Brexit Instability Impacts Climate Policy

Brexit instability

Even climate policy can be impacted by Brexit out of proportion to the amount of time that it will take to institute any real change.

Emilie Mazzacurati and Camille LeBlanc from Four Twenty Seven, a firm that helps companies navigate the risks and opportunities in climate change, has weighed in on what Brexit could mean for long term climate policy.

Brexit Time Line

Brexit Vote:: Yes let's leave Cameron Resigns:: Won't send exit letter  New Leader Elected Maybe Re-Brexit No vote:: New PM sends exit letter likely December 2016 55 nations vote to ratify 2 years minimum Jan 1, 2019:: earliest date Britain exits

Prime Minister David Cameron has indicated that he will let his successor send the actual notice which will start the two year - - at least -- process under Article 50 of the Lisbon Treaty, the EU's governing legislation. In order to avoid creating two kinds of financial returns, one before and one after an actual exit in a given year, there is speculation that the the date for delivery of the notice will be December 2016, meaning the process won't be completed until Jan 1, 2019.  In the meantime, there are routes for extensions, the potential for another vote before the actual notification to the EU under Article 50, and a very grey area about whether a nation that has formally announced an exit can 'take it back'. Nevertheless, uncertainty is a bad for markets.

Impact on Markets 

Ms. Massacurati, Founder and CEO, and Ms. LeBlanc, Chief Strategy Officer at Four Twenty Seven, comment that, "In the short run, Brexit means, at the very least, delays and complications in the process towards the ratification of the Paris Accord." They went on to note:

  • Financial volatility could overshadow climate regulations: The financial volatility caused by the referendum’s outcome could distract the worlds’ financial regulators and have a negative impact on current efforts to better regulate climate-related financial disclosures.
  • New UK government unlikely to be 'climate friendly': Looking ahead, the incoming Eurosceptic government in the UK is unlikely to make climate change its priority, depriving global climate negotiations from a leader and political engine towards more ambitious greenhouse gas cuts.
  • Possible set back for clean energy investments: In a worst case scenario, a full-blown global economic crisis would set back investments in clean energy, cut budget for both mitigation and adaptation efforts, and fuel further discontent from the middle-class and the unemployed.
  • Populist movement could negatively impact climate policy: Over the long run, a possible “contagion” effect enabling populist victories in upcoming elections in the U.S., Spain, France or Germany over the next 12 months could further hamper the enactment of effective global climate policy.

Political Implications

The extensive political uncertainty and financial volatility the referendum outcome has triggered impacts across financial markets. The uncertainty is increasing as internal tensions between the UK and the “pro remain,” including constituents within Scotland and Northern Ireland. Since each EU country has to approve ratification domestically, before the EU as a whole ratifies the accord. it is highly unlikely the 'lame-duck' Cameron government will stick its neck out by pushing for a rapid ratification of the Paris accord in the next three months. This leaves the next government in charge of a possible ratification. The leading candidate for British Prime Minister, Boris Johnson, and the UK Independence Party leader Nigel Farage, are credited both with the success of the Leave vote and with not prioritizing climate change, which casts an even longer shadow of uncertainty over whether the UK might actually ratify the Paris accord at all.

However, since the Paris Accord requires ratification from 55 countries, which represent 55 percent of global emissions, Four Twenty Seven sees a single country -- Britain -- representing 2 percent of global emissions, as unlikely to bring the global process to an end.

But while the UK has historically been a driving force in global and EU climate negotiations, they expect the new UK government will at best be a follower, at worst a laggard and opposing force in global climate policy.

Beyond Brexit

While the direct political implications of the referendum on UK climate policy are quite predictable, Four Twenty Seven does not rule out a potential ripple effect on the willingness from other countries to ratify the Paris accord. More generally, the UK vote signals that current populist trends in the world’s largest economies – U.S., France, Germany in particular – can bring a deep reshuffling of cards for climate policy.

Populists parties are typically lukewarm, if not outright opposed to climate policy and global agreements, as illustrated by the so-called 'Trump Trajectory' in the U.S. At this point in time, however, the duo believe most governments have a robust understanding of the seriousness of climate change, and will do their best to proceed with the accord ratification and with meeting their targets.

Financial Implications: Impact on Efforts to Regulate and Price Climate Risk

A very immediate impact from Brexit-induced financial volatility and risk of recession will be felt on efforts to better understand, regulate and price climate-related risks on financial markets. The very institutions and individuals that have been leading this effort globally – the Financial Stability Board and its Chair, Mark Carney, who is also the Chair of the Bank of England, as well as to some extent the Securities and Exchange Commission in the U.S -- are going to be entirely focused on preventing a complete collapse of the British economy and a global recession.

This will necessarily cause distraction away from the recent efforts to push climate change higher on the agenda of financial decision-makers. Assuming the world’s financial leaders are successful in preventing a global recession but the volatility of financial markets continues, Four Twenty Severn expects the discussion to resume and allow the recommendations from the Task Force on Financial Climate-Related Disclosure to garner the attention needed from global financial regulatory bodies.

However, if Britain’s decision to leave the EU were to cause continued turmoil on financial markets around the world, leading to a major recession, the impacts on climate change policy could be extensive, and mostly negative. Recessions in general are bad for the environment because jobs and financial volatility typically take precedence on the political agenda over environmental regulations and climate policy, often perceived as putting added burden on the economy. A global recession could lead to budget cuts and increased contention over energy and climate budgets, and otherwise lead to a scale back of efforts to reduce emissions. Financial instability could also mean a setback for investments in clean energy, with financial flows likely to flock towards safe havens (U.S. bonds, gold). Expectations of trade financing faltering, credit spreads narrowing, emerging markets assets under serious stress and a worse-than-expected earnings season -- impacting equity valuations -- all point to less money for adaptation in developing countries and a further slowdown in renewables investment levels.

Conclusion

The UK’s decision to leave the EU puts both financial markets and climate policy to the test. Financial markets were still slowly recovering from the second greatest recession in the history of modern markets. Short term volatility may bring distractions but are unlikely to drive a meaningful change of course away from greater climate risk disclosures. If continued economic turmoil materialized, it could slow down investments in clean energy and put climate and environmental issues on the back burner once again.

Article based on Four Twenty Seven blog which was posted in the Huffington Post.