REPORT April 2017 - Action on climate and energy · PDF file3 Brexit Scenarios: Implications...

REPORT Apri l 2017

BREXITSCENARIOSTHE IMPLICATIONS FOR ENERGY AND CLIMATE CHANGE SHANETOMLINSON

2 B r e x i t S c e n a r i o s : I m p l i c a t i o n s f o r E n e r g y a n d C l i m a t e C h a n g e

zTheauthorisgratefulforfeedbackreceivedfrommembersoftheGreenerUKcoalitiononanearlydraftofthesescenarios.Thejudgementsandanyerrorsremainthesoleresponsibilityoftheauthor

AboutE3GE3Gisanindependentclimatechangethinktankoperatinginthepublicinteresttoacceleratetheglobaltransitiontoalowcarboneconomy.E3Gbuildscross-sectoralcoalitionstoachievecarefullydefinedoutcomes,chosenfortheircapacitytoleveragechange.E3Gworkscloselywithlike-mindedpartnersingovernment,politics,business,civilsociety,science,themedia,publicinterestfoundationsandelsewhere.In2016,E3GwasrankedthenumberoneenvironmentalthinktankintheUK.www.e3g.orgBerlinofficeNeuePromenade6Berlin,10178–GermanyTel:+49(0)3028873405BrusselsofficeRuedelaScience231040Brussels,BelgiumTel:+32(0)28939212Londonoffice47GreatGuildfordStreetLondonSE10ES,UKTel:+44(0)2075932020WashingtonDCoffice2101LStNWSuite400WashingtonDC,WA20037UnitedStatesTel:+12024660573©E3G2016

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REPORT Apri l 2017

BREXITSCENARIOSTHE IMPLICATIONS FOR ENERGY AND CLIMATE CHANGE SHANETOMLINSON

CONTENTSAboutE3G......................................................................................................................2Copyright........................................................................................................................2

EXECUTIVESUMMARY....................................................................................................5

INTRODUCTION..............................................................................................................8

BACKGROUNDANDASSUMPTIONSFORTHESCENARIOS...........................................10Uncertaintyoverprocess.............................................................................................10UnderstandingdifferentperceptionsofnationalinterestintheUKandremainingEU-27MemberStates........................................................................................................11

SCENARIODRIVERS.......................................................................................................17ScenarioDriver1:Interactionbetweenperceptionsofnationalinterest....................17ScenarioDriver2:Orderlyversusdisorderlynegotiationprocess...............................18Scenariodriver3:Timingandextentofeconomicimpacts.........................................20

POLITICALSCENARIOSFORBREXIT...............................................................................22Scenario1:SovereignTransition..................................................................................22Scenario2:HostileNationalism....................................................................................24Scenario3:EconomicTransition..................................................................................26Scenario4:EUinChaos................................................................................................27

CONCLUSION:THENEEDFORACOOPERATIONTRACK...............................................30

ENDNOTES....................................................................................................................33

EXECUTIVESUMMARYTheofficialsubmissionbytheUKofitsArticle50notificationonthe29thofMarch2017hasstartedtheformalprocessofBrexit.Thereismassiveuncertaintyonhowthenegotiationsoverthenexttwoyearswillunfold.TheoutcomeofthisnegotiationwillhavemajorimpactsforallareasofpolicybetweentheEUandUK,includingenergyandclimatechange.Scenarioanalysisprovidesanopportunitytoexplorehowprogressintheoverallnegotiationsmayimpactspecificpolicyareas.Thescenariosarebuiltonfourkeydrivers:

• Hownationalinterestsareprioritizedbyeachside:TodateenergyandclimatechangeissueshavenotplayedaprominentroleinBrexitdiscussions.InsteadtheUKhaschosentoprioritizesovereigntyintereststomanageimmigrationandremovetheinfluenceoftheCourtofJusticeoftheEuropeanUnion(CJEU)andStateAidrestrictions.TheEUhassofarpromotedanintegrityagendafocusedonmaintainingexistingrulesandnorms(suchasthefourfreedoms)andtoholdtheUKaccountableforexistingbudgetliabilities.Asthenegotiationsprogress,howtheseinterestsinteractandevolvewillbecriticalindeterminingthefinaloutcome.

• Orderlyversusdisorderlynegotiationprocess:Thereisnoprecedentforthe

Brexitprocess.Themassivecomplexityinvolvedandpotentialattemptsbyeachsidetogainanadvantagethroughthestructureandsequencingofhowissuesareaddressedisofcrucialimportance.Anorderlyprocesswouldfacilitatetrustbuilding,enableaclearrepresentationofdifferentviewsandfacilitatecompromisetowardsafinalagreement.However,thereisasignificantriskthatthenegotiationscollapseintoadisorderlyprocess,suchashappenedinthefinalhoursoftheCopenhagenclimatenegotiationsin2009.Abreakdownofprocesswouldunderminetrustandmakereachinganydealmuchhardertoachieve.

• Thetimingandextentofanyeconomicimpacts:Sofartheeconomic

forecastsoflargenegativeimpactsintheUKfollowingthereferendumhavenotmaterialized.ThedevaluationofthePoundandthefactthattheUKcontinuestoenjoyaccesstoallexistingEUtradingarrangementsisasignificantfactorinachievingthis.However,thisdoesnotmeanthattherewillnotbeeconomicimpactsinthefuture.Thepotentialforrisinginflationandpoliticaluncertaintytoundermineinvestmentdecisionsoverthenexttwoyearsisnon-trivial.OntheEUsidethedevaluationofthePoundhasimmediatelyunderminedcompetitivenessvis-à-visUKcompanies.Ineffectcausingthemtoimmediatelybeginto‘pricein’thecostofBrexit.Dependingonhowthenegotiationsevolve,theeconomicoutlookinboththeUKandremainingEU-27MemberStatesmayshiftperceptionsonthetypeoffinalagreementthatwouldbedesirable.

• MomentumaftertheArticle50negotiations:Thereissignificantuncertainty

overthefulltimeframefortheBrexitprocess.Bothsideshavepubliclydiscussedsomeformofcontinuationarrangement,withtheUKreferencing“implementationperiods”andtheEUconsideringthepossibilityforathreeyeartransitionalarrangement.ThusthemomentumfromtheArticle50processwillbeimportantfordeterminingfuturecooperation.Theremaybeanumberofstakeholdersthatwillattempttosecureacleanbreakafter2years,potentiallytopreventanyattemptstoretreatfromafullBrexitdeal.Ontheotherhandthedesiretoavoidcliffedgesforbusinessandcitizensmayleadtootherstakeholdersseekingtomaximizethepotentialforcontinuationarrangementsinordertoallowforthesmoothestpossibleprocess.WhethertheArticle50processisviewedasa‘one-shot’or‘repeated’gamewillsignificantlyimpactthefinaloutcome.

Fromanassessmentofthekeydriversandinterests,fourmainpoliticalspacesforlandingaBrexitdealwithinthenext2-3yearsemergeasshowninfigure1below.Thekeyaxesindefiningthescenariosareanorderlyversusadisorderlynegotiationprocessandwhethersovereignty/integrityorcooperationinterestsdominatenationalpositions.Thesescenariosarefocusedontheperiodto2020,withanassessmentoffuturemomentum(eitherupwardordownward).AllofthescenariosarepredicatedontheUKleavingtheEUanddonotexplicitlyconsiderthepotentialforasecondreferendumetc.tototallyreversethecurrentpoliticalcourse.However,theydoresultinverydifferentlevelsofcooperationgoingforward.Figure1:OverviewofpoliticalscenariosforBrexit

ThenegotiatingdynamicsareinitiallyheadedtowardsaSovereignTransitionscenariowherebytheUKcontinuestoprioritizenationalsovereigntyandtheEUpromotesthe

