Increasing interconnectivity with Continental Europe will necessarily require co-operation between UK and EU Internal Energy Market in any Brexit scenario, also at international-global level.  If the UK were permitted to participate in the Energy Union following Brexit, it would need to negotiate an appropriate partnership with EU and adopt - and comply with - the relevant European internal and external law. 

The first question to be addressed is: can the UK continue to participate in the liberalisation of the European Energy Market (EEM), can the EEM continue the liberalisation process without the UK? The second question is: can the EU optimally negotiate the multilateral and global agreements on energy/climate change?

From a legal point of view, one of the most important question needing a quick answer is how the UK would join the EEA Agreement given its more advanced implementation of EU Law. The answer will only be known as part of the Brexit negotiations, after the triggering of the famous Article 50 of the Treaty of Lisbon. In fact, the exact nature of the exit and the future UK-EU relationships is still to be negotiated and it is expected that the United Kingdom will attempt to extract favourable terms in a new trading arrangements that still provides the country access to a single market1, while the European Union will reset such an arrangement.

As this is the first time that a Member State has left the “28-Countries Club”, there are many significant uncertainties over substance, process and timelines. In the interim period and while negotiations are on-going, the legal status of the EU-UK relationship (and all attendant rules and regulations) will remain unchanged. But there will be political changes: the UK will not participate in the next European Councils and Councils of Ministers. Over the near term, uncertainty will be the defining feature of the direct and indirect impacts on energy markets. Nonetheless, it is possible to begin to outline some of the impacts on the energy system.

 

The Brexit impact on Energy Markets 

Concerning the Direct Impact, as evidenced in the immediate reaction to the Brexit vote, and because the status quo will remain in place on the regulatory and trade front, the direct impact on energy markets in the short term will be supposedly “..limited to the volatility of commodity prices, most prominently the price of crude oil”2.

The Indirect Impact on Energy Markets is perhaps more significant in the near and medium term than the direct impacts and moderated through the effect the British referendum will have on global economic growth. An example of indirect impact is the cost of access to credit. The risk premium on investments will likely rise, both in the UK and elsewhere, but “investors will remain risk averse until the long term is more predictable, and this will likely stiffen investments and restricts the flow of capital even further across global markets”3.

There is also the possibility of Uncertain Impact on Energy Markets. Going forward, much of impact on energy markets will be determined by the future contours of the UK relationship with the European Union and even more on the shape of the Union itself, which will be determined in the months ahead by a complex web of political and technical factors. There are three major areas of uncertainty when it comes to the Brexit’s impact on energy and climate policy that will be influenced by these negotiations: the future of climate policy, the future of British access to the EU market, and additional potential EU exits.  These areas are by far most consequential for energy markets and policy, but are by no means the only areas of uncertainty.

 

Access to EU Market: the Framework 

A considerable impact of a potential Brexit for energy markets will be determined by the shape of the future EU-UK economic relationship (as well as the political future of the United Kingdom itself). There are, essentially, five possibilities for the relationship: 1) status quo – the United Kingdom does not leave the European Union and remains part of the common market; 2) the United Kingdom leaves the Union but retains full access to the EU single market (the Norway model); 3) the United Kingdom has restricted but significant access to the common market on a bilateral basis (the Swiss model); 4) the United Kingdom does not have access to the common market but negotiates a separate free trade agreement with the Union (the Canada model); 5) the United Kingdom and the European Union are not able to negotiate preferential trading terms, and access to the common market would be premised on the World Trade Organization rules.

 

Climate Policy and multilateral agreements 

When it comes to multilateral climate policy, the United Kingdom - the European Union’s second largest emitter of CO2 – has participated in UN climate negotiations as part of the broader EU bloc, and its climate commitment to the recent Paris Treaty was submitted as part of the broader European commitment. What will happen to the EU target – will it need to be resubmitted, and would any submission need to be more or less stringent without the United Kingdom - remains to be seen. Likewise, whether they will submit a new climate pledge, and the shape and scope of that pledge, is also up in the air. However, the United Kingdom is on the path to cut emissions by 2030 under a domestic law. The broader EU negotiating dynamic on climate moving forward may also change. The United Kingdom is often credited with both pushing for more stringent climate targets and for the adoption of market-based mitigation (rather than top-down-wide standards and goal setting). How the European approach to climate negotiations may change without the presence of the British remains to be seen.

The EU position to the conference was set by the October 2014 European Council Conclusions on the EU 2030 climate and energy framework. It forms the basis for the EU’s Intended Nationally Determined Contribution (INDC) which still commits the EU to a domestic reduction of greenhouse gas emission by at least 40% below 1990 levels by 2030. The EU submitted its INDC on 6 March 2015, as one of the first parties to do so.

The EU position was obviously set by the UK contribution and the EU position to the next COP 22 will be set, if Brexit will be early concluded, without the UK contribution. This will be clear but only formal point of view. The EU position will be substantially a Regional Position, comprehensive of the UK as a part of the European “continent”. We foresee a special and sectorial negotiation between EU and UK on COP 22 as a result of the “internal” negotiation on the European Energy Market.

The EU Think Tank Platform for Paris 2015 analysed the EU role in a geopolitical situation that has evolved since the adoption of Kyoto Protocol. It calls on the EU to provide leadership through its “soft power” towards reaching a strong Paris Agreement under UNFCCC, which would also strengthen the credibility and the influence of the UN and the multilateral system. A strong international commitment to decarbonisation can also address concerns about European competitiveness, giving the EU as a “regional” whole, comprehensive of the UK, a chance to reconcile good global citizenship and self-interest, according to the authors.

 

Notes

[1] Please make refernce to the following pages: Norvegian Model, Swiss Model etc.

2 Andrew Stanley, Centre for Strategic Studies.

3 Global Fossil Energy and Climate Change mitigation, in Climate Change, May 2016, volume 136, Issue 1, pp. 69-82