Brexit and the EU ETS: options to go it alone

The possibility of a Brexit is dominating headlines in the UK. Of course the tragic international issues of the day are still omnipresent but it’s the domestic agenda that sets this Government’s heart aflutter. David Cameron has used international platforms to talk about a very domestic preoccupation – the UK’s relationship with the European Union (EU). A referendum in June is looking almost certain. Europe is an emotional debate for this island, and an ideological one for many politicians.

UK EU Ensign

The case must be made for the UK remaining apart of a Union that sees it work together with 27 of its closest allies. Policy makers and the public alike must realise that in an increasingly globalised world the UK can maximise its global influence through multilateralism. The EU emissions trading scheme (ETS) is just one example where UK has used its influence to pursue its policy priorities, and push it out to the world.

The power of markets.

The UK has pro-market tendencies. This is equally true when it comes to environmental issues. Early on the UK sought to explore the provisions in the Kyoto Protocol (KP) that allowed for emissions trading. In 2002 the UK developed a pilot emissions trading scheme to develop an early understanding of how such a mechanism could work and to gain a first mover advantage. Believing it offers the perfect balance of flexibility and cost effective emissions reduction the UK went on to promote emissions trading to fellow EU Member States. The strategy was remarkably effective and in 2005 an EU-wide scheme was established. The EU would lead the world in tackling climate change and the EU ETS would be the jewel in its climate policy crown. Now, ten years later, the EU ETS is in its third phase. It regulates some 11,000 installations – factors and power plants – across 31 countries, covering some 2 billion tons of CO₂ (equivalent). Although it has been beset with problems since inception, the UK remains a staunch proponent of the EU ETS.

UK Secretary of State for Energy and Climate Change, Amber Rudd, has declared her willingness for the UK to “work hard with others to get major reforms.” She is a vocal champion of the market stability reserve (MSR), the latest move to give long term stability to the market. Here’s the bind. The UK has successfully prompted emissions trading to fellow EU Member States. It remain ardent that it’s the most effective solution to reducing emissions in a cost effective way. What then would leaving the EU mean for the UK’s participation in the EU ETS?

Brexit and the EU ETS?

Should the UK leave the EU there are three possible options for it regarding emissions trading:

  1. The UK leaves the EU but remains in the EU ETS.

Membership of the EU is not a prerequisite to participating in the EU ETS. Lichtenstein, Iceland and Norway are all participants. While possible, the practicalities would prove frustrating even if the politics allowed it (which would be doubtful). Outside of the EU the UK would lose its seat at the table to influence the continued debate around the MSR and the wider reform of the EU ETS. Like Norway, the UK would be subject to ETS Directive’s provisions yet have no input the process. “Policy by fax”, as the joke goes. The implications for the UK are serious. It has 768 active installations in the EU ETS, which collectively emitted 198 million tons of CO₂ (equivalent) in 2014. Norway, by comparison, only has 137 installations in the EU ETS, which emitted 25 million tons of CO₂ (equivalent) in 2014. The stakes for the UK are greater, so therefore is the need to be around the table for the sake of representing its installations covered by the legislation.

  1. The UK leaves the EU and the EU ETS.

There is nothing stopping the UK setting up its own trading scheme. After all, it has experience of running a national scheme. Furthermore, any such scheme could be linked to the EU’s. Switzerland is currently negotiating (for many years already!) linking its scheme using this mechanism. This option too might prove galling for the UK. Walking away from something it has worked so hard to create and promote only to set up a parallel tack seems like a retrograde step. Businesses would likely protest at the notion of additional layers of bureaucracy and different compliance mechanisms across their EU wide portfolio. That would go against the very basis of the emissions trading as a cost effective mechanism.

  1. The UK leaves the EU and abandons emissions trading.

Heresy! So say the market purists, but this merits serious consideration. The atmosphere does not care how the reductions are made. Taxation is a simple and effective means of factoring in the cost of externalities. A major UK supermarket recently reported the newly introduced plastic bag tax of £0.05 (€0.07) per bag cut usage by almost 80%. Taxing emissions at an EU level is not possible as levying taxes is the reserve of Member States. However, free from the shackles of the EU the UK would be free to pursue a more effective policy. The UK’s existing carbon floor price could be simply and quickly reformed. It’s hard to see the UK government going for this.

International influence

The UK has not only promoted emissions trading to fellow EU Member States. It has used the EU ETS as a platform to sell the idea internationally. China recently announced plans for a national emissions trading scheme. This is not a coincidence; rather, a direct result of the UK promoting emissions trading as policy option. In a UK-China joint statement on climate change the UK committed to continuing to support the development of China’s national carbon market. This commitment has been outlined in the Foreign Office’s strategic policy objective for China. The UK Government’s Special Representative for Climate Change Sir David King recently spoke of the possibility of the EU and Chinese trading schemes linking. It is precisely because the UK is a part of a larger EU-wide scheme that gives it weight and gravitas at the international level.

Too often the EU is portrayed as something forced upon the UK.  Emissions trading is just one example where the UK has been able to promote its interests to the whole EU, and then use the platform as a way to engage more widely internationally. The UK has been and could remain to be an instrumental force in the EU.

 

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