Cooperationinterestsdominate

Sovereigntyandintegrityinterests

dominate

Orderlynegotiations

Disorderlynegotiations

Sovereigntransition

Hostilenationalism

Economictransition

EUinChaos

integrityofexistinginstitutions.However,thisisaveryunstablepoliticalspace.Anumberofdrivers,suchasfailuretoagreeonexistingUKbudgetliabilitiesorthefutureroleoftheCJEU,couldcauseacauseacollapseinthenegotiationprocessandanescalationtowardsaHostileNationalismscenario.InthiscasetherewouldbeahighprobabilitythatnofinaldealisreachedattheendoftheArticle50periodandbothsideswouldfaceamessyexitfortheUK.Thethirdscenario,theEUinChaos,representsavictoryforextremistpoliticiansinotherEUcountries(suchasintheforthcomingFrenchelections)orthepotentialforaEurozonecrisistoleadtoamajorcountrysuchasItalyorGreeceleavingtheEuro.InthisinstancetheEUfocusesitsattentionelsewhereandtheBrexitnegotiationswouldonceagainbereducedtodisorder.TheFinalscenario,EconomicCooperation,wouldrequireashiftinprioritizationofnationalintereststofocusonalonger-termandsmootherBrexit.Inthisscenariotheinitialfocusisonagreeingasetofstabletransitionalorimplementationarrangements,whichallowforamuchlongernegotiationoffutureUK-EUtradearrangementsandcooperationonotherareassuchasclimate,energyandsecurityissues.TheSovereignTransition,HostileNationalismandEUinChaosscenariosproduceverynegativeoutcomesforenergyandclimateissuesonbothsides.AnyrestrictedaccesstotheInternalEnergyMarket(IEM)fortheUKincreasesenergypricesandcreatesaccessissuesforEUMemberStatessuchasIreland.ThereissignificantinvestmentuncertaintyandtheUK’swithdrawaldisruptsimplementationoftheEU2030ClimateandEnergyPackageandtheEnergyUnion.CooperationonenergysecuritysuffersandRussiaissignificantlyempowered.TheUKswithdrawalfromEuratomunderminesit’scivilnuclearprogrammewhichalsohasimplicationsforEUbasedcompaniessuchasEDF.InboththeSovereignTransitionandHostileNationalismscenariosthenegativeimpactsarelargerfortheUKthantheEU;whilethepositionisreversedintheEUinChaosscenario.Nonetheless,anyoftheseoutcomesislikelytoprovideasignificantchallengetothelowcarbontransitiononbothsidesoftheChannel.Incontrast,theEconomicTransitionscenarioprovidesamuchstrongeroutcomeonenergyandclimateissues.Theinherentbenefitsofcontinuedcooperationaremaximized,providingstabilityforcontinuedinvestmentanddeliveryofexistingprogrammes.However,atpresentthisscenarioissignificantlylesslikelythaneithertheSovereignTransitionorHostileNationalismoutcomes.Theprobabilityofasuccessfuloutcomeonenergyandclimatechangecanbeincreasedthroughtheestablishmentofacooperationtrackontheseissueswithinthenegotiations.TheUKhasalreadysignaledthatitwouldliketoestablishabroadpartnershipwiththeEUthatgoesbeyondjustfuturetradingarrangements.However,ithassofarlimitedthescopeofthisagreementtohardsecurityissues.Bycreatingaspacetodiscussfuturecooperationonenergy,climatechangeandbroaderenvironmentalobjectivesbothsidescanincreaseoutcomesforthesepolicyareasandreducethechanceofacrashBrexitthatwoulddamageeveryone.

INTRODUCTIONTheoutcomeoftheUK’snegotiationtoleavetheEuropeanUnionwillhavemajorimplicationsformanyissuescentraltopeople’slives,includingenergyandclimatechange.Differentoutcomeswillcreateverydifferentrisksandopportunitiesforpolicyandinvestmentasthegovernmentcontinuestomanageenergyandclimatesecurity,environmentandcompetitivenessobjectives.ScenarioanalysisprovidesatooltoassessarangeofdifferentBrexitoutcomes,andunderstandthecriticaldriversanddecisionpointsthatinfluencedifferentresults.TheUK’senergyandclimatechangepolicyisintimatelylinkedwiththeEU.Energyisa‘sharedcompetence’meaningthattheresponsibilityforpolicyhasbeendividedbetweencentralEUinstitutionsandindividualmemberstates.TheUK’senergymarketisphysicallyconnectedtotheEUwithBritainimporting7%ofitstotalelectricityconsumptionfromtheEU.1ThecombinationofEUstatesandNorway(whichisamemberoftheEuropeanEconomicArea)accountforover70%ofallUKimportedgas.2TheopenborderbetweenNorthernIrelandandIrelandisalsoanenergyborder.ThefuturerelationshipoftheUKinrelationtotheInternalEnergyMarket(IEM)willbehighlysignificant.TheUK’swholesaleelectricitypricesareamongthemostexpensiveintheEU.BeingabletobuycheaperpowerfromthecontinentthroughlinkedEUelectricitymarketsissavingtheUKconsumersabout£90millionayearatcurrentlevelsofinterconnection;butthisisexpectedtoriseto£160millionayearwithmoreinterconnectorsbytheearly2020s.Meanwhile,thedemandfromtheUKprovidesrevenuetoEUproducers.Thearrangementbenefitsbothsides.Similarly,futuregrowthinrenewableusebothintheUKandEU-27MemberStateswillrequiremoresystembalancingresources.ResearchshowsthatsharingbalancingresourceswiththeEUcouldsavetheUK£3billionayearinsystemcosts.3Moreco-ordinatedandstrategicgridplanningacrossonshore,offshoreandcrossborderregimescouldsavetheUKanadditional£1.5billionto£10billionby2030.4Giventheuncertaintyoffutureenergyfuelandtechnologyprices,thereisalsosubstantialoptionvaluetobegainedbysupportingthedevelopmentofaflexibleelectricitysystem.TheexistingEnergyCommunityagreementthatallowssomesouthernandeasternnon-EUMemberStatestoparticipateintheinternalenergymarketprovidesaprecedentunderwhichtheUKcouldcontinuetoparticipateinthemarket.ItisimportanttonotethatfortheUKtofullyparticipateintheInternalEnergyMarketitwouldneedtobewillingtofollowtherulesofthatmarket,includingrestrictionsonStateAid.EUStateAidrulesaredesignedtoprohibitMemberStateGovernmentsfromgivingspecificcompaniesorsectorsanunfairadvantageovercompetitorsinotherMemberStates.SuchrulesarenecessarytocreatealevelplayingfieldonwhichMemberStatescantradefreely.However,asoutlinedinthescenariosbelowthismayprovetobeacontentiousissuewithinthenegotiations.OnclimatechangepolicytheUKhasnegotiatedcollectivelyontheinternationalstagewithotherEUcountries;submittingajointNationallyDeterminedContribution(NDC)

foremissionsreductionsby2030totheParisAgreementin2015.AsthecollectiveEUclimatechangetargetfor2030istranslatedintobindingtargetsforindividualmemberstatesthroughtheEffortSharingRegulationtheimpactoftheUKleavingcouldhavesignificantconsequences.SimilarlytheUKiscurrentlyamajorpartoftheEuropeanEmissionsTradingScheme(ETS),andsoBrexitcouldhavemajorimplicationsonitsfutureoperationandviability.

BACKGROUNDANDASSUMPTIONSFORTHESCENARIOSUncertaintyoverprocessTherearemanyuncertaintiesaroundhowtheBrexitnegotiationswillprogress.ExtractingtheUKfromtheEuropeanUnionisanimmensetaskconsistingofnotone,butmanylinkedprocessesofwhichfivekeyareasareoutlinedbelow:• Process1:agreeingtheUK’stermsofwithdrawalfromtheEUunderArticle50

oftheTreatyonEuropeanUnionwithreferencetoaframeworkforfuturecooperation

• Process2:agreeingtheUK’snewtradingrelationshipwiththeEU

• Process3:agreeingtheUK’snewtradingrelationshipswiththerestoftheworld,includingover50countrieswithwhichtheUKwouldneedtonegotiatenewtradearrangements.

• Process4:changingtheUK’sdomesticregulatoryandlegislativeframeworkthroughtheGreatRepealBillandsubsequentaction

• Process5:negotiatingnewcooperativeactions/institutionswithEUandothermultilateralbodieswhichlieoutsidethescopeoffuturetradeagreements(e.g.coveringissuessuchasairquality)

Someoftheseprocessesmaybejoinedtogetheratanegotiatinglevelbutseveralmayremainseparateanddistinct.Theoveralltimeframeofthenegotiationishighlyuncertain.TriggeringArticle50providesatwoyearwindowtoconductnegotiationsandcanonlybeextendedbyunanimousagreementofallMemberStates,somethingthatmaybedifficulttoachieveinpractice.However,theotherprocesseshighlightedabovemaytakemuchlonger.ForexampleittookSwitzerland12yearstonegotiatethemajorityofitssectoraldealswiththeEUandithasstillnotbeenabletoconcludeanagreementonenergyissues;andtheCanada-EUCETAnegotiationshavebeenongoingforover7years.Assuch,indevelopingscenariosforBrexititisimportanttoconsiderthephasingandtimeframeofdifferentagreementsandthepotential‘momentum’,eitherpositiveornegative,whichcouldemergeaftertheArticle50processisconcluded.OntheEU-27sidetheEuropeanCommissionwillleadnegotiationsinresponsetoArticle50,guidedbyMemberStates(asoutlinedinfigure2below),withtheEuropeanParliamentgettingafinalvote.TheUKGovernmenthasalsopromisedafinalvoteforitsParliamentonthedeal,however,thiswillnowbea‘takeitorleaveit’voteattheveryendoftheprocessandsomaygivelittlescopeforadjustment.

Figure2:OverviewofEUBrexitnegotiatingprocess(timingsareapproximate)

UnderstandingdifferentperceptionsofnationalinterestintheUKandremainingEU-27MemberStatesDifferentmodelsforBrexitarepopularlycharacterizedasbeingonaspectrumbetween‘hard’options,generallyassociatedwithWTOorfreetradeagreementmodels,or‘soft’options,associatedwiththeNorwayandSwissmodelsofdeeperintegration.However,inpracticeusingthisterminologycanleadtothecreationoffalsechoices.Thekeytoanynegotiatedsettlementistheonethatreflectstheunderlyinginterestsofthoseparticipatinginthenegotiation.Thusdeliveringa‘hard’or‘soft’Brexitisnotanendinandofitself,itishowthosesettlementsreflectdifferentnationalinterestsovertimethatwillbecriticalfordeterminingsuccessorfailure.InordertomapnationalinterestsforboththeUKandEU-27weneedtoconsiderseveraldimensions.Themostcriticalisbetweentheobjectivemeasuresofadifferentoutcome(e.g.higherorlowerGDP,judicialoversightbyonebodyoranother)andtheweightingdifferentstakeholdersplaceontheseoutcomes.Thismayleadtodeepdivisionsbetweendifferentstakeholdergroupswithinonesideoranother.Thesecondimportantdimensionisbetweenoverallintereststhatcutacrossallsectorsandareasofpolicyandthosethatrelatenarrowlytoenergyandclimateinterests.Thisisimportantinrelationtotrade-offsacrossdifferentareas.Thus,specificclimateandenergyobjectivesmaybesubsumedwithinbroadernegotiationsonimmigrationrightsetc.Thethirdishowtheperceptionsofdifferentstakeholdersmayevolveovertimeinresponsetoprogress(orlackthereof)inthenegotiationsorinresponsetorealworldevents.

