What Brexit Means for Climate

06/27/2016 01:31 am ET | Updated Jun 29, 2016

BOTTOM LINE

  • In the short run, Brexit means, at the very least, delays and complications in the process towards the ratification of the Paris Accord.

  • 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.

  • 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.

  • 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.

  • 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.

Image courtesy: Free Range Stock, photographer Daniel J Schreiber “London Landscape"

 ANALYSIS

Political Implications: Impact on the Paris Accord

The only certainty regarding the impact of Brexit on climate policy comes from the extensive political uncertainty and financial volatility the referendum outcome has triggered. As the political debate turns towards the process for the UK to exit from the EU and deepening internal tensions between the UK and the “pro remain” constituents within Scotland and Northern Ireland, this uncertainty will at a minimum cause a temporary slowdown of the ratification process of the Paris Accord.

The ratification process was already expected to be long and complex for the EU. Each country has to approve the ratification domestically before the EU as a whole ratifies the accord. In the context of such a lengthy process, we think it is highly unlikely the lame-duck Cameron government would stick its neck out and push for a rapid ratification of the accord in the next three months, before its scheduled October departure. It is unclear how the UK will affect the EU ratification process during the two years preceding Briaformal exit from the EU.

This leaves the next government in charge of a possible ratification. Leading candidate for British Prime Minister, Boris Johnson, and the UK Independence Party leader Nigel Farage, who are credited with driving the success of the Leave vote, both do not believe in or prioritize climate change, casting a shadow of uncertainty over whether the UK might actually ratify the Paris accord at all.

However, the Paris Accord requires the ratification from 55 countries representing 55 percent of global emissions to come into forces. A refusal from the UK to ratify would send a negative signal but a single country representing 2 percent of global emissions would not bring the global process to an end. But while the UK has historically been a driving force in global and EU climate negotiations, we 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, we cannot 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 – could 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.

A rise in climate-sceptic governments in Europe and North America could bring to a halt the progress brought about by the Paris accord and set us back toward a high carbon emission pathway. At this point in time, however, we believe most governments have a robust understanding of the seriousness of the issue 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 and the volatility of financial markets continues, we expect 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) and away from riskier investments. 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, and this is where the main uncertainty stands at the time of writing. Short term volatility may bring distractions but 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.

By Emilie Mazzacurati and Camille LeBlanc, Four Twenty Seven

 

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