Brexit is on the final countdown. There are just a few days are left to the official date of 29 March when the United Kingdom will most likely will leave the European Union. While last minute negotiations about the final conditions or even a postponement of this leave are ongoing, organizations are beginning to anticipate and prepare for the major transformations Brexit will initiate for businesses and British society at large.
This task is extremely challenging. UK businesses have complex interdependencies with the EU, such as trading in upstream and downstream supply chains. Many more areas of daily business are affected by Brexit, demanding new processes and extra resources across business functions. Here, we will have a closer look into the area of sustainability, anticipating effects on the UK’s climate & green journey and highlighting the main changes in associated regulation which business should be aware of.
The UK has high sustainability ambitions
Sustainable development in the UK has already come a long way. The promise of a “Green Brexit” contains a vision of how ‘leaving the EU could mean not only match Europe for green policies, but outclass them,’ according to UK environment secretary Michael Gove. In the past, the UK has taken a role as a frontrunner in many areas of sustainability, amongst them climate policy. Regarding its carbon reduction targets, the UK is currently amongst the few EU countries on track to outperform the second (2013-17) and third (2018-22) carbon budgets, but is not on track to meet the fourth, which covers the period 2023-27. Meeting the UK’s 2050 target to reduce emissions by at least 80% from 1990 levels will require even more aggressive measures.
In December, the British government published a draft Environment Bill to reorganize environmental law after Brexit’s execution to address the gap in regulatory implementation. More than 80% of UK’s environmental & sustainability related rules were forged in partnership with the EU, and to some extent, are executed on European level. With no replacement legislation in place, the UK will lose access to European Union regulators and systems for governing energy trade and environmental protections.
Brexit’s influence on key sustainability regulations
The future relationship between the UK and EU is subject to ongoing negotiation and any future cooperation between them is uncertain. In its White Paper on the Future Relationship (published July 2018), the UK government has highlighted its intention to maintain high domestic standards on climate change and to continue to meet its international obligations – but it does not believe that there should be a common rulebook on wider environmental and climate change rules. However, several areas of sustainability regulation post-Brexit will require specific and sometimes immediate attention. These include:
The Paris Commitment and climate regulation
The UK government has stressed that there is no change to its deep commitment to domestic and international efforts to tackle climate change and that, following Brexit, it will continue to be bound by the Paris Agreement as an individual party under international law. While both the UK and the EU are parties to the United Nations Framework Convention on Climate Change (“UNFCCC”), the UK has ratified the Paris Agreement separately from the EU. The Paris Agreement requires each Party to prepare, communicate and maintain successive (every 5 years) nationally determined contributions (“NDC”s) that it intends to achieve. As the EU has an overall NDC on behalf of its Member States (which includes the UK), Brexit may require a technical clarification of the UK’s own NDC, or the UK and the EU could agree on a joint fulfilment agreement.
On the domestic front, the UK has standalone domestic legislation in the form of the Climate Change Act 2008 which sets decarbonization targets through its carbon budgets. As the UK’s Climate Change Act is domestic legislation, it will be unaffected by exiting the EU.
EU Emission Trading System (ETS)
The UK is currently part of a collaborative international effort to combat climate change, part of which includes its participation EU Emissions Trading Scheme (“EU-ETS”). Should the UK and EU agree terms for an orderly exit, the UK will enter a transition period whereby EU law would continue to apply to the UK “as if it were a member state”. This transition period would be expected to last until at least December 2020 – although it could be extended until as late as December 2022. This scenario will likely involve the UK’s continued participation in the EU-ETS throughout the transition period.
Without a formal withdrawal agreement in place, there will be no transition period and a ’no-deal’ Brexit will take place. Under a ‘no deal’ scenario, the UK will be excluded from participating in the EU-ETS. This means that current participants in the EU-ETS who are UK operators of installations will no longer take part in the system nor be covered by EU-ETS obligations, i.e. there will be no requirement to surrender EU-ETS allowances after the 2018 compliance year.
Carbon Emission Tax
In the event of a ‘no-deal’ and leave of EU-ETS scheme, the UK Government would introduce a Carbon Emissions Tax. The tax would apply to all stationary installations currently participating in the EU-ETS from 1 April 2019. For 2019, a rate of £16 would be applied to each ton of carbon dioxide emitted over and above an installation’s emissions allowance, which would be based on the installation’s free allowance allocation under the EU-ETS. The rate for years beyond 2019 would be set at future fiscal events. The UK government is continuing to develop options for long term carbon pricing and although is has stated that its preferred option is a ‘linked’ ETS, options could include, remaining in the EU-ETS; establishing a UK-ETS (linked to the EU-ETS or standalone) or a carbon tax.
EED / ESOS
The Energy Saving Opportunity Scheme (“ESOS”) is the UK's response to Article 8 of the EU Energy Efficiency Directive (“EED”), which mandates that all large organizations must, every four years, calculate total energy use and perform energy audits across their portfolio.
The ESOS Regulations have been transposed to UK law so, unless repealed (which is unlikely), the scheme will remain mandatory for UK businesses.
When the UK is no longer bound by EU regulations it will also lose access to EU regulators and systems governing these areas. Under the current set up, if the UK fails to comply with the current laws, such as over air pollution for instance, the European Commission takes governments to the European Court of Justice (ECJ). The UK has promised a new environmental watchdog in its draft Environment Bill to replace EU’s ECJ functions. The green watchdog will be called the Office for Environmental Protection (OEP) – a body which will work alongside the Environment Agency and Natural England to uphold existing environmental and product standards once Brexit is complete. However, this will not be in place immediately, as setting up similar public bodies and recruiting experts will typically take 2-3 years after legislation has been passed. The UK Government has put forward the topic for debate in Easter (after the scheduled Brexit date of 29 March).
The current Brexit agreement with the EU makes it clear that there's no chance of the UK remaining part of any of the EU agencies that ensure goods and services are safe and well regulated. It remains unclear how the UK government aims to establish workable systems to make sure chemicals, medicines and other products are safe for humans and the environment. While keeping standards aligned with the EU until the end of the transition promises some protection, a no-deal scenario is even more harmful. The UK will need time to set up the infrastructure, and without access to the existing agencies’ research, there is a danger of missed updates.
Sustainability’s Answer to Uncertainty
Beyond changes or gaps in regulation, the economic consequences of Brexit are likely to be negative across a wide range of scenarios. If the UK leaves the EU with no trade deal it could lose up to 8 percent of GDP. The long period of uncertainty has already created a level of stress for companies, requiring constant attention, extra resources and budgets to prepare for the most likely impacts. According to the British Chambers of Commerce, UK businesses will not step up investment in 2019 even if the government handles an orderly Brexit. The lobby group, which represents 52 regional chambers of commerce, is only one of many organizations to warn that the Brexit paralysis was spreading to boardrooms, with businesses unable to take decisions until they had more clarity on how the UK would trade with the EU after March. Very likely, this is also affecting decisions to be made on sustainability investments.
However, the global trend to a green economy - keeping global clean energy investment above $300bn a year for the fifth year in succession - will remain in place whatever happens on 29 March. Inside or out of the EU, the UK will still need clean and secure energy supplies. The desire to compete in the clean industries of tomorrow will increase, as the urgency to tackle climate change, air and water pollution and other critical systems of our environment intensify.
Contributed by Roman Smajkiewicz, Head of Compliance Consultancy UK, Energy & Sustainability Services
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