Brexit deal agreed and approved

EU Council vote European Parliament vote If a ‘mixed’ agreement, requires ratification by 38 national and regional parliaments

Commission leads negotiation (May-June 2017-late 2018)

Direct participation from European Council and EU Council presidencies

Coreper WP set up to monitor progress + GAC discussions

Perm Reps and European Parliament invited to preparatory meetings

Negotiation mandate agreed (May 2017)

Commission proposes mandate EU Council agrees mandate

EU responds to Article 50 letter

European Parliament agrees initial position: 3 April European Council agrees guidelines: Early May

Theviewsofmanystakeholdersatthemomentare‘emergent’ratherthansharplyfixed.ThisisespeciallytrueontheEU-27sidewheretherehasbeenlessintensefocusonBrexitthanintheUK.Politicians,businessesandcitizensacrosstheEUhavebeenfocusedonothereventssuchastheemergenceofDonaldTrumpintheUS,therefugeecrisis,anddomesticfactorssuchastheDecemberreferendumwhichledtoPrimeMinisterMatteoRenziresigninginItalyandforthcomingnationalelections,notablyinFranceandGermany.AstrongfocusonBrexitpositioningwillonlynowemergefollowingtheUKssubmissionofitsArticle50notification,andeventhenforFrance,GermanyandCzechRepublictheprospectofnewleadershiporcoalitionsmaydelaythisprocessuntilmuchlaterin2017.AsummaryprovidingacharacterizationofoverallUKandremainingEU27countryinterestsinthenegotiationsisprovidedinfigure3below.Figure3:PerceptionofoverallUKinterestsinBrexitnegotiations

AtpresentthepositionsetoutintheUKWhitePaperonBrexitputsforward12negotiatingpriorities.ThishassignaledthattheUKisnotseekingcontinuedmembershipoftheEuropeanEconomicArea(EEA)througha‘Norway’-typemodelandprioritizesthecontrolofmigrationandjudicialsovereigntyovertheotherpriorities.However,theWhitePaperremainsanoutlinesketchofanegotiationposition,andthebalancebetweenmarketaccessandsovereigntycouldstillchange.InadditiontotheoverallinterestsinrelationtoBrexitthereareanumberofspecificenergyandclimatechangeinterestsfortheUKashighlightedinfigure4below:

Limitimmigration

• Immigrationwasthedefiningissueofthereferendumcampaign- seenasthecorepriorityforstrong‘leave’advocatestodeliveron• Tradeoffre.EUmarketaccessand4freedoms• Rightsofexistingmigrants

PromotesovereigntyofUKinstitutions

MaximiseUKtradeingoodsandserviceswithbothEUandothercountries

Maintainorincreaseinvestmentincluding

FDIintotheUK

KeeptheUKtogether

• Coreobjectiveforstrong‘leave’advocates• Particularlyrelevantinrelationto‘enforcement’mechanismssuchastheECJandStateAidrules

• KeytensionoverresolvingdegreeofEUmarketaccesswithinterestsonimmigrationandsovereignty.UnclearhowmucheconomicpainUKcitizenswillingtobear• LikelytobeamajorfocusinkeysectorssuchasCityofLondonpassportrightsandautomotivesupplychainaccess• Signalsontradingrelationshipswithothercountriese.g.USandChinawillbeimportantindefiningbroadercontext

• EUmarketaccessmaybeakeydeterminantoffutureFDIflowsfromcountriessuchasJapan• Inadditionuncertaintyduringnegotiationperiodmayreduceinvestment intheshort-mediumterm

• Brexit settlementhasimplicationsforfuturerelationshipwithdevolvedadministrationsespeciallyNorthernIrelandandScotland

AvoidnegativeimpactonUKeconomy

• Avoidmajoreconomicdisruptionand“cliffedge”forbusinessassociatedwithuncertaintyorthesuddenimpositionoftariffsetc.• ImpactonUKpublicfinancesandkeysectorsreliantoncurrentEUfunding(e.g.agriculture)

Figure4:PerceptionofoverallUKenergyandclimateinterests

TheUKWhitePaperontheUK’sExitfromandNewPartnershipwiththeEUacknowledgesmanyoftheseissuesbutdoesnotsetoutaparticularlyclearprioritization,insteadsayingthat“weareconsideringalloptionsfortheUK’sfuturerelationshipwiththeEUonEnergy”.5Inpart,thecomplexityoftheBrexitprocesshasprovidedachallengetotheUKgovernmentinworkingthroughdeepimplicationsforallpolicyareas.InparticularthenewDepartmentforExitingtheEuropeanUnionwillneedtomanagetheinterdependentnatureofmanyoftheseissues,whiledrawingontheexpertiseofindividualgovernmentdepartmentsthatmaybemoreusedtooperatingintraditionalWhitehallsilos.Thismayprovideforflexibilityinthecomingnegotiationsbutalsogeneratessignificantrisksthatenergyandclimatecouldbesubsumedunderbroadernegotiatingpriorities.Box:1EuratomandtheimplicationsofBrexitfornuclearpower6The1957EuratomTreatyisoneofthethreefoundingtreatiesoftheEUandestablishedtheEuropeanAtomicEnergyCommunity(EAEC).AlthoughtheEuratomTreatyisastandalonelegalentity,theUKGovernmenthasindicatedinitsWhitePaperthatitalsointendstoleaveEuratomaspartoftheBrexitprocess;althoughitwillretainsomeflexibilityand“havethemostopenmindpossible”indiscussingfuturearrangements.ExitingEuratomcouldhavemajorimplicationsforthefutureofnuclearpowerintheUK.AtpresenttheEuratomSupplyAgencyisresponsibleforthesupplyofallnuclearmaterialtotheUKwith“exclusiverighttoconcludecontractsrelatingtothesupplyofores,sourcematerialsandspecialfissilematerialscomingfrominsidetheCommunityorfromoutside”.7EuratomisalsoresponsibleforoverseeingnuclearmaterialsafeguardsandstandardsintheUK,includinginspectionsofcivilnuclearsitesincooperationwiththeInternationalAtomicEnergyAgency(IAEA).EuratomalsohasitsownresearchanddevelopmentprogrammewhichcontributessignificantfundingtoUKprojects,includingforfusionresearch.

Energymarketaccessandregulation

• UKcurrentlyimportsasignificantproportionofbothelectricityandnaturalgasfromtheEuropeanEconomicArea(EEA).PotentialbenefitstoenergycostsandsecurityfromretainingaccesstotheInternalEnergyMarket(IEM).• Technicalstandardsforenergyregulationandtransmission(ENTSO-E,ENTSOG,ACERetc.)• Standardsforproductsandservices(whitegoods,carsetc.);Ecodesign directiveetc.

Euratom andnuclearpower

• EnsurecontinuedaccessandtradefornuclearfuelswhicharecurrentlygovernedundertheEuratom SupplyAgency(ESA)– thisalsoincludesmedicalradioisotopes.Euratom alsosetsstandardsfornuclearsafety,decommissioningandhandlingofradioactivewasteandspentfuel• Withouteffectivealternative/transitionarrangementsitispossibletherecouldbeamajordisruptionintheUKnuclearsector

Energysectorinvestment

• NeedtoavoidinvestmenthiatusasaresultofBrexit uncertainty• PotentialwithdrawalofmechanismssuchastheEuropeanInvestmentBank(EIB)forenergysectorlending• Linkstoindustrialstrategy– productivity,jobsandskillsvs energycosts

Climatechangeandenvironment

• DeliveryofdomesticcarbonbudgettargetsandUKclimatediplomacytoencourageactioninothercountries• FutureoftheEmissionsTradingScheme (ETS)• Cooperationontransboundary environmentalpublicgoods(e.g.airpollution)vs.thepotentialfora‘bonfireoftheregulations’

Energydiplomacy• ContinuedcooperationwithEUcountriesinengagingwithmajorenergyexportersesp.Russia• Membershipofearlywarningmechanism,gasadvisorycounciletc.

OnleavingEuartomtheUKwouldneedtoestablishanewsafeguardsandinspectionsregimethroughtheIAEAandtheUK’sOfficeforNuclearRegulations(ortheestablishmentofanewagency).SuppliersofnuclearmaterialsfromcountriesoutsidetheEU,suchasCanadaortheUnitedStates,willberequiredbytheirnationallawsandobligationstoinsistthattheUKhasasufficientlyrobustsecurityandsafeguardsregimeinplacebeforeanyexportscouldtakeplace.WithouteitherestablishingnewortransitionalarrangementsbytheendoftheArticle50processitwillbeextremelydifficultfortheUKtocontinuetodevelopitscivilnuclearbusiness. InasimilarfashiontotheUK,itispossibletosketchoutsomeoverallperceptionsofinterestsandrisksonthesideoftheremainingEU-27countriesandtheEuropeanCommissionasshowninfigure5foroverallissuesandfigure6forenergyandclimatespecifically.AsnotedabovetherehasbeensignificantlylessfocusonBrexitinmanyotherMemberStatessofar.DifferentEUactorsarelikelytohavedifferentinterestsonBrexit,butsofarhavepresentedahighlyunitedpublicmessaging.ForexampleMemberStateswhoarenetrecipientsofEUbudgetpayments,inparticularCentralandEasternEuropeancountries,willbeparticularlyexposedtoanybudgetreductionfollowingtheUKexit.Intermsoftherightsofexistingmigrants,SpainandFrancehaveparticularlyhighconcentrationsofUKnationalsresidentintheircountries;whileCentralandEasternEuropeanMemberStateshaveadisproportionatenumberoftheirnationalscurrentlyresidentintheUK.AcoretestfortheEU-27willbehowtheymanageanytensionsordifferencesovertheprioritizationofdifferentissuesasthenegotiationsprogress,andtherelationshipbetweentheCommission,CouncilandParliament.

