The United Kingdom may have voted to leave the European Union, but international climate change commitments are unchanged, meaning business must still face up to the challenge of decarbonisation

The United Kingdom's vote on 23 June to leave the European Union has triggered what could prove to be several years of business uncertainty. But one thing is for sure: decarbonisation is going ahead.

We know this because shortly after the Brexit referendum the British government approved the UK's fifth carbon budget. This commits the UK to reduce its greenhouse gas emissions by 57% against 1990 levels by 2032. The independent Committee on Climate Change (CCC), which proposed the fifth carbon budget, said the government's approval showed that even in the shadow of Brexit, the UK “is open for low-carbon business”.

The fifth budget is in line with the Paris Agreement, the United Nations deal agreed at the end of 2015, intended to pull the world back from dangerous global warming. Under the agreement countries have made decarbonisation commitments, known as Intended Nationally Determined Contributions (INDCs). So far, these are insufficient but ultimately, it is hoped they will be enough to keep global warming below 2 degrees Celsius – and ideally the rise should be limited to 1.5°C.

The approval of the fifth budget shows that, even outside the EU, the UK intends to play a part in the global effort to drive down emissions. The nation does not have a national INDC and will need to disentangle itself from the EU's pledge, which is for a 40% emissions cut by 2030 compared to 1990. The EU, meanwhile, will have to adjust the way it shares the target, to account for the UK’s departure.

For sustainable business, the fifth budget was a welcome signal. Dax Lovegrove, an adviser on sustainability and former director of sustainability for Kingfisher, says it could put the UK on a road towards a “green and smart” economy. Without the fifth carbon budget, sustainable business would have feared a post-Brexit “backslide into a brown and dumb economy”.

Companies will therefore have no excuse post-Brexit to relax on emission reductions. The fifth carbon budget will affect the entire UK economy. All companies will need to assess their operations, introduce the maximum emissions-cutting efficiencies and plan for the post fossil fuel world.

Uncertainty prevails

Although the carbon budget confirms the direction of travel for the UK economy, Brexit means that Britain will have more freedom to choose how it will reach the destination. Until now, the EU has provided the regulatory framework for the UK's emissions reduction efforts – and the UK has played a full part in shaping that framework. Post-Brexit, the UK could choose to go it alone.

Companies will not necessarily welcome this. Decarbonisation requires stable regulation with sufficient incentives for investment. Companies want to know to what extent the UK will still participate in the EU's decarbonisation framework.

Peter Sennekamp, spokesman for the main EU employers' federation, BusinessEurope, says industry supports the Paris Agreement, but wants clarity on how the goals will be delivered. “We have warned against uncertainty, which is our biggest fear,” he says. “As long as the UK government hasn't come up with their clear roadmap, we will simply have to wait.”

Emissions trading

So far, power plants and energy-intensive industry, such as steel and cement-makers, have borne the brunt of the EU emissions-reduction effort. They participate in the EU's flagship climate policy, the emissions trading system (ETS), which works by capping the emissions of roughly 12,000 facilities. The cap is tightened each year, in principle prompting emissions-cutting investment. The ETS covers about 45% of EU greenhouse gas emissions.

Boris Lagadinov, head of analysis at British climate think tank Sandbag, says that “the UK was the pioneer of emissions trading”, with a voluntary UK ETS pre-dating the EU version. Even post-Brexit the UK “is very likely to stay within the ETS”, according to Lagadinov. This would mean, however, that the UK would continue to participate, while giving up the power to make decisions on the future development of the ETS.

The EU meanwhile will push ahead on emissions trading, with or without the UK. A reform to tighten up the system is under way. “We do not expect the EU to change its targets,” Lagadinov says, but he adds there might need to be some readjustment to compensate for the UK departure.

For the more than 600 British industrial facilities covered by the ETS, alternatives to staying within the scheme would likely be disadvantageous. Mirabelle Muuls, an ETS specialist at the Grantham Institute for Climate Change says that the “least likely scenario” is that the UK would replace ETS participation with a carbon tax. Such a move would go against the UK's long-standing advocacy of emissions trading as the best tool to cut carbon.

Another possibility is that the UK creates a stand-alone ETS. But this could lead to some companies with facilities in different countries having to comply with parallel schemes with differing rules, with the “downside that business would not like the complexity,” Muuls says.

Of course, the UK outside the EU could opt out altogether of putting a price on carbon. But it is hard to imagine how this could be done while delivering the fifth carbon budget. Such a move would also do immense damage to the UK's reputation as a decarboniser and, Muuls says, would harm the UK's future relationship with the EU, which would not want to see UK companies given a short-term advantage because they are not subject to a carbon price.

“There is a clear need internationally beyond any Brexit for a strong carbon price. That's what the UK should continue pressing for,” Muuls says. Other non-EU countries, such as Norway and Switzerland, participate in the EU ETS, and post-Brexit, the UK “could negotiate its place in the ETS as part of other trade agreements” with the EU, she adds.

Beyond the ETS

Sectors outside the ETS, such as farming, construction and waste management, will also have to make greenhouse-gas cuts if the fifth carbon budget is to be met. In these areas, however, continued UK participation in the EU framework is less obvious.

