Image by Kieran Burnie
As the new year looms ever closer, so does the conclusion of the Brexit transition period. Negotiations with the European Union are far from over – but one of the less frequently discussed issues is the impact Brexit might have on the United Kingdom’s domestic climate change law and policy.
UK's Domestic Law
The Climate Change Act 2008 is the “central legal plank” of the UK’s domestic climate change policy, setting a statutory requirement to reduce greenhouse gas emissions by 100 percent by the year 2050. This is achieved through a “carbon budget” system, which imposes a limit on the total greenhouse gas emissions the UK is permitted to produce in a given 5-year period. The current budget from 2018-2022, detailed below, is 2,544,000,000 tonnes of CO2 equivalent.
The carbon budget system under the Climate Change Act is a highly flexible regime. If the UK fails to meet the maximum emissions of the previous carbon budget, the Secretary of State has the power to “carry forward the whole or part” of the remainder to meet current energy demands. Equally, the Secretary of State can “carry back” up to one percent of a future carbon budget.
The purpose of the carbon budget system is to progressively reduce the UK’s CO2 emissions in order to combat climate change. By setting and adhering to carbon budgets, the UK is able to reduce harmful greenhouse gas emissions whilst ensuring the country has sufficient energy flexibility to meet modern demands. It is imperative that these budgets are not exceeded.
EU Law and the EU ETS
In addition to the Climate Change Act 2008, the UK is bound by the EU Emissions Trading System (EU ETS). This serves as a “cap-and-trade” system, covering as many as 11,000 installations across 31 countries. Each installation is granted a number of “allowances”, which are defined under Article 3 as being “one tonne of carbon dioxide equivalent”. An installation may only emit as many tonnes of greenhouse gases as their allocated allowances under the EU ETS system (listed in Annex II).
Article 12 also stipulates that installations that do not use all of their allowances are entitled to sell the remainder to other installations that are at risk of exceeding their allowances. In doing so, the EU ETS “cap-and-trade” system has created the world’s first “carbon market”, encouraging operators to trade emission allowances in order to reduce the overall emissions of the EU.
The EU ETS has been separated into three phases. It was initially created under Directive 2003/87/EC and, under Article 9, required Member States to create a “national allocation plan” (NAP). The NAP established the allowances to be given to each individual installation, and in doing so created a “bottom-up” EU-wide cap on greenhouse gas emissions: the sum of the NAPs from each Member State created an overall cap on EU emissions.
It quickly became clear that granting such discretion to Member States was dangerous. Some States granted excessive allowances to such an extent that the total allocations far exceeded the actual emissions of the EU. The EU ETS was designed to enable operators to sell unused emission allocations to other installations – but, due to over-allocation, there was very little demand. The EU carbon market collapsed, with prices falling to as low as £0.72 per tonne from highs of £29.51. As the EU ETS progressed into its second and third phases, the Commission began instead to use a “top-down” EU-wide cap under Article 9 of Directive 2009/29/EC to prevent further over-allocation. This EU-wide cap can be actively reduced over time by the Commission in order to further limit the greenhouse gas emissions of the EU.
EU ETS and Carbon Budget
The EU ETS and UK carbon budget system under the Climate Change Act 2008 have certainly interacted over the years. In a recent publication, the Committee on Climate Change attributed the UK’s success in meeting its second carbon budget to “changes in accounting for the EU ETS … cap”. The second carbon budget was established in the Carbon Budgets Order 2009 when the UK’s allocations for those years under the EU ETS had yet to be finalised – but when the Commission reduced the UK’s allocations by 30 percent, the second carbon budget did not change to reflect this accordingly.
The UK’s allocations were smaller under the EU ETS regime than they were under the Carbon Budgets Order, allowing them to artificially overachieve the target of the second carbon budget by a significant margin. The Committee on Climate Change further noted that, if not for this accounting change by the Commission, the UK would have exceeded its second carbon budget by as much as 66,000,000 tonnes of CO2 equivalent.
So far, the UK has adhered to the budgets established under the Carbon Budgets Order 2009. The carbon budget system has served to assist with the global effort to combat climate change – but, in truth, much of the UK’s success is the result of overarching EU obligations which, on 1 January 2021, will no longer hold sway. Whilst there is hope that a standalone UK ETS would work alongside and link to the EU regime, the stagnation of Brexit negotiations has rendered that particular outcome unlikely by the end of the transition period. Some have urged the UK to reject a domestic ETS due to extreme market volatility.
Without membership to the EU ETS, the UK would likely implement a carbon tax – much to the distaste of many energy companies. The Committee on Climate Change stated that, “without any [legislative] change to the third carbon budget, it is highly likely that the carbon budget will be comfortably met again if only because of this accounting change”. The future of UK climate law and policy – especially insofar as carbon cap-and-trade systems are concerned – remains to be seen.