Figure5:PerceptionofoverallEU-27andEuropeanCommissioninterestsinBrexitnegotiations

Figure6:PerceptionofEU-27andEuropeanCommissionenergyandclimateinterests

Inparticularthereisanemergingdynamicbetweenanintegrity/punishmentagendathatwouldseektominimizeflexibilityinthenegotiationsandseekto‘win’businessandinvestmentswitchingawayfromtheUK;versusamorecooperativeagendathat

Maintainintegrityofthesinglemarketandcustomsunion

• Integrityofthefourfreedomsandcustomsunion• ProtectionofEUrules• Avoidcherrypickingofsectors/interests• Rightsofexistingmigrants

‘Punish’theUK– IthastobeworseoutsidetheEU

thaninsdie

Maximiseeconomicopportunities/Minimise

DefendEUbudget

GetonwithcorebusinessandavoidBrexit

contagion

• Therehavebeensomestatementsmadebyalimitednumberofstakeholdersthatgobeyond therealmofmaintainingintegrityofexistingEUrulesandinstitutionsandcouldbecharacterisedasseeking‘punishment’fortheUK• Populistpoliticiansmayattempttoexploitthisagendawithdomesticconstituencies insomememberstates

• BestpossiblerelationshipwithUKesp.innumberofkeysectorse.g.cars• ‘Win’foreigndirectinvestment (FDI)andbusinessswitchingfromtheUK• ‘Fairness’acrossremainingMS– esp.importantforIrelandinrelationtoenergy

• SecuresettlementfromUKforexistingliabilities(estimatesrangefrom€40bn-€70bn)• ConcernoverimpactofUKleavingonoverallbudgetlevels,especiallyamongstnet-recipientcountriesinCentralandEasternEurope(UKleaves~€10bnperannumhole)

• AvoidapositionwheretheUKis‘holdingBrusselshostage’byblockingprogressonnewlegislation• ElectionsinFrance,Germany,CzechRepublicandBulgariain2017• Getonwithmanagingotherissues:Eurozone, refugees,Trumpetc.

Playthelonggame

• MaximisetheadvantagesofincumbencybyutilisingtheabilitytowaitouttheUKonceArticle50istriggeredandthetwoyearwindow(unlessunanimouslyextended) begins• UtilisethesignificantlylargerstaffandlevelofexpertiseavailabletoEUinstitutionswithrespecttotradenegotiations

• Delayeddevelopmentofinterconnection, animportantsourceofflexibilitytosupportahigh-renewables powersystem.• DelayeddevelopmentofoffshorewindintheNorthSeas(UKhasoverathirdofEuropeanoffshorewindpotential)• Disruptedsupplychainsforlowcarbongoodsandservices

• SpecificFrenchinterestinensuringHinkley PointCcancontinuetogoahead

• UncertaintycausescleanenergyinvestmenthiatusinbothUKandEU-27• TheEIBlosesamajorshareholder(providing16%ofitscapital),constrainingitsabilitytosupportclimateandcleanenergylending• SignificantreductioninfutureEUbudgetmeanslessEUinvestment inclimateandenergy

• UKwithdrawalfromtheEU’sUNFCCCnegotiation‘bubble’ lowersEU’sheadlinetarget(fromatleast40%to~36%• UKwithdrawalfromEU-ETSleadstoincreasing‘hotair’inthesystemfromlegacyUKemissionsallowances• Aradicalderegulationary economicstrategyfrompost-Brexit UK(‘SingaporeoftheNorthSea’)forcesa‘racetothebottom’onenvironmentalstandards• SomeMemberStatesmayuselackofUKcompliancetoavoidimplementationofEUenvironmentandclimaterules

Energydiplomacy • ContinuedcooperationwithEUcountriesinengagingwithmajorenergyexportersesp.Russia• Membershipofearlywarningmechanism,gasadvisorycounciletc.

wouldseektomaximizecontinuingcontributionsfromtheUKtotheEUbudgetandprotectexistingtradingrelationships.

SCENARIODRIVERSFromtheassessmentofdifferentprocessesandperceptionsofnationalinterest,anumberofkeydriversforfutureBrexitscenariosstandout.ScenarioDriver1:InteractionbetweenperceptionsofnationalinterestThefirstmajordriverishowtheUKandEUchoosestoprioritizetheirperceptionsofnationalinterest.Asoutlinedabovethereisnosingleviewthatissharedacrossallstakeholdersoneachsideofthenegotiation.Howeachsidechooseswhichaspectstopromoteascoreprioritiesversuswhatitisacceptabletotrade-offinordertoachievethemwilldeterminetheavailablespaceforafinalagreement.GiventhecomplexityofBrexitthereisasignificantriskthatmistakesaremadeinunderstandingofissuesandpotentialoutcomesoneitherside.Clarityoverintentionsandthecreationoftrustwillthereforebeimportantincreatingasuccessfulnegotiatingdynamic.WithintheUKthemainobjectiveforPrimeMinisterTheresaMayintheshort-termistocontrolherparty.AsTheresaMaypersonallycampaignedforremainingintheEUduringthereferendum,thepro-Brexitforceswithinherpartyarecloselywatchingtoensuredeliveryoftheresult.GiventheweaknessoftheoppositionLabourPartyintheopinionpolls,thegreaterrisktothecurrentgovernmentisaninternalsplit,eitherwithinherownpartyorwiththedevolvedadministrations,ratherthanimmediateelectoraldefeat.ThereisastrongagreementacrosstheConservativepartyontheneedtocontrolimmigration,andthiswasacentralthemeofthereferendumcampaign.However,thepro-BrexitforceswithintheUKareafarfromhomogenousgroup.Insteadthereisaspectrumofopinionrangingfromahighlyderegulatorywing,ledbyfiguressuchasLiamFox,focusedonmaximizingtradeandincreasingglobalization;toamuchmoreprotectionistwingwhichseekstotryandrollbackfromcurrentglobalizationtrends.SofarinherpublicstatementsonBrexit,andthe12mainprinciplesoutlinedintheGovernmentsWhitePaper,thePrimeMinisterhassoughttoalignmorecloselywiththepro-globalization,deregulatoryforceswithinherparty.However,thereareinherenttensionsinthisposition.InparticularpursuinganactiveglobaltradeagendahasledthePrimeMinistertoseekarapidtradeagreementwiththenewDonaldTrumpadministrationintheUS;atthesametimethatPresidentTrumpispursuingastronglyprotectionistapproachtotradeandconsideringoptionstolimitUSinvolvementintheWorldTradeOrganization.DependingonhowtheseeffortstoforgenewtraderelationshipsinparallelwiththeArticle50negotiationsplayout,alongwitharangeofotherfactorsexplainedinthedriversbelow,theUKmaydecidetoevolveitsprioritizationofnationalinterests.

OntheEU-27side,asnotedabove,therehasbeenalesspublicfocusonsettingoutadetailednegotiatingposition,althoughthisdoesnotmeanthatpreparationshavenotbeendevelopinginprivate.ThemainthemestoemergesofarareprotectionoftheintegrityofexistingrulesandinstitutionsandseekingasettlementontheEUbudgetthatwouldseebotha‘divorce’settlementandpotentiallycontinuedcontributionsfromtheUKforongoingprogrammesthatitmaystillparticipateinonceBrexitiscomplete.Althoughstatementsabout‘punishing’theUKhavebeenlimitedtodate,itisclearthatthereisthepotentialforsignificantescalationbetweenthetwosides.Thus,whilemanyintheEUwillstartwithapositionthattheUKwillendupworseoffasaresultofleaving,themainfocuswillbeonmaintainingintegrity.However,alimitednumberofstakeholders,especiallypopulistpoliticiansinsomeMemberStatesmaygofurtherandactivelyseektopromoteapunishmentagenda.ThisunderlyingissuecouldemergeandescalaterapidlyinthefaceofhostilityorbelligerencefromtheUK.ThereisalsoadeepsenseontheEUsidethatbyplayingalonggametheycanmaximizetheadvantagesofincumbency.ThetwoyeartimelimitonArticle50negotiationsmassivelystrengthenstheEU’shand.AlthoughtheUKPrimeMinisterhaspledgedto‘walkaway’fromabaddeal,inrealitythereisnowhererealisticallytowalktootherthantheveryhardestofBrexits.GametheorysuggeststhattheclosertheexpiryoftheArticle50windowcomesthestrongertheEUpositionwillbe.

