Brexit, and an uncertain road for the European Emissions Trading Scheme

land area in Europe the night

On the day Theresa May officially triggers Article 50 and begins the Brexit process, Stakeholder Engagement Manager Dr Alex Howe writes about the value of a European scheme that aims to limit and reduce greenhouse gas emissions from more than 12,000 power and manufacturing plants in 31 countries, which together account for around 45% of the EU’s total emissions.

With the UK set to trigger Article 50 and begin its exit from the European Union (EU) this week, the Grantham Institute – Climate Change and the Environment at Imperial College London and its sister organisation the Grantham Research Institute on Climate Change and the Environment at the London School of Economics, hosted an event last week to discuss what Brexit could mean for the United Kingdom (UK)’s involvement with the EU-wide Emissions Trading Scheme (ETS).

“The Paris Climate Change Agreement has changed the world, but the rest of the Europe still hasn’t caught up,” said Dr Ian Duncan MEP, the Conservatives’ spokesperson on fisheries, energy and climate change in the European Parliament, who gave the keynote address at the event. Despite ratifying the Paris Agreement, he suggested that the European Parliament is yet to take the lead in climate policy.

Brexit puts the spotlight on several EU schemes that the UK is currently involved in. Since its inception in 2005, the EU ETS has changed the way that business is conducted, by establishing a monetary value for the right to emit greenhouse gases that cause climate change. This scheme was already under scrutiny before the Brexit vote, because its current phase is due to end in 2020, and Ian is the European Parliament’s Rapporteur considering reforming the ETS and giving it a new lease of life.

Dr Ian Duncan MEP, spokesperson on fisheries, energy and climate change in the European Parliament, delivers a keynote address

What effect has emissions trading had on Europe?

Over its first ten years, the EU ETS has governed the greenhouse gas emissions from 12,000 power and manufacturing plants in 31 countries, which together account for around 45% of the EU’s greenhouse gas emissions (5% of global emissions).

About 40% of these emissions come from highly polluting coal and lignite power plants, creating what Adam Whitmore, Special Policy Adviser from the Sandbag think-tank, calls a “huge opportunity” for some members of the EU to make cuts. Unless these changes are made elsewhere, he says the UK’s actions will have little bearing on the EU’s overall targets because the UK has already cut its coal emissions so much. Adam argued that the currently proposed reforms of the EU ETS, especially the changes to the Market Stability Reserve limiting its size, will be all the more important if the UK leaves the EU ETS.”.

Dr Ralf Martin, an Assistant Professor at Imperial College Business School, and Dr Mirabelle Muûls, Grantham Lecturer in the Economics of Climate Change and Assistant Professor at Imperial College Business School, have looked into evidence for any effect the ETS is having on emissions, innovation and the economy for a recent Grantham Institute briefing paper. They found that over ten years, the EU ETS has led to a reduction in industrial carbon emissions, with no detrimental effects on economic performance.

Critics of the scheme argue that stringent climate change policies in EU countries, without similar action in other countries, have no real impact on global emissions, and can only lead to European businesses being less competitive in global markets. According to Ralf, the scheme is designed to tackle these concerns and is highly integrated across the European continent in terms of setting the policy, its implementation, and enforcement.

Emissions trading in Europe post-Brexit 

Despite leading the European Parliament in adopting the ETS, and following its progress over ten years, Ian Duncan questioned whether the UK should now remain a part of the EU ETS or take the opportunity to create a system of its own. Back in 2016, he supported the campaign for the UK to remain part of the EU, but thinks “the UK is better going it alone, when it comes to reform [of emissions trading]”.

“You can’t please all of the people all of the time,” Ian said, referring to the limitations of the EU ETS, and the compromises that were required before the initial scheme finally passed a vote in the European Parliament. Clearly this is also the case when it comes to Brexit.

While there are now opportunities for further reforming the ETS, evidence collected for the Grantham Institute Briefing Paper suggests that it is worthwhile maintaining and developing this landmark policy. “As an alternative policy, a carbon tax would provide more certainty and visibility for low-carbon business, therefore it should remain a potential tool for policymakers,” Mirabelle Muûls told the audience at the event.

The UK as an emissions trading outpost

“The UK is a small contributor to aggregate emissions regulated under the EU ETS, and so has disproportionately benefited,” said Dr Baran Doda, Research Officer at the Grantham Research Institute on Climate Change and the Environment at the London School of Economics. In offering a vision for the UK’s involvement after Brexit, he discussed three options: maintain participation in the EU ETS; instigating a UK ETS that could link up with other countries’ schemes; or instituting a UK carbon tax.

“If I was playing a ‘fantasy policy’ game I would choose an ETS like California’s [which covers a broader range of sectors, like transport]”, Adam said and raised the opportunity for the UK to work with partners outside the EU, such as the Western Climate Initiative or China.

Find out more

Evaluating the EU Emissions Trading System: Take it or leave it? An assessment of the data after ten years – Grantham Institute Briefing Paper – Dr Mirabelle Muûls, Dr Jonathan Colmer, Dr Ralf Martin, Dr Ulrich Wagner

Academic paper: Carbon dating: when is it beneficial to link ETSs? – Dr Baran Doda and Dr Luca Taschini, December 2016

Non-technical commentary: Should the UK stay or should it go? The consequences of a divorce with the EU ETS – Dr Baran Doda, Victoria Druce and Dr Luca Taschini, 14 February 2017

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