Download Response to the Energy and Climate Change

Response to the Energy and Climate
Change Committee inquiry “Leaving the
EU: implications for UK climate policy”
22nd August 2016
About Energy UK
Energy UK is the trade association for the GB energy industry with a membership of over 90
suppliers, generators, and stakeholders with a business interest in the production and supply
of electricity and gas for domestic and business consumers. Our membership encompasses
the truly diverse nature of the UK’s energy industry – from established FTSE 100 companies
right through to new, growing suppliers and generators, which now make up over half of our
membership.
Our members turn renewable energy sources as well as nuclear, gas and coal into electricity
for over 26 million homes and every business in Britain. Over 619,000 people in every corner
of the country rely on the sector for their jobs with many of our members providing long-term
employment as well as quality apprenticeships and training for those starting their careers.
The energy industry adds £83bn to the British economy, equivalent to 5% of GDP, and pays
over £6bn in tax annually to HM Treasury.
Key points
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A stable legal and regulatory framework is important to support energy investment;
Government should have an orderly process for reviewing the legal and regulatory
framework in the light of the referendum result.
Climate policies are closely intertwined with energy policies and it will be necessary to
consider the two together when defining the UK’s future relationship with the
European Union (EU). The UK has played a leading role on climate change action
through its own domestic legislation and should continue to do so.
Energy UK considers that the UK, with its unique history of Emissions Trading
System (ETS) development, implementation and stakeholder engagement has an
important ongoing role to play in the development of the EU ETS and the extension of
emissions trading globally.
Energy UK’s preference at this stage is for the UK to remain within the EU ETS whilst
retaining influence over its future development so as to deliver a robust carbon price
signal. If the UK is unable to influence EU ETS governance to deliver a credible price,
then alternative options should be explored.
It has been suggested that the UK may have less influence with the United Nations
Framework Convention on Climate Change (UNFCCC) and other countries when
developing climate policy once it is outside the EU. Government should ensure that
alternative ways to influence policy development are explored, as the UK should
continue to seek ways to support climate action in Europe and globally, while
maintaining domestic ambition
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What role has the UK played within the EU in terms of driving the bloc’s international
climate change ambitions?
1. The UK has played a leading role on climate change action through its own domestic
legislation and should continue to do so. It has been instrumental in pushing for strong
European and international carbon reduction commitments and enacted the first-of-a-kind
Climate Change Act in 2008 with binding requirements to reduce domestic emissions by
80% by 2050. The UK also played a leading role in the EU’s adoption of a 2030 climate
and energy framework, and notably the agreement of a 40% greenhouse gas (GHG)
reduction target.
2. The UK led the way with the first national, multi-sector emissions trading programme ever
established; the UK ETS, starting in 2002, pre-dated the introduction of the EU ETS in
2005. The UK has also contributed substantially to the development of the technical
monitoring and reporting protocols that underpin the implementation of policy instruments
such as the EU ETS and allow for more accurate carbon accounting.
What should be the Government’s priorities on the EU Emissions Trading System
when negotiating the UK’s exit from the EU? What would a successful negotiation
outcome look like?
3. Article 50 of the EU Treaties sets out the process for a Member State to leave the EU.
This Article provides for a two-year period of negotiation, during which EU legislation
continues to apply in the leaving Member State. Once the UK formally leaves the EU, it
could in principle then repeal any regulations that it wanted to. However, this will depend
on the settlement reached with the EU, with many options available: Norway, for
instance, implements virtually all EU energy and environmental legislation as a price for
retaining access to the single market, whilst some options for a bilateral trade deal would
leave the UK with full autonomy over climate policy within the bounds of its proportion of
the EU’s commitments under the COP21 Paris Agreement.
4. If the UK is to retain access to the Internal Energy Market (IEM), then maintenance of the
EU ETS architecture will very likely be required as climate and other environmental costs
form an important part of wholesale electricity prices. The UK could remain a participant
in EU ETS, as is the case with Norway. A possible alternative may be to exit the EU ETS
and either establish a separate trading scheme that could be linked to the EU ETS, or
maintain a Carbon Price Floor that is equal to, or higher than, the EU ETS allowance
price. A full impact assessment would be required before contemplating such changes. It
will be important that GB and other European generators face equivalent costs to ensure
as far as possible competition on a level playing field.
