Brexit: a barrier to clean energies and climate change agreements

Introduction:

To a large extent, Brexit has been a surprise. This implies that part of its consequences have not been studied ex ante in a serious way, as UK leaving the EU was not considered as a plausible outcome. EU is now dealing with a hangover coming from a mix of uncertainties, unexplored possibilities, and unexpected circumstances. For instance, some people are not even convinced that Brexit will really come into effect. UK is a big player in the EU in particular for what concerns clean energies and EU is a big player on the international scene for what concerns climate change agreements. One may therefore wonder what is going to happen on the one hand for wind, solar and interconnected grid in the EU and on the other hand, for the extension of international climate change agreements or even simply the enforcement of the existing ones. Very little attention has been paid by economists to these issues so far first because Brexit is recent and was not a realistic situation ex ante. Second, no changes are expected to happen in the short run. Indeed, the EU rules “acquis communautaires” remain in place and there will be very little impact on the energy business: the price of energy sources is not set by the institutions in Brussels but on international markets. However, one can expect important consequences for the longer run, some of them due to the increase in uncertainties generated by Brexit

Part 1 : Consequences for the development of clean energies in the EU

Let’s start by analysing the consequences of Brexit for the development of clean energies in EU. The energy business is a lot about huge irreversible investments in infrastructures. Whether we consider electricity generation using solar panel or wind power, the development of such energy sources requires to invest important amounts of money into the solar panels the wind mills and the land to install them. These investments are not easy to sell back as there is no real secondary market. As a result, they are irreversible, meaning that once they have been done, we have to keep them for a long time. It is not a problem if future is perfectly known. In such a case, future operating costs and benefits are certain and not having the opportunity to undo the investments in solar panels or windmills does not matter. Of course, future is never perfectly known. But what is happening with Brexit is that the future for energy markets in the EU is getting a lot more uncertain. Ambiguity about the new U.K.-EU relationship will for sure raise uncertainty about changes in energy and climate policies. It is well-known in economic analysis, and in fact quite intuitive, that under reinforced uncertainty, investors become more reluctant to realise investment projects and wait before implementing them. Therefore, one can expect that UK clean energies expansion will significantly slowdown and as the UK is a big player for wind and solar energies, this slowdown will affect the whole EU clean energy development as well.

Also note that clean energies are intermittent and one choice made by the EU to tackle solar and wind intermittency is to set up a single European energy market with a large interconnected grid to balance excesses and shortages at different European locations. Again, such a grid requires irreversible investments and the UK was playing an important role in this grid. No doubt that the interconnected grid project is now going to be delayed, further impeding on European clean energies development.

An example is already provided by the Hinkley Point nuclear project in the UK involving French EDF and Chinese state-owned nuclear companies CGN and CNNC.¹ Even if EDF Chief Executive Officer Jean-Bernard Lévy committed to build Hinkley Point C whatever UK decision, there is a concern that the cost of construction could rise following the depreciation of the pound and that the project’s profits could be reduced if electricity consumption in the UK declines as a consequence of an economic downturn. Such a fear is not necessarily founded as not only the pound depreciation enters the picture, but it is sufficient to lower investors’ confidence and reduce investments.

¹ China General Nuclear will take a 33.5% stake in EDF Energy's £18 billion ($28 billion) project to construct the plant.

Part 2 : Consequences for international environmental agreements to fight climate change

Another important long term consequence of Brexit concerns international environmental agreements to fight climate change. Addressing climate change is very complicated in particular because of its global dimension. It is global Green House Gases (GHG) emissions that increase average temperatures which in turn generate cost to the economies. These costs are unevenly spread among countries (some may even actually gain from a warmer climate) with no correlation with the GHG emissions of each country. Therefore it requires a global environmental policy. It would make no sense for Hong Kong (or Switzerland) to engage into a very stringent policy to reduce their own GHG if no other country in the world is doing the same. And if the environmental policy is decided globally, it means that it results from close international cooperation, for instance to set emissions targets. Such a cooperation is very difficult to set up and in particular it requires leaders both from a diplomatic point of view and a GHG emissions point of view. US has not really played this role so far. It seems that China, by exploiting co-benefits between air pollution and climate change reductions, is becoming a first mover in the climate change mitigation international game. But so far, a very important player has been the EU. The EU has long been a respected international leader in international environmental negotiations. It comes from the close cooperation between the European institutions, and the member states… including the UK. As they have spoken with one voice, the EU’s collective impact has been a lot stronger than a collection of national positions taken by member states.

With the UK now out of the team, the EU becomes a smaller player in international negotiations, making it more difficult for the EU to play the leading role. Moreover, the UK has been a pro-active player inside the EU team with a lot of concerns for environmental issues. It may be that international cooperation inside the EU itself becomes more complicated without the UK to lead it. More difficult environmental negotiations in and out the EU will also delay international agreements. This can be observed for agreements that have already been made: what becomes the outcome of COP21 without the UK in the EU? The plan EU countries submitted in Paris as a 28-member bloc needs to be recalibrated since the UK is now out, but as the U.K. was part of the EU at the time of the negotiations, any change will require fine tuning. All this will take time and in the case the UK and the EU would delay ratification, one may wonder whether the agreement will later… or never enter force.

As a conclusion, Brexit generates a lot of uncertainties that will delay the development of clean energies and it will slowdown international environmental agreements as well. But things may become even worse: other countries may follow the UK example and it may be more difficult to address any global problem in the future as it could be viewed as questioning national sovereignty.