Brexit: changing the climate of UK carbon legislation

Brexit: changing the climate of UK carbon legislation

Exactly how much of the UK’s carbon legislation will be affected by Brexit?

The UK’s vote to leave the European Union (EU) will create many challenges and uncertainties as a new relationship between the UK and the EU is established. As a result, environmental objectives developed on the back of EU Treaties or Directives might be affected. EU regulations and targets which are not enacted in UK law would no longer be binding. However, UK laws resulting from EU Treaties or Directives will remain, unless the new Parliament decides to repeal them.

Following the result of the EU referendum there is much uncertainty about the UK’s future agreements and relationships with the EU. Speaking at the Business and Climate Summit, Secretary of State for Energy and Climate Change, Amber Rudd, stated that the UK will not step back from international leadership on climate change and that we “must not turn our back on Europe or the world.” A statement in line with this promise was made by Minister of State for Energy, Andrea Leadsom, who has reassured that “nothing will change”, hoping to provide necessary certainty for investors and businesses. Despite having differing opinions on the EU referendum both Rudd and Leadsom seem to be on the same side again, and have now confirmed a 57% CO2 reduction target in the fifth carbon budget.

With nearly 70% of our energy and environmental objectives originating from the EU, managing our transition could be a difficult task. It will be in the hands of the new Government, under a new leader following the resignation of David Cameron, to decide if EU objectives could cease to drive Britain’s green energy development.

UK influence on the EU

The UK was considered the world leader back in 2008 when it first introduced a long-term binding emission reduction law with the Climate Change Act. It also introduced the world’s first application of trading greenhouse gasses (GHG) in 2002, which predated and influenced the development of the EU Emissions Trading Scheme (ETS) in 2005. Traditionally, the UK has worked together with the EU to influence the direction of energy and climate change schemes on both at EU and international level.

With all this in mind, businesses will need to be fully aware of which areas in the sector will be at the centre of attention as the EU and UK part ways.

The areas which are unlikely  to change …

Carbon budgets

First introduced with the UK Climate Change Act (2008), these provide a benchmark towards our 2050 carbon reduction target. It is very much a British idea and regulations are unlikely to change post-Brexit.

Carbon Price Floor (CPF)

Introduced by the UK Government in 2013, it uses EU ETS as a benchmark. It is unlikely that this area will change in the future as the Government has already announced to let the CPF increase in line with RPI inflation from 2020/21 onwards when the current freeze ends. The revenue generated benefits the Treasury, and if CPF were changed, the revenue shortfall would have to be made up elsewhere.

Greenhouse Gas (GHG) reporting

It is a requirement of the UK Climate Change Act (2008) and EU GHG monitoring mechanism (2013). Even if EU law does not apply in the UK post-Brexit, companies will still need to report their GHG emissions.

Climate Change Levy (CCL)

This environmental tax was first introduced in 2001 by the UK Government to help meet its legally binding commitments under the Kyoto Protocol. Currently, as part of the March 2016 Budget announcements, CCL is set to increase from 2019 beyond the standard RPI rise. This is to incorporate the cost of the Carbon Reduction Commitment (CRC), a decision unaffected by the EU referendum result.

Climate Change Agreement (CCA)

The current CCA scheme started in 2013 and will remain in place until 2023, protecting UK energy intensive businesses. It is a voluntary scheme made by the Environment Agency (EA) and it is unlikely to change post-Brexit.

Energy Saving Opportunity Scheme (ESOS)

Part of the EU Energy Efficiency Directive (2012) and transposed to UK law as ESOS Regulations 2014. Unless it is repealed, the ESOS requirement will continue to be mandatory for UK businesses even post-Brexit.

EU Non-Financial Reporting requirement (NFR)

The UK is currently in the process of implementing this EU Directive (2014) into national law. Once transposed it will require companies to provide environmental information in their management reports. It is likely that some form of NFR would become a fundamental requirement driven by stock exchanges and accounting standards regardless of Brexit.

And those likely to change …

EU renewable energy targets

Probably one of the most rumoured areas likely to be changed post-Brexit. The move away from binding EU targets could be motivated by the drive for higher energy efficiency. Plus, the UK already has Carbon Reduction Commitments under the Climate Change Act (2008). Those can be met by a range of energy efficiency measures and demand reduction.

EU Emissions Trading Scheme (ETS)

If participation in the EU single market is not part of a new agreement, then being part of the EU ETS could also be under question. In this case, the UK could have two options. One is to negotiate participation as a non-member state (the Norwegian model) and the other is to reintroduce the UK ETS and link it back to the EU ETS system.

Carbon Reduction Commitment (CRC)

While unaffected by Brexit, CRC is to be scrapped from 2019, and the lost Treasury revenue added to a reformed CCL scheme. As a UK-wide scheme introduced back in 2010, the driver behind the change is to simplify the tax landscape.

Medium Combustion Plant (MCP) Directive

An EU Directive (passed in 2015) that is not yet transposed into UK law. Designed to put limits on emissions of certain pollutants by plants between 1MW and 50MW (thermal), it would need to be enacted by a post-Cameron Government if they decide to keep the requirement. If adopted, it would add an additional level of environmental reporting and commitment for many medium-sized industries, as well as those involved with direct heating or drying.

VAT on solar panels

Currently, due to EU legislation, the UK is set to raise the VAT on solar panels from 5% to 20% from 1 August 2016. Once outside the EU, Britain may repeal this requirement and return to the previously reduced VAT rate.

VAT on energy bills

A rate of 5% is charged on energy bills in the UK, which is currently lower than most other EU countries. It is likely that this may change or even be reduced to zero, as Britain has more control on setting the VAT rate and prioritising the needs of fuel-poor consumers.

Stay ahead of the changes

You can be rest assured that we keep a close eye on the energy markets and changes to carbon legislation. Our clients will be kept up to date with our regular Market Intelligence (MI) updates and reviews.

We’ll keep our blog updated with industry developments as they unfold and how they could affect you. You can also follow our MI team on Twitter @UTWinsights.

If you have any energy or carbon queries relating to the referendum result, you can call us on 01527 511 757 or email corporate@utilitywise.com

Paul Anderson

Posted by on Sunday, the 3. July at 16.43

Paul Anderson joined Utilitywise in 2000 as a member of the Market Intelligence team.As a Senior Analyst, Paul is responsible for the production of bespoke strategic consultancy projects as well as developing analytical models. This has included a market-leading Triad forecasting model and a fully inclusive delivered energy pricing forecast tool. Paul has an Honours degree in Film and English from the University of Kent.