5. We would welcome an early signal from the Government on its intentions regarding the
EU ETS. EU ETS calculations are based on numbers set or reset at the start of each of
its phases, so we would support, at the very least, the continuation of the status quo until
the end of Phase III on 31 December 2020. Any changes regarding the UK’s involvement
in the EU ETS should be announced and prepared well ahead of that date.
6.
Energy UK remains strongly committed to the EU ETS as a key policy tool for achieving
the European Council goal of an economy-wide 80-95% reduction in EU GHG emissions
by 2050. There are economies of scale in operating a carbon trading scheme at the
European rather than national level. We consider the EU ETS to be the most appropriate
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pan-European instrument to drive investments in carbon reduction because it is
technology neutral, can drive lowest cost carbon abatement across the economy, and is
fully compatible with the IEM. However, the ETS requires strengthening if it is to
encourage investment in low carbon technologies within the next decade.
7. The UK has previously played an integral role in advocating a stronger carbon price
signal, as reflected in the UK Carbon Price Floor (CPF), which has helped to deliver
reductions in GHG emissions in the electricity generation sector. Energy UK’s preference
at this stage is for the UK to remain within the EU ETS whilst retaining influence over its
future development so as to deliver a robust carbon price signal. If the UK is unable to
influence EU ETS governance to deliver a credible price, then alternative options should
be explored.
8. The UK’s departure from the EU may shift the balance of opinion amongst the remaining
27 Members away from adopting ambitious climate policy measures. It could also reduce
support for EU ETS as a policy instrument, since the UK has tended to be one of the
major advocates of market-based mechanisms such as emissions trading. This could
potentially raise competitiveness issues for UK industry, though the UK may have greater
scope to adopt targeted carbon leakage measures.
9. Alongside EU ETS, it is important that the UK maintains its domestic framework for
promoting decarbonisation, including the Contract for Difference, which stabilises
revenues and reduces risk for low-carbon investors. Such policy tools complement EU
ETS in driving investment in the most cost-effective low-carbon technologies by providing
stable long-term price signals.
10. A major revision of the EU ETS Directive is currently underway: the Commission tabled a
proposal covering the period 2021 to 2030 in summer 2015 and this could be finalised
during 2017, with European Parliament votes scheduled for October and December 2016
in the two relevant Committees – ITRE (industry) and ENVI (environment). The UK
should continue to play an active role in the EU ETS revision whilst still a Member State,
and should seek to ensure the EU ETS is future-proof so as to enable the UK’s continued
participation if desired.
11. It is important that the Government should make available resources in the Department
for Business, Energy and Industrial Strategy (BEIS) to continue the active participation by
UK officials in the decision-making that takes place in both Council of Ministers Technical
Working Groups and in policy discussions, as well as in Commission-sponsored fora,
while we work through the process associated with invoking Article 50. We consider that
the UK, with its unique history of ETS development, implementation and stakeholder
engagement has an important ongoing role to play in the development of the EU ETS
and the extension of emission trading globally.
12. The NER300 has been an important funding stream for the development and
commercialisation of innovative low-carbon technologies, e.g. in renewable energy. The
second call for projects under the NER300 fund was open to EEA countries, as
participants in EU ETS, as well as EU Member States. If the UK continues to remain a
direct participant in the EU ETS, then access to a high-value Innovation Fund post-2020
should be an important priority for the UK.
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What are the implications of the UK’s exit from the EU on both the UK’s and the EU’s
COP21 pledges? What will be the UK’s future role within the United Nations climate
change processes?
13. Based on existing legislation and current government announcements, it is likely that the
UK would continue to reduce carbon emissions unilaterally irrespective of its relationship
to the EU. This is supported by the fact that UK emission reduction obligations through
the Climate Change Act are more ambitious than those imposed by EU legislation. On 30
June, the then Secretary of State, Amber Rudd, reiterated the UK’s commitment on
climate change irrespective of the UK’s exit from the EU, and accepted the Committee on
Climate Change’s recommendations for a Fifth Carbon Budget and adopted targets that
will require a 57% reduction in GHG emissions by the end of the period 2028-2032. This
was a welcome boost to confidence in the low-carbon energy sector.
