Grayling Sectoral Insight: Energy and Environment
Brexit proofing the Emissions Trading Scheme
In 2005 the European Union introduced the Emissions Trading Scheme (ETS), which aimed to ‘promote the reduction of greenhouse gas emissions in a cost-effective and economically efficient way.’ In essence, the system restricts the greenhouse gases that may be emitted by certain sectors: energy-intensive industry, power producers, and airlines. The mechanism works by firms being allocated or buying allowances to emit greenhouse gases. As time goes on, the cap is brought down, with the result being a decrease in emissions.
However, the system was long beset by problems. In the shadow of the economic crisis and subsequent downturn, the demand for emissions permits fell, and with it, the price. Additionally, the amount of allowances in the system accumulated. In light of the dysfunctionality of the system, and the central role which the ETS is intended to play in the achievement of the EU’s climate targets (namely, cutting emissions drastically), reform is needed.
At present, the ETS is under reform in the legislature of the European Union: the European Commission presented a proposal to this end in July 2015. However, this was before Brexit. The United Kingdom is one of the European Union’s biggest emitters of carbon dioxide and other greenhouse gases, and as a Member of the EU its businesses hold a considerable number of emissions allowances under the ETS.
In the context of the revision of the Emissions Trading System aviation elements, European parliamentarians have foreseen the dangerous situation whereby British firms could ‘dump’ their emissions allowances if no deal is reached by March 2019. If the UK – the second biggest emitter of greenhouse gases – suddenly has a surplus of allowances which it no longer needs, it could resell them back to European firms at a profit (many of these allowances were freely allocated by the UK). UK firms gain a windfall, EU firms are able to boost production by polluting a little more and the carbon price tanks.
To prevent this scenario the European Parliament has moved to protect ‘the environmental integrity of the EU emission trading system’. In the first Brexit amendment to an active piece of European regulation in the legislature, the Parliament amended the ETS Directive thus: ‘In order to protect the environmental integrity of the EU emission trading system, aviation operators and other operators in the EU ETS may not use allowances that are issued from 1 January 2018 onwards by a Member State in respect of which there are obligations lapsing for aviation operators and other operators.’ Essentially, once a Member State leaves the Union, ETS allowances are rendered null and void.
The Grayling View
In the ongoing drama about what kind of divorce settlement the UK will reach, or what kind of future arrangement the EU and UK will have, the spectre of a ‘cliff edge scenario’ lingers on. Indeed, now legislators in the EU are taking active steps towards protecting the interests of the Union (in this case, environmental) in new or recast legislation – surely a new level of preparing for the worst.
In this case, the EU is trying to future-proof a (hitherto disappointing) flagship scheme to reach its own targets – and those of the Paris Climate Agreement – for emissions reductions. However, this little episode signals something altogether more concerning. As negotiations continue to flounder without any tangible progress this seemingly small amendment on ETS is indicative of legislators’ attempts to fire-proof their house from the Brexit ‘fire’ – before it all goes up in smoke. The open question is where else might the EU’s legislators feel obliged to Brexit proof legislation.
Grayling Network Insight - From Grayling's Office in Cardiff, Wales
See Brexit and Dai
In a country so reliant on European funds, the shock of Brexit has been cataclysmic.
With some of the poorest regions in Europe located on the Welsh side of Offa’s Dyke and The European Union paying for new roads, new schools, helping our hill farming industry prosper and protecting some of our most famous foods, the expectation was that Wales would vote Remain; so when the Wales result was announced, shockwaves emanated through the country. However, those in power in Cardiff Bay swiftly accepted the results and began work on securing the best deal possible for Wales.
The result has led to a sticky situation constitutionally within the UK, as some of the major areas of power are devolved to the Senedd in Cardiff Bay. This has led to friction between the First Minister, Carwyn Jones, and Theresa May. The First Minister, and the majority of the Senedd believe that the powers that cross into devolved competencies in Wales should rest immediately with Cardiff Bay, whilst the UK Government believes that a ‘cooling off’ period is needed, with the powers resting in Westminster for the time being. To complicate matters even further, there have been calls from The First Minister for UK wide frameworks, particularly in area such as agriculture, a wholly devolved area, meaning that there must be some confluence of devolved and national policy.
The Grayling View
The full impacts of Brexit for the Principality are yet to be fully understood. The Welsh Government have promised that they will do whatever they can to secure the best deal for Wales, and to prioritise trade with the rest of the world. But with Welsh Ministers facing months of work to wade through EU regulations, with the Cabinet Secretary for Environment and Rural Affairs claiming that she had over 1000 pieces to go through, and jobs already re-locating to the EU, the Welsh Government faces an uphill battle to ensure that Wales can prosper from the decision to leave the EU.
The highlights from the UK:
Conservative Party Conference: What the f's been going on?
