Brexit Carbon and Energy Management

What Carbon & Energy Looks like outside the EU

The future of a lot of carbon and energy legislation may not be as ‘up in the air’ as you might think. Much of our relevant legislation is UK home gown and – dependent on the model the UK negotiates to trade with EU /EU member states, a great majority of legislation will remain intact.
We look at UK legislation and also some models for trade and their implications to carbon and energy.

Brexit Buster - Aconyms

EFTA – European Free Trade Agreement
EEA – European Economic Area
WTO – World Trade Organisation
ESOS – Energy Savings Opportunity Scheme
CRC - Carbon Reduction Commitment

 

UK Legislation

Climate Change Act

5th Carbon Budget has been agreed (post EU Referendum) and commits our country to firm carbon targets between 2028 and 2032 to be 57% below 1990 levels. So we can expect strategic actions – i.e. decarbonising power generation and also encouraging carbon reductions within large and corporate entities.


Mandatory GHG Reporting

Currently implemented for FTSE Main Market businesses, this legislation stems from the Company’s Act 2006. We expect that the consultation on Carbon Taxation and Reporting may well extend the GHG Reporting (which is made within the Directors’ Report section of the Annual Report & Accounts to all large private/listed companies i.e. any company with:

• Turnover > Euro 50M AND balance sheet >Euro 30M or
• >250 employees (regardless of whether full/part-time or so-called ‘zero hours’

Mandatory Carbon Reporting  

Carbon Reduction Commitment (CRC) – Although the CRC will be cut in 2019, it is still very much in place. We expect Climate Change Levies (CCL) will be increased to make up for the shortfall in tax to HM Treasury as a result of the cut to CRC. In short, you will be taxed for each kWh of power that you use.

Mandatory GHG Reporting vs. CRC

Climate Change Agreements (CCA) – Will still provide a means for intensive energy users in certain sectors to cut CCL exposure in exchange for a commitment on emissions.

Vehicle Fuel Taxation –The GB Pound hit a 31 year low against the US Dollar, making the price of oil more expensive for us. It’s unclear where longer-term exchange rates will be and therefore there is risk of fuel costs increasing.

Post EU models the UK could adopt 

Here are three models the UK could adopt and their implications.

Model 1 - Apply to join EFTA and sign up to the EEA Agreement (aka ‘Norway model’)

Why? Guarantees right of entry of goods. Removes the need to negotiate huge number of bilateral agreements between trading states (taking many years)
Issues – EFTA signature requires free movement of labour – but Article 112 provides an emergency brake to impose immigration quotas.

This model also requires contributions towards the EU budget!

The environmental provisions of the EEA agreement cover EU legislation as it relates to water, air, chemicals, waste & noise

Doesn’t Cover - Bathing Water Directives, Habitats Directive, Wild birds Directive, Directive on trade in wild flora and fauna. Common agricultural and common fisheries policies.

Legislation in scope

Pesticides Regulation
Packaging Waste Regulation
Registration, Evaluation, Authorisation & restriction of Chemicals (REACH)
Air Quality Directive
Water Framework Directive
Environmental Impact Directive
EC Climate Change - Energy Policy Package 20-20-20 includes

  • Energy Efficiency directive – ESOS comes from this
  • EU ETS
  • Renewable energy directive

Model 2 - Operate under World Trade Organisation model

  • Significant tariffs for the UK
  • No guarantee of right of entry of goods

Model 3 - Negotiate bilateral deals with EU in specific areas (in or out of EFTA)

• E.g. there are around 100 Swiss/EU agreements
• Negotiations take place product group by product group on the basis of the Combined Nomenclature, which has 99 broad sections and is nearly 1000 pages long

Within models 2 & 3 it is hard to see that we would be able to give up environmental compliance at least on parity with the nation that we are trading with – i.e. to trade with Germany we would need to apply equal environmental legislations that apply to their nation.

Models 2 & 3 seem harder, though it may be possible that the UK applies a ‘Flexit’ phased approach and chooses Model 1 and the transitions over time to another model… only time will tell.

What is Next?

Our view is that it is unlikely that carbon & energy legislation will be lessened/repealed for UK businesses and consumers in any of the Brexit models. In any event, the business case in terms of operational cost, return on investment and supplier requirements remains firmly intact. As for our part, we will continue to lobby for incentives for businesses to carry out carbon/energy reductions including capital/tax incentives and funding.

 

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