ScenarioDriver2:OrderlyversusdisorderlynegotiationprocessThesecondmaindriveriswhetherornottheprocessofnegotiationisorderlyordisorderly.Anorderlyprocessisoneinwhichthereisagreementonthesequencingofdifferentprocessesinthenegotiationsandthereissuchasufficientleveloftrustthatbothsidesbelievetheothertobenegotiatingingoodfaith.Adisorderlynegotiationiswherethereisabreakdownorstalemateintheformalprocessand/orabreakdownintrust.TheCopenhagenclimatechangenegotiationsin2009areanexampleofadisorderlyprocesswherebytheformalnegotiatingmechanismsfailed,resultinginadhocgroupingsofheadsofstatemeetinginbackrooms(whilesomehadtoleaveearlytocatchflightsbacktotheircapitals),tryingtodrafttextbythemselvesandultimatelyfailingtogeneratesufficienttrusttoresolvetheirdifferences.GiventhecomplexityandpoliticaldynamicsinvolvedacrossthedifferentcountriesandinstitutionsinvolvedinBrexit,itwillbeasignificantchallengetostructureengagementinamannerthatisconducivetoconstructivelyidentifyingandresolvingdifferences.AlreadytheremaybedifferencesbetweentheUK’sapproachsetoutinitsArticle50letter,whichenvisagesdiscussinginparallelthetermsofwithdrawalandanewpartnershipincludingafreetradeagreement,andthedraftEUnegotiatingguidelineswhichstressesthatsufficientprogressmustbemadeonwithdrawalissuesbeforeworkonthenewrelationshipcanbegin.8Howthenegotiationsarestructuredwillmateriallyimpactthepotentialtrade-offsandfinaloutcome.Thusthereislikely

tobesignificanteffortinvestedbybothsidesina‘negotiationaboutthenegotiations’todeterminethisstructureinthecomingmonths.However,failuretoreachagreementonthewayforwardwouldsignificantlyunderminetrustandentrenchhard-linepositionsonbothsidesratherthanworkingtowardsareasofcompromise.Thereareclearlessonsfrompreviousinternationalnegotiations(suchasintrade,sanctionsdisputes,environmentandclimatechange)thatestablishingtrustbetweenthemainPartiesisanessentialprecursortoconcludingasuccessfuloutcome.IftheBrexitnegotiationscollapseintoadisorderlymessdominatedbynarrowconcerns,thiswouldseverelylimitthescopeofpotentialagreement.Thetimingofbroaderpoliticalprocesses,especiallytheFrenchandGermanelectionsin2017,willalsohaveasignificantimpactonthenegotiationprocess.Changesingovernment(historicallyitcantakeseveralweeksfornewGermancoalitionstobeagreed)mayleadtonewsignalsandprioritiesfortheEuropeanCommissionandcouldmeanthattheEUmaynothavefinalizeditspositionsonmanyissuesuntillate2018.Thiscouldfurtherincreasethechanceofconfusionintheprocessandcompressthetimeforfullnegotiations.Thedesiretopresentnegotiationoutcomesasasuccessathome,canleadtoasituationwherenegotiationsareuniquelyfocusedontheareasofleverageinsteadofthoseofmutualbenefit.IntermsofleverageinthenegotiationtheUKperceivestheimpactofitswithdrawalontheEUbudget(approximately€10bnperannum),it’scontributiontomilitarydefence,andthethreatofcreatingahighlyderegulatedeconomyontheperipheryofEurope(sometimesreferredtoas“SingaporeintheNorthSea”)asbeingcentraltoitsnegotiatingstrategy.FortheEUthepowerofincumbency,theabilitytomaintaintheintegrityofexistingrulesandinstitutions,andthetickingclocktheUKfacesoncetheArticle50processistriggeredareacoresourceofleverage.Therearemanyareasformutualbenefitandcooperationbeyondtheseissues,suchasclimateandenergyissues,butwithoutskilfuldiplomacythereisalsothepotentialforthenegotiationstoquicklybecomestranded.Anorderlynegotiationprocesswouldfacilitategreatercooperationandunderstandingofmutualinterest.Incontrastadisorderlyprocesscouldlimitthescopeforagreementregardlessoftheunderlyingintentthatmightexistacrossthedifferentparties.Thisisalsoimportantinrelationtotheleveloftransparencyandtheinvolvementofdifferentinstitutions(e.g.theUKandEuropeanParliaments)atdifferentstagesofthenegotiation.Inanynegotiationitiscommonplaceforpartiestoattempttoconcealtheirfinal‘redlines’(theboundaryofminimalacceptance)inadvanceofadeal.However,inmostformsofinternationalnegotiationattemptstoultimatelydefeatoneorotherpartyareoftencounterproductive.AgreementcomesfromestablishingwhetherthereisamutuallyacceptablespacebetweenthedifferentPartiesredlines.Thisisnottoexcludeformsofpoliticalposturingandpressure,thisisnecessaryinordertofullytestandexploreotherparties’positions;butultimatelyasuccessfulresolutionisonewherebothsidescanclaimvictory.Constructinganorderlynegotiationprocessthatincludeselementsonthefuturerelationship

betweentheUKandEUandbroaderaspectsofcooperationwillbeimportanttoachievingthis.

Scenariodriver3:TimingandextentofeconomicimpactsAkeyuncertaintyisthelevelofeconomicpainthatbothsideswillexperienceunderdifferentoutcomesduringthecourseofthenegotiations.Economicpaininapoliticalsenseisnotnecessarilythesameassimplycalculating‘cost’,inparticularperceptionsofpublicconfidencecanbeverydifferentinrelationtoavoidedgainsratherthanactuallosses.Forexampleaneconomythatisgrowingmoreslowlythanitwouldotherwisewillcreatedifferentpoliticaldynamicstoonethatisinafullrecession,eveniftheeconomiccostofslowergrowthisextremelylarge.IntheinitialmonthsfollowingBrexitamassivedevaluationofthePoundhasactedasabufferintheUKagainstnegativeshocks.Althoughimpactswerenotuniformacrossallsectorstheprojectionsforanimmediaterecessionfollowingthereferendumvotehavebeenprovedwrong.However,itislikelytoincreasedomesticUKinflation,whichhasbeenathistoricallylowlevelssincethefinancialcrisisin2008.Thereisanimportanttimingissuewithinthenegotiations.CurrentlyUKexporterstotheEUhavethedualbenefitofmaintainingtarifffreemarketaccesswhilegainingacompetitivenessadvantagefromthedevaluation(thepoundhasfallenbymorethan16%againsttheEuro,meaningUKexporterscouldtechnicallyreduceeuropricesbythisamountandstillreceivethesamerevenueinpoundsastheydidbeforethereferendum).InascenariowheretheUKsuddenlymovedtoWTOonlyrulesthiswouldmeanthattheeconomicimpactintheUKwouldonlyberealizedaftertheinitialArticle50negotiationhadbeencompleted.FortheEUthereverseistrue:EUexporterstotheUKarealreadyundergoingaperiodofadjustmentowingtolossofcompetitivenessfromthefallinthepoundandsowouldlikelytobelessimpactedbyanyfuturemovestoaWTOsystem.AtthesametimethefullpotentialbenefitsofcompaniesorinvestorsswitchingawayfromtheUKwouldonlyberealizedafterthenegotiationshadconcludedandthereiscertaintyoverthenewarrangements.IneffectitcouldbearguedthattheEUisalreadypricinginthecostofBrexit,whiletheUKwillpotentiallyonlydosoaftertheconclusionoftheArticle50process.TheresolutionofthesedifferentinterestsandhowtheuncertaintyovereconomicimpactsarevaluedwillthereforebeamajordeterminingfactorinshapingdifferentBrexitscenarios.However,theresultoftheseimpactsisfarfromcertain.WithintheUK,ifthereality/expectationofeconomicriskssharplyincreasesthismayleadtothePrimeMinisterseekingamorecooperativeoutcomeandcouldunderminepoliticalsupportforthehardestformsofBrexit.AlternativelyifeconomiclossesareseenassunkcoststhismayhardensupportforcleanerformsofBrexit,andpotentiallyempowernationalistpoliticalvoices.Thus,althoughperceptionsofeconomicimpactwillpotentiallybeasignificantdriver,itisimportantnottodrawnarrowlinearinterpretationsarounddifferentimpacts.