The EU largely leaves policies for non-ETS sectors to national governments, unless common standards for the single market are needed. On 20 July, the European Commission, the EU's executive, proposed the so-called effort-sharing regulation. This allocates to countries overall emissions cuts for 2030 that they must find from non-ETS sectors. But the regulation does not tell them how to make the cuts.

In the effort-sharing proposal, the commission handed the UK a 37% non-ETS cut to be achieved by 2030 compared to 2005 levels. The EU climate commissioner Miguel Arias Cañete said the commission could not take the Brexit vote into account because for now “the UK remains a member state, with all the rights and obligations of a member state. And EU law continues to apply in full to the UK. So we present the proposal in the present circumstances.”

It can take two years following a commission proposal for an EU regulation to become law, so Brexit might well have happened by the time the effort-sharing regulation is finalised. But even if the UK ends up outside the framework, the British government will still have to satisfy the fifth carbon budget, and that will mean finding emissions cuts from those economic activities not in the ETS.

The impacts of this on companies in the UK and the remaining EU countries are hard to predict. One example is transport, which is covered by the effort-sharing decision. The EU already has in place several measures to reduce emissions from transport, such as carbon-cutting fuel efficiency limits for cars and vans. These will be tightened post-2020.

After Brexit, the UK might be free to put in place its own standards, depending on how much Britain continues to participate in the EU single market. But even outside the single market, it would make little sense for the UK to adopt standards out of step with the EU's. Having to comply with different standards would just mean greater costs for companies.

Another example of an area where things could vary post-Brexit is the inclusion of carbon sinks in emission reduction goals. The commission's effort-sharing proposal would allow EU countries some leeway to use new sinks, such as newly planted forests, to reduce the emissions cuts they must squeeze from non-ETS sectors.

Hannah Mowat, a campaigner with forestry NGO Fern, says that the UK has resisted such offset schemes, which could “undermine the target.” She adds “we will miss this leadership role”. Outside the EU, the UK would be free to exclude carbon sink credits from its decarbonisation efforts. But without the UK's influence, the remaining EU countries might decide to allow greater use of carbon sinks, reducing somewhat the pressure on companies to decarbonise.

Investment at risk?

Massive investment is needed for decarbonisation, for example to replace carbon-based energy generation with renewable capacity. Such large-scale investment by companies is likely to need public support, for example through up-front finance or agreed tariffs for future electricity generated from renewable sources. Brexit raises questions for the UK about where to find the money.

Michael Grubb, a professor of energy policy at University College London, told a mid-July hearing of the House of Lords EU sub-committee on energy and environment that Brexit could undermine plans to integrate the UK into EU energy markets. A number of interconnectors are planned or under way to exchange energy with other EU countries. These interconnectors allow surplus energy in one country to be sent to another and are vital for renewable energy – on sunny days in France, for example, the energy produced might exceed local needs and can be sent to where the sun is not shining.

Grubb said interconnectors “have been among the most reliable sources of supply.” If interconnector projects are suspended post-Brexit, the UK “can cope but it's going to cost more”. If the UK leaves the EU single market for energy, “what exactly does the electricity trade look like? I wish I knew,” Grubb said.

He added that outside the EU, the UK could also lose access to project finance from the European Investment Bank, which “has been quite a major investor and supporter of UK energy investment”. Without such funding, the UK might have to find more up-front finance from its own resources, for example through the UK Green Investment Bank. However, the funding pool for the UK within the EU would be larger, and costs likely lower.

James Court, head of policy for the UK Renewable Energy Association, says that Brexit or not, the UK has “a huge need for new energy infrastructure,” with the UK due to phase out coal by 2025. Britain has made great strides on renewables. In May 2016, for the first time ever, solar power generated more electricity than coal in the UK. “Any rowing back would be a mistake,” Court says.

Don't wait and see

Until the UK's Brexit plan becomes clearer, however, few predictions can be made about climate and energy policy. There are “lots of variables,” says Court, including whether the UK stays within the EU single market, or finds itself completely on the outside.

But this does not mean that companies should adopt a wait-and-see attitude. Nicholas Schoon, policy manager of Bioregional, a social enterprise that promotes sustainable projects, including many in which companies are partners, says that before EU environmental policies started to be introduced in the 1980s, “Britain was definitely a laggard.” Within the EU, “we really cleaned up our act.”

The EU has been “so fundamental” to green policies, and “we're going to have years of uncertainty,” but “we have to try and find some positives” from Brexit, Schoon says. “We're going to carry on and try to work our way through in this new era.”

Dax Lovegrove says sustainable companies must step up so that the politicians who are taking the UK out of the EU can “get informed by talking to the business leaders around the green economy.”

Lovegrove argues that as Brexit proceeds, progressive UK climate policies could steady the ship by providing jobs, for example through the energy renovation of homes or the creation of distributed power generation based on renewables. Brexit will bring great change, but in climate and energy terms, it does not need to mean falling behind.

Brexit  EU  climate change  CCC  carbon budget  Paris Agreement  INDC  emissions  greenhouse gases  Environment  climate policies  energy