Business benefits of EU ETS reform clouded by Brexit uncertainty

EXCLUSIVE: Last week's vote in favour to reform the EU's carbon market is a "strong signal" that energy-intensive businesses should accelerate decarbonisation processes, although the European Parliament's rapporteur on the reform has warned that Brexit will act as high-profile distraction.

New rules to counter the imbalance between the supply and demand of allowances from the EU’s Emissions Trading System (ETS) were agreed in November 2017. Last week, 535 MEPs voted in favour of a deal piloted by British Conservative Julie Girling, with Member States set to “rubber stamp” the deal later on.

Girling’s reform proposal aims to limit the amount of excess allowances currently on the market, which has stifled investment into low-carbon technologies, according to some critics. For example, the EU ETS sets a cap on the total emissions from electricity generation and enables UK-based industries to purchase emissions reductions from overseas, which is often a cheaper alternative than reducing operational emissions directly.

According to Girling, the new reform is a balance between the Union’s environmental ambition and the protection of energy-intensive industries, such as steel and construction. The UK will remain part of the EU ETS for a two-year transition period following Brexit, but little information has been given beyond that point.

Speaking exclusively to edie, Girling warned that the distraction and “uncertainty” of Brexit could stop carbon-intensive industries from accelerating the transition to a low-carbon economy.

“The reform is certainly a pretty strong signal that UK industry will need to start doing more,” Girling said. “I haven’t met anyone from those industries who doesn’t want to attempt it, but investment cycles and availability of capital hasn’t helped.

“My problem is that all the economic uncertainties of Brexit will concentrate the mind. High intensity business is looking at a future where we’re unsure of trading relations, or whether they’ll be an exporter, importer or both. I don’t think it bodes well for our decarbonisation agenda that businesses have other pressures on them at this time.”

The UK is the second largest emitter in the European Union (EU), and research suggests that a UK departure from the EU ETS would tighten the supply-demand balance of the system by around 745 million tonnes.

The reform aims to outline the EU’s carbon market for the post-2020 period. Currently, the emissions trading scheme obliges more than 11,000 power plants and factories to obtain permits for each tonne of CO2 emitted. The intention is to create a financial incentive to pollute less, but a surplus of around 1.6 billion allowances has hindered the market since 2013.

The new measures would soak up the surplus, which should incentivise polluters to invest in solutions that lower emissions without stifling productivity. But Girling expressed concern that Brexit would distract firms from investment.

Stifled investment

Surveys have noted that UK companies have put investment plans on hold until negotiations have been cleared up, with one report warning that Brexit could disproportionately threaten the green economy in the North of England.

The European Commission has agreed on a new measure to protect its ETS against a potential breakdown in Brexit negotiations. The new measure is intended to stop potential sell-offs of permits if UK businesses are ejected from the market because of Brexit, posing more financial concerns for businesses.

Brexit will leave a €13bn hole in the EU budget and the bloc’s institutions are now beginning to plan in earnest for life after the UK’s financial contribution. Taxing plastic and shifting emissions trading income to EU level are two of the mooted solutions.

Matt Mace

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