De-alignment with EU climate and environmental rules: the risks to British industry

With the UK set to override elements of the Withdrawal Agreement, PWB takes a look at the negative impacts on British Business of the lesser discussed, but no less important, de-alignment of climate and environment regulations, writes Emily Stewart.

With the UK signalling that it is ready to legislate to override elements of the Withdrawal agreement, the future rules on the Irish border and the single market are rightly in the spotlight. However, deregulation on climate and environmental goals will also impact significantly British and European markets and livelihoods but has yet to be discussed in any detail.

PWB is keen to point out that regardless of the type of exit, the physical proximities to one another’s markets is a reality that cannot be ignored. Should the UK seek to deregulate, it might make a trade deal with countries like the US and China slightly easier, but it will leave swathes of industry that depend on EU trade out in the cold.

At the outset, the intentions of the British Government looked at least pragmatic, and at best quite good. The Environment Secretary, Michael Gove, had signalled that standards and regulations would be raised beyond current EU norms. In order to make this a reality a strong statutory body, able to hold the government fully to account for its environmental performance would need to be created.  It would require prosecutorial powers and be coordinated and adapted across the four nations of the UK.

Moreover, it would need to be recognised by the EU as equivalent in stringency and power to its own instruments. Only then would the principle of the level playing field for the single market be accepted. In order to help facilitate post Brexit trade, all of this would need to be in place transition period deadline at the end of the year, which while the British Government has said will be up and running by January 1st, 2021, may be hampered by lack of progress with the Environmental Bill, which would need to pass to give the new Office for Environmental protection its powers.

While the UK has been slow to come around to the economic impacts of deregulation on climate and environment, the EU has already started to look at mitigating the effects of a bad neighbour were the UK choose to go down this route.

The European Green Deal introduced new wording on carbon leakage that would enable border taxes on high carbon goods coming in from outside the EU. In practice, this means that if the UK drops the standards that the EU ETS requires of manufacturing to try and gain a competitive advantage, they could be penalised by their closest trading partners.

Britain’s chemicals industry; which at £55.5 billion of revenues is the UKs second largest, faces comparable issues If the UK were to fail to maintain and track EU standards, setting up its own equivalent of the European Chemicals Agency (ECHA) and implementing regulation that apes the EUs Registration, Evaluation and Authorisation of Chemicals (REACH); then access to the single market is likely to be limited, while the importing and exporting of chemicals could prove costly and lengthy. This is particularly difficult for a sector heavily reliant on cross-border supply chairs in the production of substances and materials that are at one mundane and sophisticated. Anecdotal examples of household products that cross make multiple border crossings on their way from raw material to supermarket shelves. Add different regulatory frameworks to that mix and the implications for the competitive position of the UK sector become even more stark (1).

Similarly hampered by a lack of uniformity in rules would be British agriculture. High welfare standards are necessary to keep access to the EU market. Attempts to undermine these in order to secure trade deals with countries with lower standards could be catastrophic for swathes of British industry that rely on exports to the EU (such as the Welsh lamb industry which exports 93% of its products to the EU). Should British Agriculture look to deregulate downwards, it may too be subject to carbon border taxes under the ETSs sister regulation, the Effort Sharing Agreement.

Leaving the Common Agricultural Policy (CAP) was, despite the fact that UK farming had in recent funding periods become a net beneficiary of the policy, often touted as a potential benefit to Brexit, allowing for higher standards on environment and climate. However, even if the UKs own standards align with or exceed those set by the EU, the new trade deals the UK is looking to strike means that it is likely to find itself allowing products on the market that have lower standards, thereby de facto undercutting those higher domestic standards.

As well as the potential disadvantages in terms of access to the single market, British industry looks set to further miss out on a number of funding schemes to help the transition to a low carbon economy. Since 2000, the UK has received more than €37 billion in European Investment Bank loans towards energy infrastructure projects, including €6 billion towards low-carbon projects (2). The EU budget covering 2014-220 provided the UK with around €5.8 billion of funding for projects that support the environment and tackle climate change. Having decided to leave all of the associated budgets and schemes for the low carbon transition, the UK will need to be able to convince the EU and international partners that it is able to foot the bill for its promised industrial modernisations. If they are unable to do this, it could mean a double whammy of losing out on both EU subsidies and potential new investors from modern industry.

While this piece has focussed on the direct impacts to industry. It is worth again underlining that lowering environmental and climate standards will lead to further reputational damage to the UK. As a member of the EU, the UK was often looked to for leadership on climate, and its loss was lamented by many of the more ambitious EU member states. With the COP26 conference due to take place in Glasgow next year, the UK must be able to convince not only its former allies and closest trade partners, but also the rest of the world  that it is able and willing to meet its climate and environment commitments. Reneging on past commitments and actively lowering standards will further signal to the rest of the world that the UK is not a serious contender in future investment and trade considerations.

(1) There have been indications by the UK Government of its intention to replicate EU-REACH with an identical UK-REACH. The exact mechanisms, other than replicating the legislation of the EU, are unclear and the situation remains fluid.

(2) Brexiters have frequently made the assertion that the EIB’s lending has somehow involved the UK in handing over monies to the bank. This is of course untrue. The EIB lends just as would any other investment institution. In this case the EIB’s loans are guaranteed by the Member States of the EU (rather than by institutional assets). The only real money the UK provided was a share of ‘founding capital’. The UK’s guarantees disappear as loans are repaid. Remaining within the EIB was open to the UK should it have sought a different future relationship with the EU.

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