What will Brexit mean for the UK’s carbon reduction targets?

“We will build back and bounce back greener,” UK Prime Minister Boris Johnson declared at his 2020 Conservative keynote speech in October, referring to the country’s post-pandemic recovery. Britain, he added, will become “the world leader in low-cost clean power generation”.  

In the preceding weeks, several green policy initiatives had been unveiled: an offshore wind bonanza to power all UK homes; re-wilding 30 per cent of Britain; no new fossil-fuel vehicles. All to be achieved in the next decade as part of the UK’s net-zero by 2050 ambition.

The announcements were welcomed across party lines. However, despite having reduced its emissions by 28 per cent in the last decade, largely due to plummeting coal use, the country is still far from being on course to reach its target, even with the new initiatives. As previously outlined by the UN’s Intergovernmental Panel on Climate Change, making gains in the next decade is crucial and so to be on an irreversible pathway to decarbonisation, a colossal effort across every sector is needed.

Yet the country is in flux. Not just because of the pandemic, but also its radically changing context due to Brexit. As the transition period expires at the end of the year, huge policy gaps will be created and access to key EU mechanisms that have, arguably, supported the country’s emission wins so far, will be restricted or gone altogether. This huge shift will inevitably impact how – and how quickly – the UK achieves its climate change goals.

One obvious sector to be impacted is energy. After January 2021, the UK looks likely to lose unfettered access to the EU internal energy market (IEM), which is used to send and receive electricity to other member states via interconnectors.

The UK has the world’s biggest offshore wind capacity. More installed interconnectors – it currently has five but several more are planned – will allow it to shift excess wind-power generation, including from new projects like the 1.2GW Doggerbank, to other EU countries through the IEM.

Though both parties recognise the benefits of continued co-operation on energy interconnection, post-Brexit the UK is likely to lose access to the shared IEM algorithm that facilitates international trading, says Emma Champion, associate at BloombergNEF. This includes for intra-day and day-ahead markets, which are among the most liquid products of a power exchange. “Instead the UK will need to hold explicit auctions for trading electricity on interconnectors, which will limit the efficiency,” she explains.

In a renewable energy and decarbonisation context this could be significant, says Shane Tomlinson, the deputy CEO of E3G, an independent European climate-change think tank. “Energy interconnection is critical for reducing costs of UK decarbonisation and to maximise renewable energy use, particularly intermittent offshore and onshore wind,” says Tomlinson, who was previously an energy policy adviser in the Prime Minister’s Strategy Unit.

The UK’s exclusion from the EU’s IEM could require increased energy system investment of £500m annually, according to the Grantham Institute at Imperial College London.

RenewableUK’s director of future energy systems, Barnaby Wharton, adds that while leaving the EU will not impact on offshore wind expansion, “it’s important our future arrangements with the EU and the IEM allow us to trade energy smoothly so we can export our surplus power when we are producing it and import flexibly to support our energy system when necessary”. Without this access, energy prices in the UK will almost certainly rise, according to the UK government’s own assessments.

However, Mike Barber, sustainability and climate change partner at Deloitte, doesn’t think commercial investment in new infrastructure will be impacted. “If there were going to be only a few renewable projects then I’d be concerned. But that’s not the challenge; it’s building them quickly enough,” he says.

After the transition period, the UK will also leave the EU Emissions Trading System (ETS), which is the world’s biggest carbon market. There are plans to build a national scheme by the end of 2020 that could link back to the EU one; however, the pandemic has reduced the likelihood that the government will meet this deadline. Instead, a carbon tax could be created that will cover the majority of the sectors under the ETS, but significantly not aviation.

Emissions trading and carbon pricing are integral to incentivising emissions reductions, particularly for those hard-to-avoid pollutants or those that are uneconomic to reduce. Although, the EU ETS has arguably lacked teeth, recent assessments note the price could rise to as much as €65/t (£59/t) of CO2 equivalent by 2030 under the European Commission’s most ambitious scenario for greenhouse gas cuts in the bloc.

Big polluters, such as the steel sector, have said a UK national carbon price will be less flexible and could increase the tax burden on domestic companies, while Champion says it would be much less effective than being part of a Europe-wide ETS. “The ETS has the benefits of liquidity and price discovery as part of a larger market. That would be difficult to achieve with a carbon price and the smaller UK market,” she explains.

However, others, including Dieter Helm, an academic who has advised the government in these matters, has said the UK could be more ambitious and opt for both: a UK ETS and eventual carbon tax.

“Although that would not be perfect, it will be a massive improvement on taking over an EU ETS over which we had no influence or control in the future,” he said in a recent podcast.

The biggest impact, however, on future UK climate mitigation strategies will arguably be its future trade relations with the EU and other countries.

‘We could support our trading partners in decarbonising their supply chains, raising the incentives for low-carbon production and efficiencies.’

Loss of free trade with the EU is well documented as potentially impacting supply chains of low-carbon technology manufacturers, some parts for which are produced in Europe. James MacGregor, a trade policy expert and economist at environmental engineering consultancy Ramboll, says another challenge levied by Brexit is maintaining environmental standards while under pressure to secure trade deals. Some of his clients in the engineering sector have voiced concerns about the direction of UK standards.

“It’s very easy to race to the bottom; you want to increase trade and so you increase primarily low-quality trade and that is the last thing net-zero needs,” he says. “We strongly encourage the government to continue to be bold and fearless in this space and send the right messages about negotiating trade deals with a low-carbon hat on, trying to embed incentives for low-carbon-emissions goods.”

For example, Australia, a country the UK is keen to strike a deal with, has the second-highest carbon intensity for its economy of all OECD countries. There’s also the extra emissions from transporting more products from further afield to consider.