Scenariodriver4:MomentumafterArticle50negotiationsThefourthmajordriverofthescenariosisthemomentumcomingoutofanynegotiationsandthetimeframeoverwhichtheyareundertaken(ingametheorytermswhetherthisisviewedasa‘oneshot’or‘repeated’game).ThecomplexityofBrexitmeansthatthereisunlikelytobeasingleandneatresolutionofallissueswithinthetwoyeartimeperiodfromtriggeringArticle50.Insteadthereislikelytobeaninitialsettlementandprocessfollowedbyanextendedperiodofengagementandadjustmentbasedonsubsequentevents.Iftheinitialroundofnegotiationsendinacrimonyandmutualdistrustthiswillmakefuturecooperationmuchharder.Ontheotherhand,ifthereispositivemomentumandaclearunderstandingoffutureprioritiesthiswouldleadtomoreproductiveengagementsgoingforward.IntheUKtherehavebeenargumentsputforwardinsupportofbotha‘clean’Brexitanda‘phasedtransition’toavoidcliffedgesanduncertaintyforbusiness.Howtheseviewsinteractwillbeimportantinshapingfuturemomentum.TheaspirationforacleanBrexithasseveralpotentialdriversrangingfromadesiretogetresolutionasquicklyaspossibleandhencelimitfutureuncertainty;topotentiallymorecynicalmotivesontheneedto‘lockin’theresultofthereferendumbeforeageneralelectionorotherfactorscouldleadtoremainforcesregainingpoliticalpower.Similarlytheargumentsforaphasedtransitioncoveraspectrumoffactorsincludingmanagingthecomplexentanglementthatexistsafter40yearsofEUmembership;butalsoasapotentialwaytomanagefearsofahardBrexit.OntheEUsideinitialinstinctsappeartobeinfavourof‘playingthelonggame’asnotedabove.However,thisdoesnotmeanthattherearenoforcespullinginthedirectionofseekingaquickresolutiontoBrexitandsoallowingthemtomoveonwithcorebusinesselsewhere.InparticulartheremaybeasensethattheEUpositionwillbestrongestbypushingtheUKintoahardexit,thusstrengtheningEUpowerinanyfuturetradingnegotiations.Whatisclearfrommanypolicyareasincludingenergyandclimatechange,butalsobroaderconcernssuchasdefence,crimeanddigital,isthatsomeformoffuturecooperationbetweentheUKandEUwillbeinevitable.Howandwhetherapotential‘cooperationtrack’aroundtheseissuesmightemergemaybeadriverforgreatertrustandpositivemomentumfollowingtheinitial2yearArticle50period.Theimpactsofacooperationtrackforenergyandclimatearediscussedinmoredetailbelow.

POLITICALSCENARIOSFORBREXITFromanassessmentofthekeydriversandinterests,fourmainpoliticalspacesforlandingaBrexitdealwithinthenext2-3yearsemergeasshowninfigure7below.Thekeyaxesindefiningthescenariosareanorderlyversusadisorderlynegotiationprocessandwhethersovereignty/integrityorcooperationinterestsdominatenationalpositions.Thesescenariosarefocusedontheperiodto2020,withanassessmentoffuturemomentum(eitherupwardordownward).AllofthescenariosarepredicatedontheUKleavingtheEUanddonotexplicitlyconsiderthepotentialforasecondreferendumetc.tototallyreversethecurrentpoliticalcourse.However,theydoresultinverydifferentlevelsofcooperationgoingforward.Figure7:OverviewofpoliticalscenariosforBrexit

Scenario1:SovereignTransitionThisscenarioisprobablythemostrepresentativeofthecurrentUKnegotiatingposition.TheUKwouldnotseektoremainamemberoftheEuropeanEconomicArea(EEA)andthefourfreedoms–enablingittosetanindependentimmigrationpolicyandrestrictfreedomofmovementfromotherEUcountries.ThecentreofthenegotiationsislikelytorevolvearoundtheUKdesireforeitheranewfreetradeagreement(FTA)orabespokeCustomsUniondeal,whichwouldenableittosimultaneouslysignnewtradedealswiththirdpartycountries(e.g.theUS,ChinaorIndia)whilealsoretainingmarketaccesstotheEUatlowtariffs.FortheEUthedesireforbothsettlingexistingUKbudgetliabilities(variousestimatesfrom

dominate

Orderlynegotiations

Sovereigntransition

Hostilenationalism

Economictransition

EUinChaos

€40billionto€70billionhavebeenproposed)andthepotentialtoseekfurtherbudgetcontributionsgoingforwardwouldbecentraltoitspriorities.OtherareasofsignificantfocuswouldlikelybeonthefutureroleoftheCJEU,andinparticularitsroleinfuturetradedisputeresolutionmechanisms.Whileitisnotimpossiblethatthisnegotiationcouldmoveforwarditwouldalsocreateahighlyunstablepoliticalspace.TheFTA/CustomsUnionagreementtheUKisseekingwouldbeamajorconcessionbytheEU,andwouldraiseanumberofconcernsovertheapplicationofStateAidrulesandotheravenuesforunfaircompetition.IntheabsenceofEUflexibilitytheUKcouldbeleftwithlimitedoptionsbeyonddefaultingontoWTOrules.SimilarlyalthoughtheUKPrimeMinisterhasgivenherselflatitudewithrespectto‘appropriatecontributions’toanyfutureEUbudget,expectationsarelikelytobesignificantlybelowthatoftheinitialEUasks.Thusthereareanumberofdriversinthisscenariowhichcouldcreateabreakdowninorderlynegotiationsandadrivetowardszero-sumpolitics.Ifthenegotiationsbecamelockedonissuesofbudgetcontributions/CustomsUnionagreementwithoutconsideringwidercooperationintereststhiswouldrapidlyshiftintoadisorderlyprocessandthescenariothe‘HostileNationalism’outcomedescribedbelow.Figure8:SovereignTransitionassessmentofclimateandenergyissues

ASovereignTransitionscenarioresultsinrelativelyweakoutcomesforclimateandenergyissuesonbothsidesasthesepolicyareasarelargelysacrificedinpursuitofhighlevelobjectiveswithinthenegotiations.TheUKdesiretohaveacleanbreakfromtheEEAandEUinsistenceonstrongintegrityleadstoarapidexitfromtheIEMwithnegativeconsequencesforbothsides.Thereissomeasymmetryoninvestmentandclimatechangeissueswhereitislikelythattherapidexitwouldincreaseinvestment

Energydiplomacy

ImpactonUKperceivedinterests ImpactonEU/Cion perceivedinterests

Negative:UKunlikelytoretainIEMmarketaccesscausingariseinenergybillsandincreasedcostoflowcarbontransition

Negative:UKlikelytoleaveEIBcuttingoffanimportantsourceofenergysectorinvestment

Neutral:UKfreetosetownclimatechangetargets.However,mayenduppassivelyacceptingmanystandardssetinEUwithlittlesayintheircreation

Neutral:ScoperemainsfordiplomaticcooperationandengagementwithRussiaandothermajorexportcountries

Negative:UKwouldneedtorapidlyestablishnewarrangementsortransitiondeal.Riskofsignificantdisruption

Negative:IrelandlikelytobecutofffromrestofIEM.UKmayimportlesselectricityfromcontinentalsuppliers.IncreasedcostoflowcarbontransitionandriskUKpursuesderegulatoryagenda

Neutral:UKwithdrawalmayimpactEIBandotherEUfundingforenergyinvestment.However,broaderEUinvestmentlandscapemorerobust

Negative:EffortsharingregulationdecisionscouldbesignificantlycomplicatedbyUKwithdrawal.Couldleadtoreopeningof2030climateandenergypackageanddelayinEnergyUnionimplementation

Neutral:ScoperemainsfordiplomaticcooperationandengagementwithRussiaandothermajorexportcountries

Neutral:Althoughshort-termriskwhilenewarrangementsestablishedimpactmuchlowerforEUasawhole(however,wouldbenegativeforFrancegivenHinkleyPointCexposure)

Momentumgoingforward:DownwardUnstablepolicyspacethatcouldquicklydescendintoahostilenationalismscenario

uncertaintyintheUK,makingitarelativelylessattractivevenueforinvestmentthantheEU.However,thelackoftransitionarrangementsonclimateissuescouldcreatesignificantcomplicationsfortheeffortsharingregulationandviabilityoftheETSfortheremainingEUcountries.ThepursuitofacleanbreakbytheUKalsomeansthatthereisariskthateithertransitionalornewarrangementsarenotputinplacewithrespecttoEuratom,whichcouldcausecomplicationsintheUK’snuclearpolicyintheshort-term.Themomentumafter2020fromthisscenarioisdownwardforenergyandclimateissues.Therearesignificantrisksofeconomicshocksandotherimpactsonbothsideswhichcouldrapidlyleadtoescalatingblameandabreakdownoftrust.Theemphasisonsovereigntyandintegritycouldberelatedtogreaterlevelsofhostilenationalismgoingforwardandlimitthescopeforfuturecooperativearrangements.

Scenario2:HostileNationalismThisscenarioispartofaconnectedpoliticalspacewiththeSovereignTransitionscenariowhereprovocationonbothsidesleadstoamajorbreakdownoftrustandafocusonzerosumpolitics.Thusalthoughthestartingdynamicsareverysimilartoscenario1thefailuretoconstructanorderlynegotiationprocessleadstoamorenegativeoutcome.ForexampleifagreementontheUK’spaymenttosettleoutstandingliabilitiescannotbereachedortheUKdenysanyrolefortheEUCJinfuturetradearbitration,itcouldquicklyleadtofragmentationandthenegotiationprocessdescendingintochaos.TheUKthreateningtounderminesecuritycooperationwiththeEUcouldalsoleadtoahostileresponsefromtheremainingEU-27countries.Thiswouldcreateaselfreinforcingdynamicwhichcouldfeednationalistinstinctsinboththemediaandwiderpopulationonbothsides,promotingevermoreintransigentpositions.ThiswouldrapidlyincreasetheprobabilitythattheUKrespondsbythreateningamassivederegulatoryagendatoundermineEUcompetitivenessandrefusestomakeanypaymentsforoutstandingliabilities.TheEUthenrespondsinkindandthosestakeholderswhomaywanttofocusona‘punishment’agendainsomeMemberStateswouldbeempowered.TheUKcould,inextremis,alsotryandblockprogressonallexistingEUlegislationwhichcouldfurtherentrenchEUpositions.InthisscenarionosuccessfulagreementisreachedastheArticle50timelimitexpires,leadingtoUKexitingfromtheEUinachaoticdefault.Thiscreatesstrongnegativemomentumandalackoftrustforfutureengagementwithongoingargumentsaboutoutstandingbudgetliabilities/punitivetariffsetc.Thisscenarioislikelytogeneratemaximumeconomiccostsonbothsides.

