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The key to net zero? UK-EU cooperation

With finances tight and growth sluggish, closer alignment would bring mutual benefit.

By Ben Westerman and Adam Berman

If a week is a long time in politics, the eight years since the Brexit earthquake feels like several lifetimes. Those years have been defined by acrimony between London and Brussels, with minimal political space to discuss shared problems. But times are changing. The bitterness of the Brexit years belongs in the rear view mirror: global challenges are too great to tackle alone. With an election on the horizon, minds are turning to what UK-EU relations might look like under a Labour government.

For Labour, recent travails over its green spending plans reflect the challenges of achieving net zero and increasing prosperity in a sluggish, low-growth economy. The UK’s relationship with the EU provides an opportunity to tackle these challenges.

Labour may be nervous about reopening the wounds of 2016, but it is faced with reality: for a nation with a 69 per cent trade-to-GDP ratio, economic growth depends on a better trading relationship with Europe, and energy and climate policy provide both sides a golden opportunity to strengthen ties. Their climate goals are almost identical. Both are committed to net zero by 2050, and both plan to rapidly increase clean energy capacity. Both face the threat of the Inflation Reduction Act’s protectionism and the challenge of weaning themselves off a reliance on Chinese imports. Challenges around investment, supply chains, planning, and grid infrastructure are as common on the continent as they are in the UK.

As relations warm, there is political space to tackle these challenges together. With net zero under pressure from the populist right and public finance constraints, now is not the time for an approach to net zero that will take longer and cost more for the sake of tribalism. As resources reduce and competition increases, collaboration is king. Energy and climate is the obvious place to start.

This isn’t just about reaching net zero faster and at lower cost. The Inflation Reduction Act and the EU’s Net Zero Industry Act demonstrate that the EU and US see the green transition as an economic opportunity. Rather than mimicking US protectionism we could never hope to compete with, the UK’s best bet lies in cross-border collaboration to grow low-carbon industries and the wider economy.

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Labour sees a combination of supply-side reform and sustained investment as the route to growth. Their pitch around policy predictability is an attempt to provide certainty, promising to use the levers of the state to crowd investment into the sustainability sector. We’ve heard a lot about the catalytic role of public investment; what about the state’s regulatory power to attract additional private investment?

Investors value jurisdictional ease. Nowhere is this more acute than with a green taxonomy – a dictionary of definitions for sustainable investments – an area where the UK has dragged its feet. Working to implement and align a UK taxonomy with the EU’s is an easy win. With an international race underway for finance in the green transition, interoperable standards on green finance are essential to driving investment in the right directions. Paired with pension reforms to unlock capital, this is a major opportunity to incentivise low-carbon investment. Failing to cooperate with the EU, however, risks disincentivising sustainable investment. With our world-leading financial services, this isn’t just an opportunity for the City of London; it’s in the interests of Paris, Amsterdam, and Frankfurt that the UK incentivises clean investment that can lower the cost of decarbonisation.

Taxonomy isn’t the only area where investment is being missed. Carbon pricing is one of the most important vehicles for catalysing low-carbon activity, and the UK has always been a leader in this field, playing a huge role in convincing the EU to adopt a pricing system 2005. Post-Brexit, the UK’s new standalone Emissions Trading Systems (ETS) could have been even more ambitious than the EU’s. But as the UK’s carbon price has collapsed, it’s become clear that we are not stumbling so much as tumbling: the EU’s carbon price is now roughly double the UK’s. Energy UK research suggests that this is costing the Exchequer an eye-watering £3 billion in lost revenue every year. That’s money that could be spent on schools, hospitals, and other public goods. Meanwhile, our ETS is failing to incentivise investment in low-carbon projects.

There is a simple solution: cooperation. Linking the UK and EU ETS would align our carbon prices, ensuring a much more robust regime with industry’s backing. Not only would this bring down the cost of decarbonisation, but would provide a simple solution to an impending headache; the EU’s Carbon Border Adjustment Mechanism (CBAM).

In 2026, the EU implements its CBAM, subjecting imports to the same carbon price as domestic production: yet more red tape for British businesses exporting to their largest market. If the UK-EU carbon pricing dynamics remain the same, British companies will have to pay over half a billion pounds a year into EU coffers simply to continue exporting to Europe. The CBAM design also means that our homegrown clean energy will be forced to pay a carbon price despite being 100 per cent clean.

The UK has recently announced its own CBAM, but, predictably, ours won’t mirror the EU’s. The UK CBAM has a slightly different design and runs to a slightly different timeline. Divergence for divergence’s sake is not a serious approach. ETS linkage and CBAM alignment is grown up politics – cooperating to find mutually beneficial solutions to shared problems.

This also rings true for the way we trade energy. The UK and EU have huge ambitions for the North Sea, home to a complex system of wind farms and undersea high-voltage cabling. A successful clean energy story in the North Sea hinges on willingness to collaborate with other European countries. But since Brexit, we’ve reverted to an inefficient form of electricity trading which cost British consumers around £370 million in 2022 alone. More efficient trading arrangements allow projects to be delivered quicker, and at lower cost. Recognising the benefits for both sides of closer cooperation could open the door to a recoupling of our energy markets.

This isn’t about Brexit any more. It’s about taking the most effective path to tackling two of the biggest challenges we face: arresting national economic decline and facing the threat of climate change. Of course, these are just some of many areas of UK-EU collaboration worthy of attention. Mutual recognition of standards around green technologies or rules of origin that reflect the supply chain and manufacturing strengths of both sides could also be explored. Opening up supply chain relationships with Europe will, for example, help to capitalise on UK opportunities around battery recycling and manufacturing, while helping both sides to counter Chinese market dominance in electric vehicles.

As we face an age of global instability, both sides have much to gain and even more to lose. Now is the time for governments to work together.

[See also: The government must stand firm on heatpumps]

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