What might “Brexit” mean for Sustainability?
In the month since the UK’s momentous decision to leave the European Union the question What does “Brexit” mean for… has been asked for almost every topic you can imagine. I’m going to continue that trend and try and unpack what it might mean for the subject that I care most about. What does Brexit mean for the UK’s, and a world’s, ambition to create a more sustainable future for us all?
The short answer is that nobody knows. There is still far too much uncertainty to be definitive but it is possible to consider some hypotheses and potential ramifications. It is probably useful to break the question down a bit:
- How is the UK exiting the EU most likely to unfold?
- What might the end state look like?
- What are the potential economic, political and legal consequences?
- What are potential consequences on the UK’s sustainability agenda?
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How is the UK exiting the EU most likely to unfold?
This is still a matter of debate and disagreement. The only thing that everyone does know is that nothing formally starts to happen until the UK Government (with or without parliamentary consent) invokes Article 50 of the Lisbon Treaty.
In his resignation speech outgoing Prime Minister David Cameron made it clear he felt this was something that his successor should do. Since Theresa May’s rapid accession to 10 Downing Street she has put many of the key individuals in place but as yet made no firm commitments on a date. It seems increasingly unlikely to happen in 2016.
Once Article 50 is invoked this starts the clock on a two-year window in which the UK negotiates its divorce settlement. This window is can only be extended with unilateral agreement from all 27 remaining members. The one precedent of a separation is Greenland’s decision to leave in 1982. It took them three years to work things out, mainly things to do with fish, and I don’t think anyone would be offended by the suggestion this was a slightly simpler arrangement. In (very) general terms the EU are pushing for the whole Article 50 process to run as quickly as possible so that it doesn’t stifle all other business.
In an attempt to clarify the research team at JP Morgan put together a base case in the days immediately following the decision on how things might unfold between now and 2019. One particularly interesting point is that they have Scotland as voting for independence in 2018/19 in their base case.
What might the end state look like?
Having been through the huge effort of negotiating a settlement what is UK likely to be left with?
There is no agreed position on this and it will almost certainly be a hybrid of existing models given the unprecedented nature of the second largest economy in the EU breaking away. Of the models that do currently exist the BBC produced a useful summary of what they all mean. There is essentially a spectrum. At one end is the “Norway Model” in which the UK stays part of the European Economic Area (EEA), complies with the vast majority of the currently legislation (including freedom of movement), and incurs 94% of the current EU related costs (according to a study by Open Europe). The other end of the spectrum (and the default if no agreement can be reached) is the WTO option in which the UK becomes like any other country and would be subject to all the same tariffs and trade restrictions. Tariffs differ wildly between sectors.
Capital Economics have put together a useful chart on the current EU tariffs placed on certain types of goods. These range from 0–2% on cotton, wood and paper to >50% on dairy products. Just to make things slightly more complicated the UK is actually only a member of the WTO as part of the EU so would need to negotiate its new membership of that organisation in parallel.
What are the potential economic, political and legal consequences?
There has been a lot of focus on the economic consequences of these eventual outcomes and (surprise, surprise) nobody can agree. The same Capital Economics report shows the diversity of opinion. Written before the vote it outlines on page 7 the range of studies available. At one end is an LSE paper that suggests a 2.2% — 9.5% drop in GDP and at the other a UKIP funded paper that concludes a net positive impact of +10% for UK GDP. More recently Christine Lagarde of the IMF has said they are expecting a 1.5% to 4.5% drop in UK GDP by 2019 and Mark Carney continues to describe the decision as the biggest risk to the UK financial stability. For those who love detail June Financial Stability Report published by the BOE is a classic of the genre.
The political consequences are a little more immediate. Of the leaders who contested the UK general election of May 2015 only one (Nicole Sturgeon) of the top six parties (by share of the votes) will still be in post by this September. That isn’t even to mention the difficulties that Labour leader Jeremy Corbyn is currently facing in commanding the support of his parliamentary colleagues. This turbulence and resulting power vacuum will inevitably effect the ability of the current government to move forward with its agenda. Even allowing for the brutal efficiency with which a new cabinet has been put in place there are numerous things that have or will be delayed; just one high-profile example is the decision on airport expansion which is now not expected until the autumn session of parliament (a full 15 months after the Davies Commission concluded).
