Brexit: What Lies Ahead?

The following opinion piece comes from PACE Executive Director Lance Brown.

This past Thursday, in a development reported around the world, the people of the United Kingdom voted to leave the European Union. Labeled ‘Brexit’, the vote was a shocking move in many respects. British Prime Minister David Cameron immediately resigned his post. Stock markets tumbled. The British pound, so long revered for its soundness, crashed to its lowest rate in thirty-one years. Astute observers worldwide, including many in the U.S., understood that Brexit’s splash would cause ripples that extend far beyond Britain’s, or even Europe’s, shores. And that many of those ripples would impact global energy politics.

Just how will the British exit from the European Union affect global energy? It is difficult to say for sure. However, educated voices have begun offering their thoughts, painting the broad strokes of what the energy portrait of a non-European UK might look like. There are also unavoidable realities that are worth confronting.

For starters, it should be noted that the roots of the modern European Union began in 1951 with the formation of the European Coal and Steel Community. The group, which did not include the UK at its inception, was an attempt by six continental nations to create a common market for coal and steel after World War II. The founders hoped that doing so might reduce competition for natural resources, create more free trade, and thus preclude future wars. In a very real way, the beginning of European unity was tied directly to energy.

Fast forward to the late 1990s, when the modern iteration of the European Union took shape, creating a continental marketplace for goods and a common platform for public policy. Today, the European Union consists of twenty-eight member states and more than 500 million residents. The EU shares a common currency, the Euro, although the UK opted from the outset to retain its own currency, the fabled pound.

A European Outlier

The decision to keep the pound wasn’t the only asymmetry with Britain’s continental partners. In addition to being a literal island in the EU, there are many ways UK was also a policy outlier. This includes attitudes toward energy. British leaders have continued to favor nuclear energy and shale gas, two energy sources largely looked down upon by other EU members. Just days ago, PACE explained that shale gas, unlocked by fracking, was ready for full-scale launch in the UK. Such pro-fossil energy positions are not often found in other EU nations, who have continued to shun traditional energy in favor of new sources.

In fact, many in the UK have felt that the nation’s struggle to keep down energy prices is a result of Europe’s restrictive and highly anti-fossil climate policies. Many see Brexit as a repudiation of the UK’s fealty to Europe on energy issues. An opinion by Michael Bastasch in The Daily Caller explains, “Britons have been struggling under high energy prices for years, in part due to rules passed down from EU bureaucrats. Environmentalists opposed leaving the EU for precisely this reason. The Brexit vote signals the U.K. is lurching right, and will likely reject heavy-handed climate policies.”

Part of that ‘lurching right’ is a reaction against the EU’s scheme to restrict carbon emissions. Sold as a way for Europe to reduce its carbon footprint using market forces, the EU adopted a system of carbon trading that has largely benefitted those on the continent, to the detriment of UK businesses. The EU, for example, adopted a relatively close-minded renewable energy standard that eschewed nuclear power.

In a recent piece in Forbes, Rod Adams crystallizes the British frustration with European climate policies, writing, “The UK will be able to keep its new carbon tax and ditch the ineffective EU Emissions Trading Scheme (ETS), which has been a relative loss for UK companies who have purchased more credits than they have sold. It will be freed from EU required “renewable energy” standards and able to establish a more comprehensive “clean energy” standard that is more aggressive while allowing a greater range of potential solutions that include nuclear energy as a major contributor to the targets.”

In fact, the liberation of British nuclear ambitions should be one of the main outcomes of Brexit. Currently, the EU provides a good deal of leverage to anti-nuclear members. In fact, European law has even allowed anti-nuclear nations such as Austria to challenge contracts related to the construction of British nuclear plants under the argument that they represent illegal state aid. As Sara Steffanini writes in Politico, “Britain’s departure from the EU will force broad changes to the bloc’s energy and climate policies, and remove a crucial ally for Central Europeans – but it will also give London far more freedom to pursue nuclear projects.”

Impacts on Consumers, Investment

Perhaps the most important question is what effect Brexit will have on British energy prices. PACE has written as recently as March on the way that UK energy policies, forced in part by EU standards, have raised the price of electricity across Britain. Those policies, which highly favored renewable energy and paid little heed to the health of the UK grid, have caused an abundance of fuel poverty and diminished the likelihood that the UK grid will remain reliable for much longer without significant action to build more nuclear or fossil assets.

“I’m old enough to remember the power cuts of the 1970s, when Britain was the sick man of Europe,” said the UK’s Energy and Climate Change Secretary Amber Rudd. Untethered from a shared European energy grid, there is no way to know whether Britain’s grid will return to its sickly ways or make the proper investments to grow more robust. It seems certain, though, that departing Europe will have major cost implications.

In terms of the Brexit debate, both the ‘remain’ and ‘leave’ sides claimed that their side would lower energy prices. However, the available data seems to paint a different picture. While more analysis is surely forthcoming, an independent report from Vivid Economics found that leaving the EU could cost British consumers as much as £500 million per year in the 2020s. Those costs would be born by households and businesses in the UK.

Iain Conn, CEO of the British energy company Centrica, explained to Politico in May, “If the UK is not around the table in the EU, influencing how efficient the European energy market can be, how much competition there is in the European energy market, then the probability is that our customers in the UK will see higher energy costs.”

Aside from higher energy prices in the near-term, a hasty exit from Europe could also compound British energy woes by suppressing investment in the UK. Major energy leaders at BP and Shell have already hinted at such, stating that the instability resulting from Britain’s exit presents a high risk for costly investments such as energy exploration or the construction of new manufacturing concerns. In a February letter addressing Brexit, a group of 198 business leaders, including the CEOs of BP and Shell, laid out those concerns, firing a shot across the bow of the ‘leave’ campaign.

“Business needs unrestricted access to the European market of 500 million people in order to continue to grow, invest, and create jobs,” wrote the business leaders wrote. “We believe that leaving the EU would deter investment, threaten jobs, and put the economy at risk. Britain will be stronger, safer, and better off remaining a member of the EU.”

A Matter of Security

While the potential impacts to consumers or to foreign investment in the UK might be in doubt, there is one outcome of Brexit on which almost all observers agree: Russia is delighted with the British vote to leave Europe.

The reasons are straight-forward enough. For decades, the European Union has remained a buffer against Russia on a variety of fronts. One of those fronts is energy, where the interdependence and open market of European energy has allowed at least a modicum of resistance against Russia’s energy agenda. That agenda has only grown more aggressive under Vladimir Putin. The availability of energy options has helped some European nations avoid total dependence on cheap natural gas from Russia, which nearly always comes packaged with political influence from the east.

“As a bloc of 500 million people, we have the power to force Putin’s hand,” UK Secretary Rudd put simply. Now, Europe has 64 million fewer people to help withstand Putin’s advances.

The always insightful Robin Mills, author of The Myth of the Oil Crisis, recently wrote a pointed piece on the effects of Brexit, drawing parallels to the possible direction of U.S. energy politics.

“…The geopolitical style of China and Vladimir Putin’s Russia has long been in the Trump mould – mercantilist bilateral deals that blur politics and economics, breeding exclusion of others, trade wars and the use of energy as a weapon,” writes Mills. “The Brexiteers have chosen their path but others too will reap the consequences. In today’s world, independence is a myth: there is only interdependence or dependence.”

Whether you agree or disagree with Mills’s assessment, one can only hope that the fall-out from the UK’s decision to leave Europe will be minimal for the British people. We hope the same for the American people. Stability, not uncertainty, is the currency that will vouchsafe America’s future.