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Another stormy week in Brexit, this time on the high seas with France threatening to cut off electricity supply to Jersey in the Channel Islands in retaliation for what it says are unacceptable conditions attached to coastal fishing permits. At the same time the UK tabloids are salivating over Boris Johnson dispatching the Royal Navy. Children, children.
Still, in the early stages of the relationship this kind of muscle-flexing is perhaps to be expected, but it does not create a conducive atmosphere for co-operation just at the moment where the TCA is about to open up the myriad management committees the Brexit Briefing touched on last week.
One example of where strategic co-operation is surely both necessary and to the advantages of both sides is the focus of today’s Brexit Briefing: carbon-trading. The goal of reaching “net zero” is mutually held and top of the global political agenda this year ahead of the G7 in Cornwall in June and the COP 26 conference in Glasgow in November.
Brexit has taken the UK out of the EU’s Emission Trading System, the carbon market that sets a cap on the levels heavy polluters can produce and forces them to purchase carbon credits to cover their annual output.
Post-Brexit the UK has created its own version of this system, which will hold its first auctions for carbon credits this month amid a cloud of uncertainty about how the UK ETS will interact with the EU scheme, given as yet there is no formal linkage between the two.
Industry experts say creating a linkage between the EU and UK schemes is vitally important because it will harmonise prices across the EU, the risk of carbon price distortions that would do nothing to facilitate the shared commitment to achieving net zero.
In recent weeks, industry has been pushing the government hard for clarity. This month more than 40 leading industry bodies, including the CBI and groups representing energy intensive industries like chemicals, ceramics, glass and paper, wrote jointly to the government urging the linking of the EU and UK schemes as a matter or priority.
Under the terms of the TCA, the UK and the EU committed to “seriously consider” linking the schemes but thus far the mood music out of Whitehall has been pretty tepid. Ministers have only agreed to consider some form of “international linkage”, without specifying with whom or when.
The government argues that the UK ETS scheme is “more ambitious” than the EU one and that it contains mechanisms to stabilise prices which should address industry fears over volatility. But when it comes to connections with the EU, it says only that it is considering “a range of options” on how the UK’s scheme can work best with other carbon markets.
For businesses that need to be able to predict the future of carbon with some degree of certainty and hedge against future fluctuations in carbon prices, leaving the UK scheme untethered from the EU one is a source of significant concern.
Last month the Chemical Industries Association wrote to Anne-Marie Trevelyan, the minister for Energy and Clean Growth, warning that business had “no clarity” regarding the potential price trajectory of the UK ETS.
“UK manufacturers and utilities are therefore striking contracts to sell products and electricity without any insight into the price of carbon, a key element of their costs,” warned the CIA’s chief executive Steve Elliott.
With EU prices hitting record highs of €50 this week, the widespread assumption is that UK costs will be even higher, given that the UK ETS has tougher emissions caps and the UK market, being smaller, is at greater risk of speculators driving prices northwards in anticipation of ever tougher future reduction targets.
The Department for Business, Energy and Industrial Strategy has responded to industry fears in part by saying companies can wait and watch to see where the UK carbon prices settle, but that ignores the fact that many companies have strict policies requiring them to buy credits — whatever the price — to cover emissions’ liabilities. Many cannot wait.
These issues are creating real-world problems for companies like CF Fertilisers, which the Brexit Briefing spoke to this week. It produces about 1.5m tonnes of fertiliser per year, equating to about 40 per cent of the UK needs.
Brett Nightingale, CF’s managing director, says there is an apparent lack of joined-up thinking in government, not only on linking the EU and UK ETS but also, for example, on a carbon border adjustment mechanism to avoid cheaper, high-carbon equivalents from countries like Russia and China being dumped on the UK market.
“There is a real need for a genuine, joined-up strategic approach to all of this as we strive to decarbonise in response to the UK’s ambitious targets,” Nightingale told Brexit Briefing. “But what we’re facing is the cumulative impact of disparate policies that are driving up energy and carbon costs to unsustainable levels.”
Which brings us back to Brexit and the current atmospherics between London and Brussels which, amid all the squalls and squabbles, are not exactly conducive to keeping a clear focus on the bigger picture.
As the 40 industries pointed out in their letter to the government, a deal would require “political will”, both from the UK to engage, but also from the EU not to make broader linkages on alignment that they know are an ideological anathema to the Brexit implementation minister Lord David Frost and the Johnson Brexit.
It is not impossible. Given the basic similarities between the two ETS mechanisms, they argue there should be no two schemes that are “easier to link” and doing so would not require the UK to surrender either revenues or control of the rules.
This, they conclude, would mean that such a mechanism was beneficial for the UK economy without diluting the all-important “sovereignty” of the scheme.
Industry has pinned its hopes on relations normalising as we enter the second half of this year. Whether key areas like emissions trading can be siloed from more combustible topics, like fishing rights, will be an early test of what can be achieved.
As we emerge slowly but surely from the Covid-19 lockdown, the absence of a meaningful labour mobility chapter in the TCA is likely to become more and more evident.
The £35bn fashion industry is this week once again rattling the tin for tax incentives for domestic manufacturing, immigration carve-outs and more government assistance akin to schemes set up for the (far smaller) fishing industry to help mitigate the effects of Brexit.
As the latest report and survey from lobby group the Fashion Roundtable shows, there is significant concern in the industry about the impact of labour shortages and the new frictions that are making ecommerce slower and more expensive, but will also hit the live modelling industry when travel starts to open up again.
Thus far the government has not been overly receptive to the demands of the creative industry sector — the music, travel and film industries would like many of the same things — but equally Covid-19 lockdowns have obscured the impact on services trade with the EU.
Nothing looks likely to happen immediately, but as shifting business and investment patterns emerge over the next year, expect the clamour for a change of heart to grow.
And, finally, three Brexit stories you may have missed this week
Michel Barnier has revealed that he thought Boris Johnson pursued a “madman strategy” towards the Brexit negotiations when he became prime minister in 2019. The EU’s chief negotiator this week published his diaries, The Grand Illusion: A Secret Diary of Brexit, in French on the gruelling talks that eventually resulted in a limited trade agreement between London and Brussels on December 24. His reflections will be published in English later this year.
There was potentially some good news for British holidaymakers seeking summer holidays on the continent this year. The European Commission is consulting EU national governments on granting the UK a waiver so that drivers would not need to carry a proof-of-insurance document known as a “green card” when they travel to the 27-country bloc, according to EU officials.
There was also some movement this week from Brussels on its willingness to be more flexible on the rules governing post-Brexit trade checks on businesses in Northern Ireland. Implementation of the so-called Northern Ireland protocol has been hugely controversial and helped stoke the worst riots in the area for years last month. However, EU officials warned that only a comprehensive veterinary agreement between the two sides would eliminate the need for some checks and that requires a fundamental shift in Britain’s position, they said.