to the impact on health, for example).

The U.K. government has been in breach of The EU Ambient Air Quality directive (2008/50/EC) for years. The directive sets legally binding limits for major air pollutants, including small particulate matter and nitrogen dioxide (NO2), which have been linked to respiratory and heart disease as well as increased mortality. In 2011, a law firm took the government to court for failing to meet NO2 targets in several large urban centers, including London, and failing to plan to comply with targets within a reasonable timeframe. The U.K. Supreme Court ruled in favor of the law firm's action and has ordered the government to come up with a new plan to meet the air quality limits in a more timely fashion. Post Brexit, it could be more difficult to hold the government accountable for air quality standards.

Commitments Should Stand Firm

We believe that Brexit and the subsequent structural changes to the government could be an opportunity for the U.K. to improve and exceed existing environmental standards in reduced timeframes and further incentivize green investment. However, the government's actions over the last few years suggest the possibility that environmental ambitions could be reined in instead.

We think the creation of BEIS could be seen as a positive sign that the growth of the U.K. low carbon sector is likely to be on the new government's agenda. While it is still early days, and much will depend on how Brexit negotiations evolve on a pan-European level, we believe the U.K.'s previous commitments with respect to environmental and climate change targets should remain firm. This is largely thanks to the Climate Change Act, which will also require continued investment in the U.K. renewables sector if targets are to be achieved.