Figure9:HostileNationalismassessmentofclimateandenergyissues

Thisscenarioleadstohighlynegativeimpactsforenergyandclimateissues.TheUKislikelytobeparticularlydamagedasbusinessandinvestorsstrugglewithasharpcliffedgeasthenegotiationsdescendintochaos.ThiscouldleadtoasignificantinvestmenthiatusintheUKandundermineclimatechangeobjectivesascompetitivenessconcernsleadtoafocusonderegulationtolimiteconomicdamage.AlthoughtheEUwouldlikelyremainasomewhatmoreattractiveplaceforinvestmentthantheUK,therewouldstillbenegativeimpacts(especiallyrelatedtoEUbudgetliabilitiesandfuturecontributions)asIrelandfacesbecominganenergyislandandtheUKexitcouldundermineeffortsharingregulationandtheETS.ThethreatofastrongderegulatoryresponsefromtheUK(“SingaporeintheNorthSea”)couldhavesignificantmediumtermimpacts.ContinuedcooperationonenergydiplomacywithcountriessuchasRussiawouldbesignificantlyunderminedinthisscenariowhichcouldraiseenergysecurityrisksforboththeUKandEUMemberStates.Themomentumfromthisscenarioisstronglydownward.Theescalatinghostilitythatleadstoacollapseinthenegotiationswouldresultinsignificantbitternessonbothsides.Shortofafulldiplomaticresettherewouldbelittletrusttodrivecooperationonenvironmentandclimateissues.

Energydiplomacy

Negative:UKhasasharpexitfromIEMcausingariseinenergybillsandincreasedcostoflowcarbontransition

Negative:HighuncertaintycouldleadtosignificantinvestmenthiatusasUKbusinessandinvestorsfaceasharpcliffedge.MessyexitofUKfromEIB

Negative:Cliffedgeexitmayundermineclimatechangeobjectivesinfavourofsharpderegulatoryagendafocusedoncompetitiveness.Majornegativeimpactsforbroaderenvironmentalobjectives

Negative:BreakdownoftrustwouldunderminecooperationandempowercountriessuchasRussia

Negative:Significantchanceoffailuretoagreeinterim/transitionalmeasures

Neutral:EUpotentiallysignificantlymoreattractiveplaceforforeignFDIinvestmentthanUK.However,stillsignificantriseinpolicyrisk

Negative:EffortsharingregulationdecisionscouldbesignificantlycomplicatedbyUKwithdrawal.Couldleadtoreopeningof2030climateandenergypackageanddelayinEnergyUnionimplementation

Negative:BreakdownoftrustwouldunderminecooperationandempowercountriessuchasRussia

Neutral:EUlessimpactedthanUK(however,wouldbenegativeforFrancegivenHinkley PointCexposure)

Momentumgoingforward:StronglyDownwardBreakdownoftrustwouldseverelylimitfutureengagementwithoutfulldiplomaticreset

Scenario3:EconomicTransitionThereisrecognitionbybothsidesthatitisimpossibletosuccessfullydisentangletheUKfromEUwithinatwoyeartimeframe.Followinganinitial‘testofstrength’inthenegotiationstodeterminetheseriousnessofbothsides,theUKandEUchosetofocusoneconomiccooperationintheshort-termratherthansovereigntyorpunishmentissues.Negotiationsthereforefocusoncreatingasetofstable,interimarrangements,afterwhichlengthiernegotiationscouldtakeplacetomovetowardsamorecomprehensivesolution.Thestructureofthenegotiationsrecognizethatthisisnotnecessarilyadurablesettlementinthelong-run;butthatcreatingaworkabledealthatdoesnotgeneratesignificanteconomicharmwilllikelyrequirea5-10yearwindowratherthan2years.FortheUKthereisalsorecognitionthatsecuringmeaningfultradedealswiththirdcountriessuchastheUnitedStates,ChinaandIndiamayalsotakeanextendedperiodoftime.ThisresultsintheUKretainingmembershipofthecustomsunionandpotentiallyalsofullEEAmembershipinthefirstinstance.ItwouldalsorequiretheUKtocontinuetomakesomeformofcontributiontotheEUbudget,thoughtheremaybescopetonegotiatenewlevels.ThisscenariodoesstillleadtotheUKformallyexitingtheEUaftertheArticle50negotiationsconcludein2019,andsothemandateofthereferendumisdelivered.However,thefocusisoncreatingapositivemomentumtoconcludelongernegotiationsthatcouldeventuallyresultineitheradeep‘Canadaplus’stylefreetradedeal,orSwissstylesectoralarrangements,inthemediumtolong-term.

Figure10:EconomicTransitionassessmentofclimateandenergyissues

AnEconomicTransitionscenarioleadstolargelypositiveimpactsforenergyandclimatechangeissues.ThisscenariowouldenabletheUKtoretainIEMaccesswhichwouldbringbothsignificantdomesticbenefitsbutwouldalsoensurecountrieslikeIrelandarenotisolated.BypoolingpotentialrenewableresourcesandtheabilityforbalancingacrossthewholeEUthecostsofdecarburizationarereducedforbothsidesaswell.Thisscenarioprovidesthemostpositivebasisforinvestment,althoughtheUKmaystillhavetonavigatesomeissuesinrelationtomembershipoftheEIBetc.Thescenariowouldalsoenableactivecooperationonenergyandclimateissues.FortheEUthiswouldminimizerisksofpossibledisruptiontothecurrentEnergyUnionand2030ClimateandEnergypackageagenda;andprovidestabilityfortheETS.TheUKwouldstillhavetonavigateEuratomarrangementsbutthisscenarioprovidesthemostpositivebackdroptoaccomplishthis.Themomentumfromthisscenarioisupwardforclimateandenergyissues.Byemphasizingeconomiccooperationandrobusttransitionarrangementsthereistimeandastablediplomaticrelationshiptomoveforwardwithlongertermarrangements.Scenario4:EUinChaosInthisscenariopoliticaleventsinotherEUMemberStatesprecipitateadeepcrisiswhichswitchesfocusawayfromBrexit.ThiscouldbeacountrysuchasItalyorGreecesufferingadeepcrisisinthenexttwoyearswhicheventuallyleadstoexitingtheEuro,

Energydiplomacy

Positive:UKlikelytoretainIEMmarketaccesshelpingtoreduceenergybillsandcostoflowcarbontransition

Neutral:Avoidcliffedgeforbusinessandinvestors.However,maystillneedtowithdrawfromEIB

Positive:Strongbasisforfuturecooperationonclimateandenvironmentissues.

Positive:Strongbasisforfuturecooperationonenergydiplomacy

Neutral:Goodbasisforestablishingnewarrangements/transitionalmeasuresbutmaystillfaceatighttimeline

Positive:Noenergy‘islands’createdforremainingEUcountries.UKcontinuestoprovidedemandforEUenergyandlowersoverallcostofdecarbonisation

Positive:EUpotentiallysignificantlymoreattractiveplaceforforeignFDIinvestmentthanUK.However,stillsignificantriseinpolicyrisk

Positive:Strongbasisforfuturecooperationonclimateandenvironmentissues.

Positive:Strongbasisforfuturecooperationonenergydiplomacy

Positive:Goodbasisforcontinuitygoingforward

Momentumgoingforward:UpwardGoodbasisforfuturenegotiationswhichcouldresultinarangeofoutcomes(e.g.CanadastylefreetradeagreementorSwissstylesectoral dealsetc.)

oravictoryforpopulistcandidatessuchasMarineLePeninthe2017Frenchelections.TheUKattemptstocontinueorderlynegotiationswiththeEuropeanCommissionbuttheprocessspiralsintochaosasnoclearmandateisforthcomingfromotherEUMemberStatesandthefutureshapeoftheEUasawholeisputinconsiderablerisk.InthisscenarioalargepoliticalspaceopensupformajorreformoftheEU,butintheshort-termcrisismanagementdominateswhichmakesthetimingdifficultforthe2yearArticle50process.Theultimateoutcomeofthehighlychaoticnegotiationbackdropisuncertain,butitislikelythattheUKisnotabletonegotiatesignificantnewarrangementsforanewFTAorbespokeCustomsUnionagreementetc.andsomayendupinahardBrexitontoWTOrulesintheshort-term.Momentumfromthisscenarioisalsoincrediblyvolatile.Thereislotsofpotentialfornegativeenergytoemergeandmakefuturecooperationchallenging.However,iftheEUdoesgothroughamajorreformprocessthiscouldalsoprovidesignificantopportunitiesfortheUKtonegotiateanewbasisforfuturecooperation.Figure11:EUinChaosassessmentofclimateandenergyissues

Thisscenarioresultsisanegativeshort-termoutcomeforenergyandclimateissues.ThechaoticendtotheArticle50negotiationprocessislikelytoleadtoasharpcliffedgeastheUKexitstheIEMwithsignificantimpactsonbothsides.InvestmentuncertaintyintheUKwouldbeveryhighinthisscenario,butrelativelyspeakingtheUKmightbeperceivedmoreattractivethanEurozonecountries.ThisscenariowouldresultinmaximumdisruptiontotheEUEnergyUnionprocessandCleanEnergyforall

Energydiplomacy

Negative:UKhasasharpexitfromIEMcausingariseinenergybillsandincreasedcostoflowcarbontransition

Neutral:UKmaybeperceivedasamorestablecountryforinternationalinvestors.However,stilllikelytohavetowithdrawfromEIBetc.