14. In addition, the UK remains subject to its Kyoto Protocol commitments as a member of
the United Nations and we fully expect the UK to ratify the COP21 Paris Agreement. We
would encourage the UK Government to reaffirm Britain’s relationship with the
international community by ratifying the Paris deal without delay, as any delay could call
into question the result obtained at the international level. It would also send a strong
signal that the UK will continue to play a leading role in driving global climate efforts. A
continued joint approach between the UK and EU to deliver their emissions reductions
would be possible and should be part of the Brexit negotiations.
15. The UK has played a strong role in the EU’s engagement at the UNFCCC discussions
and has helped the EU to play a leading role in GHG emission reductions and the
ongoing negotiations around a global agreement to succeed the Kyoto Protocol. It has
been suggested that the UK may have less influence with UNFCCC and other countries
when developing climate policy once it is outside the EU. However, being able to
negotiate outside a bloc may allow the UK more flexibility to use its diplomatic skills to
raise the level of ambition and help reach an acceptable global consensus. Government
should ensure that alternative ways to influence policy development are explored, as the
UK should continue to seek ways to support climate action in Europe and globally, while
maintaining domestic ambition. If the UK were to submit its own target, which is higher
than the EU target, it could feasibly encourage other parties including the EU to do more
to close the gap to the Paris Agreement’s long term objective of keeping global average
temperature increase to “well below” 2°C of pre-industrial levels by 2100.
16. A draft Effort-Sharing Regulation, which sets binding targets for the non-ETS sector for
the period to 2030 has recently been tabled by the European Commission. If the UK
decides not to be bound by this Regulation, this will involve a recalculation of the targets
for the other 27 Member States. In that situation, the rest of the EU would have to
contribute more to meet the proposed overall 30% reduction target. In addition, there
could be a need to review and revise the EU’s 2030 renewable energy and energy
efficiency targets. The completion of these adjustments could introduce delays in
implementing EU climate policies. Energy UK supports the principle of seeking costeffective emission reductions in all sectors and believes that the UK’s 37% reduction
target set out in the Regulation would not result in efforts going beyond the domestic
Carbon Budgets. If the UK decided to comply with the Regulation, this should not
therefore raise major concerns.
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What should be the Government’s priorities in deciding which EU-led climate policies
and legislation to retain?
17. A stable legal and regulatory framework is important to support energy investment.
Government should have an orderly process for reviewing the legal and regulatory
framework in the light of the referendum result.
18. The domestic policy framework, including the Climate Change Act, is extremely important
in reducing the uncertainty over climate policy potentially associated with Brexit. Energy
UK welcomes the recent commitment to the Fifth Carbon Budget and looks forward to the
production of a detailed Emission Reduction Plan by BEIS by the end of 2016 with strong
signals for investors.
19. As outlined above, continued UK participation in EU ETS would have a number of
important advantages and would complement the domestic policy framework. Current EU
proposals on effort-sharing in the non-traded sector do not go beyond the UK’s domestic
commitments and so are not a major source of concern.
20. The EU Renewable Energy Directive has been effective in driving investment in
renewable energy in the UK and other Member States. Going forward, a continuing and
reinforced commitment to the UK’s Contracts for Difference mechanism will provide
domestic signals for investment and a route to market, that will help mitigate the exit from
EU renewables legislation.
21. Climate policies are closely intertwined with energy policies and it will be necessary to
consider the two together, when defining the UK’s future relationship with the EU. The UK
Government should continue to take a balanced approach to dealing with the energy
“trilemma”, i.e. ensuring secure, affordable and sustainable energy supplies. This should
include playing a leading role in climate action both through domestic action and
international engagement. Strong cooperation with the EU should be maintained to
ensure that the risks of climate change are effectively managed.
Sam Hollister
Senior Economic Policy Adviser
Energy UK
Charles House
5-11 Regent Street
London SW1Y 4LR
Tel: 020 7024 7631
[email protected]
www.energy-uk.org.uk
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