The most fundamental thing on the plates of Theresa May and her triumvirate of minister responsible for creating a new settlement (David Davies, Boris Johnson and Liam Fox) is that they have to grapple with is how to navigate the Scylla of limiting long-term damage to the economy with the Charybdis of the very audibly vote in favour of restricting immigration. They will also have to determine how to engage the 73% of the eligible electorate who didn’t vote to Leave — many of whom feel very bruised by the experience. The events of the last month have done nothing to reduce this herculean task
What are potential consequences on the UK’s sustainability agenda?
So what does all this mean for sustainability?
The most obvious, and potentially most significant, consequence is the requirement for the UK to determine how it interacts with the various EU commitments and frameworks that it has been instrumental in creating. This includes (but is not limited to) the EU’s INDC, ratification of other elements from COP21, the 70% of the UK’s environmental protection legislation that is EU based, access to the Internal Energy Market, and the Emissions Trading Scheme.
The Government, led by erstwhile Energy Secretary Amber Rudd, has been quick to say that this vote does not change the UK’s commitment to tackling climate change and does not alter the UK Climate Change Act (2008). They have, however, admitted that it makes delivering things more difficult. It is also unlikely, given the leanings of those who led the campaign to leave, that the current government will be any more climate-friendly than the last incarnation. Headline moves to fold the Department for Energy and Climate Change into a more powerful Department for Business, Energy and Industrial Strategy has not been welcomed by all and it would be fair to say many environmental campaigners are not best pleased at the outcome.
The non-environmental components of sustainability are even less clear. There is concern from the International Development community that the UK’s current commitment to spend 0.7% of GDP on aid will be scrapped but as things stand no policy revisions have been made. Having said that the new Secretary of State for International Development Priti Patel has something of a chequered past in terms of her public statements on aid commitments.
Even if the commitment remains there are still downsides. The purchasing power of GBP dominated aid has taken a major hit since June given the rapid devaluation of the pound and NGOs are likely to find their funded options more limited given the extent to which they relied on EU money. Oxfam have produced a good summary of their concerns. The other component to watch is whether UK continues to be part of the European Convention on Human Rights (ECHR). It has been a long-held ambition of the Conservative Government to replace this with a “British Bill of Rights” but Theresa May said that she would no longer to pursue this ambition given a lack of parliamentary support. I’m not nearly a good enough lawyer to really work out what this means.
The final dimension is more closely tied to economic scenarios outlined above. Nothing legislative is likely to be concluded for at least the next three years and, in that period, there will undoubtedly be manifold economic shocks. Therefore, it would be no surprise if lots of large corporates refrain from making major capital investments. For example, Siemens decided to freeze a major wind power investment until they had more political clarity. There is the more general sense of uncertainty that pervades UK headquartered companies. In an Institute of Directors poll conducted immediately after the outcome 2/3rds of respondents said that they felt the outcome was bad for them and 36% said they were likely to cut investment. For those companies who see sustainability spend discretionary then it seems reasonable to assume that budgets are going to be squeezed if core business performance tightens.
So what do I think?
The honest answer is I don’t know. I think it is pretty clear that nothing related to Sustainability gets easier in the short, or even the medium, term because of “Brexit.” Having said that there is every chance the outcome is not nearly as apocalyptic as many are currently predicting and that a pivot away from Europe to the wider world could open up long-term opportunity. Furthermore, there is no clear-headed rationale for negotiators on either side to make it harder than it already needs to be through petulance and obstruction.
What is perhaps clearest of all is that this is significant rupture in the political landscape of both the UK and the EU. As a result, pretty much everything is up for grabs and those who want to ensure a sustainable future will need to redouble efforts to guarantee that it is established as a key part of the new landscape (whenever that emerges). Although if the Republican’s presumptive nominee wins the US elections in November then all bets really are off…
Finally, in her speech at the Business and Climate Summit just a few days after the vote, Amber Rudd (before she was promoted to be the new Home Secretary) said something that has stuck with me. She urged the sustainability community to learn the lessons from this referendum. The Remain campaign mustered a huge array of experts and armed itself with an almost endless supply of studies and facts. They all pointed to one overwhelming conclusion — voting to leave would do unconscionable unnecessary damage. They had everyone from the Archbishop of Canterbury to David Beckham making their case. Ultimately it didn’t matter and the populace voted for a vague “not this” option with little or no recourse to the practical consequences. There are clear parallels with the climate change debate. The scientific evidence for climate change is beyond reproach and the ramifications are existential but the argument is not won. To win it is incumbent on us all to find that emotional resonance with the widest possible population.