This year’s Conservative Party conference will forever be remembered for the unhappy speech by the Prime Minister: she suffered a prolonged bout of coughing, a heckler confronted her from the audience and the letter ‘f’ fell off the slogan on the mise-en-scene behind her.
And some may say that is a good thing for both Theresa May and her Government. The challenges facing May going into Conference were huge. She had to apologise to party members for a poor election result and provide enough policy interventions to placate growing concerns on housing, transport, the NHS and student fees. Most importantly, she had to speak about Brexit in the same conciliatory tone that she utilised in her Florence speech, whilst also providing enough space for her more hard-line Brexiteer membership to discuss Brexit. The poor May speech was a distraction then from a lacklustre agenda; the week was as a whole a missed opportunity.
The opening days of conference were dominated by Boris Jonson and Ruth Davidson, both of whom consistently brought conference to stand still as they moved their way from event to event. Their star quality was probably heightened by the fact that so few Conservative MPs had decided to attend conference. The membership was broadly disciplined and on message about the need for May to continue in post although there was a notable sense of frustration with the entirety of the top team. The Cabinet bickering that has dominated media headlines over the summer was also notably absent in the public appearances of MPs although behind closed doors, it was sometimes a different matter.
On Brexit this conference must be seen as a success for the Government. Last year’s conference shared the same slogan as this one; “a country that works for everyone”. Yet last year, it seemed that conference was all about “Brexit means Brexit”. Although there were plenty of events with a Brexit focus in Manchester, the majority focused on the industrial strategy, energy policy and how the Conservatives can win over younger voters. In those meetings where Brexit was discussed, the hard-line Brexiteer MPs and members were vocal, but there was also significant caution expressed by MPs, businesses and members who were clearly focused on getting on with the job of delivering the best Brexit possible. The key note Brexit speeches in the main hall were only notable for their message discipline on Brexit. There were no new developments. Brexit barely made the headlines – a success for a Government who wanted this Conference to be about domestic policy.
The Grayling View
It has often been a criticism of the Conservative Party that they are blind to the problems in the UK. This can certainly not be said of the present Government. There was a clear recognition throughout conference of the many challenges that the Government faces – what were not forth-coming were radical solutions. To the most pressing issues facing May as she entered Conference, she provided only incremental solutions. A bit more money for housing, a bit more money on rail, a freeze in student fee repayments. Nothing radical. Nothing to seize the opportunity of the platform that Conference offers. The message falling off the wall behind May towards the end of her speech served as an apt metaphor for the entire week. Whilst the Conservatives do have several messages for the country, ultimately, nothing seems to stick.
The highlights from Brussels (and Strasbourg)
Parliament holds the line and the Commission waits for more progress
The Brexit resolution in the latest plenary session in Strasbourg passed with a huge majority - 557 votes in favour, 92 against and 29 abstentions. The majority of the Political Groups expressed their disappointment with the lack of clarity from the UK Government on precisely what it wants from Brexit; and strong consensus that "sufficient progress" has yet been achieved on the Withdrawal Agreement to allow Phase 2 of the negotiations to begin. Two Conservative MEPs Julie Girling and Richard Ashworth broke with their party whip to support the resolution, earning them predictably virile criticism in some British newspapers.
Meanwhile, Michel Barnier's Commissions Taskforce is preparing for the last scheduled round of negotiations which will begin on 9 October ahead of the European Council Summit that was meant to act as the checkpoint for "sufficient progress".
The Grayling View
Given that Jean-Claude Juncker, the President of the European Commission, has said it would be a 'miracle' if "sufficient progress" were to be made in Ocotober and that Mr Barnier at his latest press conference signalled that there has been insufficient movement on the Financial settlement - it is unlikely that this week will see any breakthrough. Meanwhile the EU side displays continuing unanimity in its positions and the British side appears weaker again after the Conservative Party Conference. This raises the odds of a 'no deal' scenario; and paradoxically, a total collapse of the UK position and a wholesale acceptance of the EU agenda in Phase 1, in order to move swiftly to the complexities of the trading and future relationship.
Dates for your diary
w/c 9 October 2017 - Fifth Negotiating Round
11 October 2017 - GBU Brexit Breakfast Club
8 November 2017 - GBU Brexit Breakfast Club
19-20 October - European Council Summit - Sufficient Progress Checkpoint
14 December - GBU Brexit Breakfast Club
14-15 December - European Council Summit
1 January 2018 - Bulgarian Presidency of the Council
1 July 2018 - Austrian Presidency of the Council
End of October 2018 - Negotiations expected to end
Autumn 2018 - Spring 2019 - Possible Scottish independence referendum
1 January 2019 - Romanian Presidency of the Council
March 2019 - UK expected to leave EU
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