The UK has decided to leave the EU but maintain its climate targets. However, three central planks of UK climate policy, emission permit trade, interconnection, and nuclear power, depend on the EU. This paper discusses the implications of Brexit for climate policy.

1. The impact of Brexit on
climate and energy policy
Richard S.J. Tol
University of Sussex
Vrije Universiteit, Amsterdam
Tinbergen Institute
CESifo

2. Outline
• EU Emission Trading System
• Impact of ETSexit on EU
• Impact of ETSexit on UK
– Costs
– Financial sector
– Regulations
• Nuclear power
• Interconnection
• Ireland

3. EU ETS
• Tradable emission permits
– Regulator sets a cap on total emissions, issues
permits.
– Companies that want to emit more than allowed buy
additional permits from companies that want to emit
less.
– If market works well, all companies face the same
emission reduction cost at the margin.
• The EU Emissions Trading System is the world’s
largest emission permit market.
• ETS regulates some 45% of all greenhouse gas
emissions in the EU, from some 11,000
installations.

4. EU ETS
• Started in 2005
• Now in Phase 3, from 2013 to 2020
• Emission permits are issued by Member States
– Partly auctioned
– Partly grandparented
• Monitoring and enforcement by Member States
• Emission permits are valid in all of the EU.
• Permit do not have a country of origin.
• Emission permit gives the right to emit a tonne
of carbon dioxide (or equivalent) at any time
after January 1, 2013.

5. ETSexit
• The UK will leave the EU on March 30, 2019.
• Brexit means that the UK will leave the ECJ.
• ECJexit implies ETSexit.
• Not inevitable: Norway, Iceland, Liechtenstein
are in the EU ETS.
• Swiss ETS is linked to EU ETS, overseen by PCA.
• If there is a transition agreement that keeps the
UK in the ETS until the end of 2020, DG Climate
Action will need to redo some of its preparatory
work for Phase 4.

6. Impact on EU27
• Without a transition agreement …
• Total amount of permits will need to be
adjusted downwards by some 270 mln tCO2, the
UK allocation for 2019 and 2020.
• This is small relative to the 900 mln tCO2 of
delayed permits that the EU plans to reinject
into the market in 2019 and 2020.
• On 30 March 2019, EU will stop buying permits
from the UK, and will need to declare that all
permits in circulation are valid.
• Permit sale, emission and verification are not
synchronous, so there will unvalidated permits.

7. Impact on EU27
• The UK is a
net importer
of permits.
• Permit price
would fall.
• After the
referendum,
ETS price
dropped by
20%, from
€5.86 to
€4.67/tCO2

8. Impact on EU27
• Increasing share of emission permits are
auctioned.
• 90% of auction revenue goes to the Member
State in which the buyer is incorporated.
• 10% goes to Eastern Europe.
• €150 million
• UK has been a green champion in the EU.
• Balance will shift to brown position of France,
Poland.
• Weaker voice in international climate
negotiations.

9. Impact on UK - ETS
• In 2013 (2014), 19% (25%) of emission reductions
in the UK were met by imported permits.
• House of Commons has voted to maintain
targets in Climate Change Act 2008.
• Clean Growth Strategy reaffirms this.
• Without permit imports, climate policy will be
40% more expensive.
• Climate policy cost 0.5% (CCC) to 0.9% (Lilley) of
GDP in 2020.
• ETSexit alone will cost 0.2-0.4% of GDP by 2020.

10. Impact on UK - Finance
• City is heart of permit trade.
• In 2013, 1.7 billion permits were sold by UK
companies.
• In 2013, UK emissions were 0.5 billion tCO2e.
• Permits do not have a country of origin, but the
current permit owner does. The EU will have no
choice but to close the door to UK companies
selling permits.

11. Impact on UK - Regulation
• Some 55% of UK emission reduction measure
originate in EU laws and regulations.
• The UK has 18 months to fix this.
• EU (Withdrawal) Bill will create a UK ETS,
identical to EU ETS (but less liquid).
• The UK has a “carbon” tax.
• DECC has been folded into BEIS, which is losing
people.
• BEIS has been silent on Brexit, also in Clean
Growth Strategy.
• Committee on Climate Change:
– UK would not import permits anyway.
– Policy implementation lags behind targets.

12. Impact on UK - EurAtom
• UK climate policy has two additional planks:
nuclear and interconnection.
• Hinkley Point C (3.2 MW) and Sizewell C (1.6
MW) are only the start: 9 more units (14.2 MW)
are foreseen (initially for 2030).
• Civilian use of nuclear power is regulated by
EurAtom, which is overseen by the ECJ.
• Foreign companies would not be allowed to sell
fuel, equipment or know-how to the UK until
– regulations are non-proliferation compliant; and
– nuclear inspectorate has IAEA accreditation.
• Further delays: Hinkley C was announced in
2008 for 2018-9, now 2025-7

13. Impact on UK - interconnection
• UK has 5 GW
interconnection,
plans another 11
GW.
• Power markets
are heavily
regulated for
capacity,
frequency,
reliability,
environment,
price, access.

14. Impact on UK - interconnection
• Power markets are heavily regulated for
capacity, frequency, reliability, environment,
price, access.
• A merchant interconnector buys power in one
jurisdiction, sells in another … regulatory
uncertainty doubled.
• UK policy has focussed on retail market (where
the votes are), EU policy on wholesale market
(where the problems are).
• Regulatory convergence and certainty has
stimulated interest in interconnection – gone
now.

15. Ireland
• The Single
Electricity Market
for generation
and transmission
started in 2007,
overseen by
EirGrid and SONI,
and ECJ.
• Assets owned by
Irish, US, British
companies.
• SONI is NI gov’t.

16. Ireland
• The Single Electricity Market will end if SONI
should be free of the ECJ.
• Northern Ireland would have a small* and,
because of economies of scale in generation and
reliability, expensive grid with severe market
power in the wholesale market.
• Major costs imposed on Republic of Ireland,
which relies on the UK for gas storage.
* 1.9 v 6.7 million people

17. Wrap-up
• Brexit creates a few small problems in energy
and climate policy for the EU as a whole, but
bigger problems for the Republic of Ireland.
• Brexit undermines three central planks of UK
climate and energy policy, and destroys Northern
Ireland energy policy.
• BEIS and CCC pretend there is no problem.