Friday, July 1, 2016


Climate sceptics and neo-liberal economists are calling for a scrapping of UK climate targets in the aftermath of the UK’s referendum vote to leave the EU. Should we take this seriously? The key points surely are that the UK has been a leader in climate policy, has not previously been constrained by the EU to any significant degree, and is an independent signatory to the Paris agreement. Several of the leading contenders to become Prime Minister are on record as supporting climate targets, and it is unlikely that a major backtracking on emissions promises would be consistent with an outward looking approach to trade, either with the EU or the rest of the world.

Predictably, in the light of the Brexit vote, Nigel Lawson’s Global Warming Policy Foundation has called for a de facto reversal of UK policy in relation to climate issues.  This is wholly unsurprising given that so many of the moving spirits in the Leave campaign – Lawson himself, Redwood, Rees Mogg, together with several of the small band of Brexit economists, and the Institute for Economic Affairs, have for many  years engaged in passionate denial of both the climate evidence and the climate science.

The reasons for the correlation are clear. Commitment to and support for neo-liberal views of unfettered free markets and a minimal state are threatened, both by a Europe that does not always share those views and by a global danger whose resolution depends on global cooperation. Should this further attempt to advance the neo-liberal agenda be a cause for any concern? The answer is almost certainly not. The costs of Brexit for the power sector may be high, but the climate policy imperatives are likely to be unchanged.

The Costs and Benefits of Brexit for the Power Sector

The analysis by OIES energy experts David Buchan and Malcolm Keay has made it clear that EU membership has not been a significant constraint on UK energy policy. So Brexit is unlikely to bring any significant benefits in terms of freedom of manoeuvre. There may be some small gain in terms of less rigorous application of state aid rules, depending on how close future trading relationships will be.

Hinckley Point nuclear station is already facing serious difficulties in financing, partly for the general reasons outlined on the Power Sector page, and partly because of a growing suspicion that the  French  (despite their outstanding success in the 1980s nuclear programme)  have on this occasion gone for the wrong reactor design. If this project fails it will not be due primarily to Brexit, although deteriorating relations with the French would clearly not help. 

In principle, participation in the EU ETS carbon trading scheme may well survive the negotiations. In fact I would expect that the EU might well make it a pre-condition of serious trade talks. This is a market mechanism that, if it works effectively, helps all the participants to meet their climate targets more efficiently and economically. On the other hand, for reasons I have argued in earlier comments, the EU ETS has not been a great success, and, often to the annoyance of the Commission, has been supplemented by other national policies (not just in the UK) which have further undermined its effectiveness.  

Interconnection investment is another matter. It is an important strategic component of policy for a secure UK power sector. It provides the opportunity for major cost savings and low carbon sources of power. However, as an international network, it does require substantial technical and planning coordination between countries and agreements on commercial, legal, technical and regulatory matters. This will almost certainly be more difficult, take longer and be significantly more costly to achieve.

The biggest financial cost of Brexit to the UK energy sector may well stem from loss of the UK’s AAA credit rating, raising the cost of capital in what is going to be a very intensive transformation of the whole industry. Withdrawal from Europe will therefore make it harder and more expensive for the UK to meet its emissions targets, mainly because it has already raised the potential cost of capital, and made it harder to promote efficient interconnection.

All this however is now water under the bridge, and any adverse (or positive) impacts have little to do with climate policy per se. Much more significant will be the loss of influence for the UK on climate policy, not just in the UK but globally.

Will the UK Reverse its Climate Change Policies ?

As argued in an earlier comment, prima facie the position is very simple. If the EU signed an agreement and the UK or any member state subsequently left, then that state would not be bound by the agreement unless it had also signed the agreement itself. If it had not signed it would not be so bound. If it had signed and the EU had not, it would also be bound. The UK, unsurprisingly, has signed.

If, as seems most likely, the momentum from Paris continues to grow, a failure to ratify could make life very difficult for the UK in future post Brexit trade negotiations both with the EU and with other countries. If this is appreciated by ministers, the possibility of non-ratification may seem a little academic..

Of the frontrunners for PM, Michael Gove, despite earlier attempts to stop climate issues discussion in schools, has admitted that climate change can have a “devastating” impact on societies.  Andrea Leadsom, a prominent figure in the Leave campaign, told the Commons in March that the UK would enshrine a net zero emissions target into legislation, in line with the global pact in Paris.

The real question though is intimately linked to the form of Brexit that evolves under a new PM or a new government. Brexit economists sometimes appear to favour a completely open UK, which eliminates all UK import tariffs and allows unrestricted access to the UK market, without reciprocation. While this may be an ideologically pure view, a more realistic assumption is that the UK will seek to retain existing trade arrangements with Europe (or as much as it can) and to get new agreements with the USA, China and others. Given the global momentum on climate policies (not least in China), and the clear evidence that these challenges will shape the politics and economics of the 21st century, reneging on Paris would look like a bad move. I doubt that a politician as cautious as Theresa May would be quite so foolish.


MikeDG said...

John, I do not follow your comment on raising the cost of capital. Whilst the Government's AAA rating is probably gone, the cost of government borrowing has gone down materially since the referendum vote for other reasons. I'm not sure who would be doing the borrowing you refer to but if they were not government entities then their credit rating should not be affected by the downgrade from AAA.
In addition, I do not understand why interconnect agreements should be more difficult if the UK leaves the EU. I thought the existing agreements were bi-lateral country to country agrements and not dependent on EU membership.

John Rhys said...

You are quite right that credit rating is not the only factor affecting the cost of borrowing, other obvious ones being central bank policies and general market conditions. Recessions tend to be associated with a glut of capital and low interest rates, and sure enough the BoE response to Brexit may well include a cut in rates. But this, I would hope is a short term effect. The point is that, other things being equal, loss of AAA status will tend to push up borrowing costs.
Government entities may well be the borrowing parties for large slugs of future investment. Even if it is not the government directly, the investments will very often be supported by government or regulatory guarantees, so I find it hard to see how see how the cost of capital will not be influenced to some degree by the credit standing of the government.
I think you are right about current interconnection agreements, but a more interconnected world is likely to include new network connections whose economics depend on more than two players. I am not actually a strong supporter of some of the Commission's ambitions for a single market in energy (see an earlier post), but I do think they have a useful role to play in establishing ground rules, a degree of coordination etc.
One further point; a colleague has reminded me that the UK may now actually be quite dependent on the French interconnector for system security. This deserves some further analysis, but is potentially another headache for the UK as it heads towards exit from the EU.