Furthermore, Tomlinson says Investor State Dispute Settlement mechanisms, a system through which investors can sue countries for what they believe are discriminatory practices or legislation, are favoured by the US and Australia. Many have used them to dispute other countries’ subsidies and support for renewable technologies.

The government should be “wary” about how these could impact future legislation setting and prioritise trade with countries like the EU and Japan, “who share the same climate objectives”, he says.

However, it appears that on standards the government is moving in the opposite direction. In October, it rejected an amendment that required imported food to meet domestic legal standards from 1 January. And, according to reports, the US has banned any mention of the climate crisis in trade talks with the UK.

Although imported goods are not currently included in the net-zero target, many people, including Helm, believe they should be. Alyssa Gilbert, the director of policy and translation at Grantham Institute, says the Committee on Climate Change is contemplating a carbon border tax that allows for differentiation on body carbon content of imported goods, but this could be abandoned if obstructive to making deals.

However, negotiating new trade agreements could provide an opportunity for the UK to lead the world in low-carbon standards and regulations, as it has done in the past with the Cost Benefit Analysis tool that is currently used across the world, says MacGregor. “We could support our trading partners in decarbonising their supply chains, raising the incentives for low-carbon production and efficiencies.”

Analysis shows the UK has had a disproportionately high success rate in applying for funding from the EU Horizon 2020 programme, which bankrolls research and development (R&D) projects across sectors, including technology and engineering. Post-Brexit, academics are worried about an R&D funding gap.

Professor Philip Taylor, pro-vice chancellor for research and enterprise at the University of Bristol, says there’s been “no clear message” as to whether EU money will be replaced. “It’s very difficult to know how we’re going to maintain the same level of research funding post-Brexit as we had pre-Brexit,” he says.

In a worst-case scenario this could lead to a ‘brain drain’ and the UK not taking on as many big ambitious R&D projects, with other countries getting the “big breakthroughs first and decarbonising their own economies faster”, he warns.

Collaboration between the UK and European academics and experts will also be more difficult from the New Year, and the UK faces new costs from being shut out of expensive ‘moonshot’ projects such as the development of nuclear fusion. Currently, the government is trying to find a cost-effective alternative to the EU’s Galileo satellite network that transmits precise positioning, navigation and timing signals.

Additionally, the UK may not be included in collaboration on standards and investment in infrastructure, such as 5G, which is vital for decarbonising and increasing efficiency in the manufacturing sector – an industry that is expected to be significantly hit without access to the European single market. 5G and digitisation is “absolutely crucial to getting to net zero”, says Taylor.

However, there is a possibility the UK can still be part of key collaborations with the EU and buy back into projects on a bespoke basis. The EU might look favourably on this as part of a wider deal given the UK has been a leader in many of the bloc’s climate policy initiatives such as the ETS.

It’s likely the two sides will first need to come to agreements on things such as state aid, which is restricted under EU rules to ensure a level playing field across the bloc. For the UK, being unrestricted by these rules would allow liberal subsidies of green technologies, though this is not something all tech firms are necessarily keen on. It could also enable quicker and easier funding of research, which is permitted but is more complex under EU state aid rules, and more subsidies for local-level green projects. However, unfettered state aid rules would jeopardise an EU trade deal, which could cause more harm than good for technology companies and manufacturers reliant on EU supply chains.

After January, the UK can do things differently from before, says Gilbert. For example, once out of the Common Agricultural Policy it could change the way the agriculture sector, which is one of the toughest sectors to decarbonise, is rewarded for environmental improvement, she says. “This could be a really powerful new lever and you can see this being discussed by the sector already.”

Dr Gareth Hinds, head of electro­chemistry at the National Physical Laboratory, says he’s encouraged by the government openly stating its aspiration to increase the level of R&D, which has been lacking in the past. “This will attract inward investment to build the required infrastructure to bring in large companies, such as in hydrogen for fuel-cell and electrolyser manufacturing facilities, and batteries,” he says. “We just need to get on with the work. I think there is a big opportunity to be a net exporter in these areas in the coming decades.”

Equinor has committed initial funding to the H2H Saltend blue hydrogen project announced in July, supported by the UK’s ambition to build a net-zero industrial cluster by 2040. Similarly, the Faraday Battery Challenge is looking to attract investment into a Gigafactory.

Former governor of the Bank of England Mark Carney has described the green industrial revolution as “the greatest commercial opportunity of our time”. There are, however, challenges for every nation in achieving the task. Brexit adds to them, but it doesn’t take away from the fact the UK continues to be a powerhouse of skills, innovation and ambition, with its first-class institutions and world-leading technology companies, and that decarbonisation is essentially written into law with the Climate Change Act.

BloombergNEF’s Champion says: “I don’t think Brexit is the thing that will make or break the UK’s ability to achieve its ambition, though it does create short-term challenges; the biggest issue is the gaps in UK policy and incentives to help with some of the heavier emitting sectors, such as heating, building and agriculture.”

Much of the key policy and framework is still missing, including the long-promised Energy White Paper that will detail the path to net zero, the Net Zero strategy, and the National Infrastructure and Hydrogen strategy. And currently it’s looking unlikely that the new Office for Environmental Protection watchdog will be functioning by the start of January, which could create a governance gap.

It’s likely the government will have more climate-related announcements at the upcoming 2021 United Nations Climate Change Conference, which will be held in Glasgow next November. This is of course good, but there’s a lot to do, and it will require much more than just words and good intentions.

“I think it’s very important that we now see a confirming signal from our government that it wants to take this agenda forward really seriously and not just with words but with the regulation that we need,” says the Grantham Institute’s Gilbert.