OPINION: The UK can make good use of its strong position in the EU ETS

Mark Moriarty, chief operating officer at  Commodity Management Services, argues that the UK’s large role in the EU ETS means it will still have influence in the bloc’s climate policy

Brexit provides an opportunity for a re-examination of the UK’s current emissions policies, and it also raises the question of whether there is a better way to achieve the goals of greenhouse gas emission reductions while maximising economic growth.
Freed from the constraints of EU mandates, the UK would be able to pursue new approaches to its climate goals. Conversely, the exit of the UK, a very large emitter, from the EU is a substantial challenge to EU emissions policy and raises the question of the relative emissions negotiating position of the UK in Brexit negotiations.
The UK is a large emitter, a large financial contributor to reduction programmes and an over-performer in terms of physical emissions reduction and policy commitments. For example, based on the UK carbon budgets for 2030, the UK will have reductions of 57% (from 1990 levels). The EU’s overall goal for 2030 is 40%. Since the UK is the second-largest emitter in the EU, with about 12.5% of total emissions, the EU will have two choices should the UK withdraw from the EU’s Nationally Determined Contribution (NDC) commitment: lower the NDC; or require more greenhouse reductions from the remaining member countries. Neither is an attractive choice. A prudent negotiating strategy would take advantage of this leverage.
Most would accept that the EU’s Emissions Trading Scheme (ETS) has not performed as originally expected, with carbon prices much lower than envisioned. This was largely because there was no economic adjustment mechanism in the scheme, which led to lower demand from slow economic growth, generous free allowances and the ability to stockpile surplus allowances.
The EU is finalising reforms to address these causes. But although they contribute to the market price doldrums, they do not tell the whole story.
One of the ETS’s core problems is that it is not technically a market. A market calls for arms-length transactions between willing buyers and sellers. In the case of the ETS – and other cap and trade “markets” – there is no inherent demand for greenhouse gas emissions and therefore no underlying market value. Once an emitter has secured what is mandated, the demand for certificates approaches zero.
The deeper the demand in such trading regimes, the more effective the cap and trade “market”. So it is important to keep the large UK economy in the ETS.
If the UK left, it would weaken the ETS. Further, without the UK’s participation, the upcoming Phase 4 (2021) annual cap reduction would have to be increased to satisfy the EU NDC and maintain prices. This would result in a more challenging competitive position for EU companies. It presents a competitive advantage for the UK in Brexit negotiations.
We would expect the UK to stay in the ETS market and extract a concession that allows London-based ETS trading, because this outcome would be mutually beneficial.
Brexit is an opportunity to take a different approach to emissions policy. Although emissions reduction is a laudable goal, a far more important metric would balance emissions reductions against economic growth. The best way to have deep public acceptance of emissions policies is to show that those policies do not come at the expense of the economy. It is important to break the perceived negative correlation between emission reductions and economic growth.
One measure that reflects some of this balance is emissions intensity, which measures greenhouse gas emissions per unit of GDP. We propose a new metric that we call the economy-adjusted emission value (EEV) – the average annual percentage change in GDP minus the average annual percentage change in greenhouse gas emissions.
Economic growth and emissions reduction are both seen as positive outcomes, so this snapshot gives a better picture of the overall effectiveness of emissions policy.
For the period 1990 to 2013, the UK was the top EEV performer. And the EU and the US had similar performance, despite the US having no serious national emissions policy and a substantially simpler regulatory compliance regime.
As is evident in other markets, there is not a “one size fits all” approach to emissions reduction. But Brexit does present an opportunity for the UK to reassess its 2030 climate objectives, and whether these are best served in current EU policy.