Negative:Cliffedgeexitmayundermineclimatechangeobjectivesinfavourofsharpderegulatoryagendafocusedoncompetitiveness.Majornegativeimpactsforbroaderenvironmentalobjectives

Negative:BreakdownofengagementwouldunderminecooperationandempowercountriessuchasRussia

Negative:Significantchanceoffailuretoagreeinterim/transitionalmeasures

Negative:DisruptionacrossEUincreasesinvestmentriskwhichcouldhaveamajorimpactontheenergysector

Negative:Likelytobesignificantimpactonabilitytomoveforwardwith2030ClimateandEnergypackageandEnergyUnion

Negative:BreakdownofengagementwouldunderminecooperationandempowercountriessuchasRussia

Neutral:EUlessimpactedthanUK(however,wouldbenegativeforFrancegivenHinkley PointCexposure)

Momentumgoingforward:MixedAsEUresetsrelationshipsfollowingbreakdownpotentialforpositivemomentumtoemerge– butalsorisksofrisinghostility

Europeanspackage.ItcouldalsosignificantlyundermineclimateobjectivesintheUKasothershort-termcompetitivenessprioritiescrowdoutlonger-termobjectives.ThescenariocouldleadtoasignificantbreakdowninenergydiplomacyandempowerexportercountriessuchasRussiarelativetotheircurrentposition.ThisscenariowouldalsocarryahighriskthattheUKwasunabletosecureeitheralternativeortransitionalarrangementswithregardtoEuratom.Themomentumfromthisscenarioismixed.Althoughthescenarioishighlychaoticthereisnotthesamelevelofacrimonybetweenthetwosidescomparedtothehostilenationalismscenario.AstheEUrebuildsfollowingaperiodofchaostherewouldbeopportunitiestoforgeapositiverelationshipwiththeUK.Energyandclimatemayappeartobelesspoliticizedissuesthantradeorsecurity,andsomayenablethemtoactasapathfinderforrebuildingcooperation.However,thisscenarioisnotwithoutriskandthenegativeimpactscouldalsoempowerhostileforcesonbothsidestopromoteadestructivepunishmentagenda.

CONCLUSION:THENEEDFORACOOPERATIONTRACKInassessingtheoutcomesofthedifferentBrexitscenariosforenergyandclimatechangeitisclearthattherearestarkdifferencesbetweennegativeoutcomesforthosescenariosdominatedbyanarrow‘oneshot’focusthatemphasizeszerosumpoliticsbetweenthetwosides;andmorepositiveoutcomesfromabroader‘repeatedgame’focusthatemphasizescooperation.Giventhestrongpathdependency(wherebyinitialchoiceslimitfuturedecisions)fromabreakdownintrustandashifttoadisorderlynegotiationspaceitisthereforevitalthatacooperativetrackisestablishedinthenegotiationstokeepopenthepoliticalspacetobuildpositiveoutcomes.However,giventhepotentialfornarrowinterpretationsoftheArticle50processtofocusmostly‘onthedivorce’,itisbynomeansautomaticthatthistrackwillbeestablished.Brexitwillbeauniquediplomaticeventandnavigatingthedifferentrisksandopportunitieswillrequiresignificantstatesmanshipfrombothsides.Asillustratedinfigure12themostlikelyscenarioundercurrentdriversistomovetowardshostilenationalism.TheinitialUKnegotiatingpositionislikelytotryandmovetowardsasovereigntransitionoutcome.However,asoutlinedabovethisisahighlyunstablepoliticalspaceandwouldrequiremajorconcessionsfrombothsides.Intheabsenceofthoseconcessionscomingforwardthemostlikelyresultwillbeanescalationinhard-linepositionsandadescentintohostilenationalism.Maintaininganorderlynegotiationprocesswillalsobeachallenge.Inparticulartheremaybeanumberofpoliticalforcesonbothsidesofthechannelthatmaythinkthattheycouldnarrowlyprofitfromadisorderlynegotiationprocess:eitherbyensuringthereisnowaybackfortheUKtoremainintheEUorbecausetheyperceivetheircountry/sectormaybenefitfroma‘hardBrexit’.

Figure12:Assessmentofmostlikelyscenarioundercurrentdrivers

Thecreationofaspecificcooperationtrackforenergyandclimateissueswouldbethebestwaytomitigatetherisksofmovingtowardsahostilenationalismscenario.Therehasalreadybeensomediscussionoftheneedforongoingcooperationonsecurity,crimeanddigitalissues.Makingacooperationtrackarealityandexpandingittoincludeenergyandclimateissueswouldcreateapositivepoleinthenegotiationstobuildtrustanddemonstrateprogress.Asuccessfulcooperationtrackforclimateandenergywillrequiretransparencyandaccountabilityonbothsides.Thisisnotthesameasrequiringnegotiatorstorevealtheirredlines(finalnegotiatingpositions)assomecriticshaveargued.Ratheritiscreatingaspaceforthevoiceandinvolvementfromthepublic,businessandParliamentonareasofcommoninterest.Inparticularfourareasstandout:

• Integratedenergymarket:TheUKhasadeeplyintegratedenergymarketwiththerestoftheEUandasingleenergymarketwiththeRepublicofIreland.Inbothcasesdisentanglementcouldbetechnicallyandpoliticallychallenging.TheUKhassignaledaredlineregardingthejurisdictionoftheEuropeanCourtofJustice(ECJ).However,thecurrentUKpositionismorenuancedasitdoesnotexcludeitsroleintradearbitration,meaningtherecouldbeaninterimrolefortheECJ.Inthelongrun,newformsofcooperationsuchasanEnergyUnionbeyondEUborderscouldalsobeconsideredorpossibleextensionstotheEnergyCommunitymodel.CooperationonenergydiplomacyandenergysecurityinparticularwithregardstoRussiawouldbepartofthosediscussions.

dominate

Orderlynegotiations

Sovereigntransition

Hostilenationalism

Economictransition

EUinChaos

• Climatechangetargets:TheEUiscurrentlyintheprocessoftranslatingthejointinternationalclimatechangecommitmentitmadeintobindingnationaltargetsuntil2030.AstheUK’sownlegallybindingtargetsfromitsClimateChangeActarehigherthantheEUaverage,theUKcanmakeapositiveoffertotheEUofcontinuedcooperationonoverall2030greenhousegasreductiontargetsandtheEUEmissionsTradingScheme.

• Climatediplomacy:TheUNFCCCwilllaunchafacilitativedialoguein2018toincreaseoverallambition.InthecontextofothermajoreconomiessuchasChinaandIndiaalsotakingaction,thisprovidesanopportunityfortheEUandUKtoshowcontinuedgloballeadership.WhiletheUKmightwanttogoitsownwayintermsofclimatediplomacytoplaceitselfmoreprominentlyontheinternationalstage,itcanpotentiallybecomeanimpactfulallyfortheEUtobuildnew,climatebasedglobalpartnerships,e.g.withtheCommonwealthcountriesorLatinAmericancountriessuchasColombia,Peru,Chile,Mexico.

• Environment:NothingtechnicallypreventstheUKortheEUfrommaintainingorincreasingstandardsontrans-boundaryimpactscurrentlysetbyEUdirectives,e.g.theIndustrialEmissionsDirectivereducingindustrialpollution,withoutformalcooperation.Developingcooperativearrangementshoweverwillincreaseagencybeyondtheirownborders.NeithertheUKnortheEUwouldwanttoriskaregulatoryvacuumaboutpropertyrightsinareasofsharedresourcessuchasfisheriesorthemanagementofimpactsacrosssharedlandbordersandriversbetweenIrelandandtheUK.

Inestablishingacooperationtrackintheseareastherearealsoanumberofdifferentpoliticallevelsthatneedtobeconsidered.Firstly,howandinwhatformatwilltheseissuesbeaddressed?WillthisbepartoftheArticle50processor,perhapsmorelikely,aparallelprocess?Therewouldthenneedtobeconsiderationofhowdifferentissueswouldtranslateintoindividuallandingpointsforagreement.Wouldthisinvolvethecreationormodificationofinstitutionalbodies,formpartofanewfreetradeagreementetc.?Atthispointitmaybemoreusefultodisaggregatedifferentpolicyareasandtreatthemasseparatestreamswithinthecooperationtrack.AddressingthesequestionsislikelytorequiredecisionsbyHeadsofState.However,itwillbeimportantforarangeofactorsfromcivilsociety,business,financeandacademiatomakethecasethatacooperationtrackcanbeasuccessfultooltomanagenegativerisksinthenegotiationprocess.

ENDNOTES1https://www.entsoe.eu/Documents/Publications/Statistics/Factsheet/entsoe_sfs2015_web.pdf

2DECC(2015)‘DUKES:ForeignTradeStatistics’

3http://ec.europa.eu/energy/sites/ener/files/documents/20130902_energy_integration_benefits.pdf4https://www.e3g.org/docs/Transmission_planning_and_regional_power_market_integration.pdf5TheUnitedKingdomsexitfromandnewpartnershipwiththeEuropeanUnion(2017)pg.43

6https://theconversation.com/brexatom-the-uk-will-now-leave-europes-nuclear-energy-authority-721367EuratomTreaty,Article52,http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A12012A%2FTXT

8https://www.gov.uk/government/publications/prime-ministers-letter-to-donald-tusk-triggering-article-50

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