Brexit Papers – Chemicals Industry

Much of current law regulating the chemicals industry originates from the EU (European chemicals regulation). Therefore, the EU referendum result will have profound effects upon the UK chemicals industry, perhaps more so than any other industry. Over the coming months, the UK Government will begin the work of engagement with stakeholders in the chemicals industry in order to discover the effects of the withdrawal from the EU will have upon the industry and how best to maximise continued access to the single market.

The House of Commons Environmental Audit Committee is currently collecting evidence to better understand the future challenges of the chemicals industry and this will feed into theEuropean chemicals regulation Governments position in due course. Simultaneously, the European Commission is currently reviewing European chemicals regulation over the course of 2017. The Brexit result has meant that the current chemicals regulations review and the negotiations surrounding issues of access to the single market for third parties and third countries will play a critical role in shaping the business models of the UK chemicals industry post-Brexit.

1. Negotiation themes for chemicals industry

Immediate issues to be addressed – these are issues which fundamentally shape the business models adopted by companies with headquarters in the UK:

  • Tariff-free trade – the EU’s Common Customs Tariff (CCT) – usually between 6-9% for chemical products. The current UK chemicals industry operates at the high-end of the market. Therefore, there will be a divergence between the CCT imposed on the import or raw chemicals (which is normally substantially lower) and the export of the final product (in which the CCT is substantially higher).
  • Access to a skilled workforce – this includes possible changes to the tier system of immigration
  • Policies supporting innovation – this may include a fully-fledged government science policy in order to ensure a regulatory environment in which chemical companies can prosper or individual policies concerning R&D funding (replicating H2020 schemes)
  • Energy – a competitive and secure energy base

Longer-term concerns to be addressed – these are issues which relate to access to the market:
When we have a clearer picture of how the Government intends to proceed with the above issues, the most pressing concerns will then turn to:

  • Regulatory consistency with the EU (European Chemicals Regulation)
  • Mutual recognition of service standards with the EU and an agreement on the dynamic elements of the current EU regulatory environment

2. Effect of business models – non-tariff barriers

Aside from the formal tariff changes, businesses must begin planning for new non-tariff quotas and bureaucratic costs, particularly in the export of their products, such as:• Rules of origin regulations

  • Import licencing
  • Potential “go slow” processing at European border
  • The potential risks of regulatory divergence without a mutual recognition element. Such divergence may lead to companies having to apply two sets of laws.

3. Analysis

At this stage, very little is known about the Government’s intended negotiating position, the importance they will attach to the chemicals industry, the EU’s ‘red lines’ and the possible compromises to begin a fruitful modelling exercise of a post-Brexit UK chemicals industry. European chemicals regulationDuring the long negotiations, there are issues surrounding mutual recognition/equivalence and dispute resolution to be discussed before modelling analysis will prove substantive and informative. Furthermore, there are also important devolution issues to be decided. Control over environmental matters has been devolved and the post-Brexit legislative environment could lead to highly diverging approaches to chemicals regulation in the constituent parts of the UK adding further complications to possible equivalency compliance.

However, we do know the legal implications of leaving the single market without a trade deal or bilateral chemicals agreement in place with regards to the current European Chemicals Regulation and directives which dominate the minds of chemical industry professionals.

With regards to current EU Directives (such as WEEE, RoHS and waste management), these are already officially adopted into UK statute. Therefore, these will automatically continue to apply to companies in the UK – unless reformed/repealed in the usual parliamentary manner in the interim. Regulations, most notably REACH, CLP and BPR provide authorisation and access to the single market. Owing to the fact that these are regulations and not directives, these will not automatically be transposed into UK law, unless the Great Charter dictates they do.

It is the dynamic elements of these regulations and directives which pose the greatest concern to the UK chemicals industry and continued access to the single market. Whilst it is very probable that these directives will be transposed into UK law via the ‘Great Repeal Act’, such rules will become so-called zombie laws without the elements which enforce and shape these regulations on a day-to-day basis. Such dynamic elements include the supervision of the ever-changing nature of the legislative dossiers and the enforcement of rulings.

Such dynamic elements, notably, the European Chemicals Agency (ECHA) in the case of REACH and the European Commission in the case of BPR play an ever-increasingly important role in the shape and direction of European regulations and access to the single market. Without access and membership these institutions UK-based companies will have no manner of recourse or influence over new European laws and face difficulties accessing the single market.

These dynamic elements lead to several questions which need to be addressed by the chemicals industry, such as:

  • Should the HSE assume the responsibilities currently afforded to the ECHA or European Commission and how does devolution effect the potential role of the HSE?
  • Should transitional arrangements be put in place allowing the continued role of ECHA, perhaps even in the short-term until HSE is in a position to assume control?
  • Should the UK seek EU equivalent legislation post-Brexit and what are the consequences of the UK being classified as an “importer” for EU regulations?

With change also comes the potential for benefits to be extracted if the opportunity is appreciated and maximised. For examples, the UK may seek to divert from the EU’s current hazard-based approach to European chemicals regulation, adopting instead a risk-based approach with no prospect of substitutional principles being introduced. This could potentially lead to a regulatory environment of greater innovation within the UK market. The UK could also withdraw from the EU’s Emission Trading Scheme ETS. However, to maximise these potential benefits, it is important for the industry to appreciate the political background and context they are operating in when developing arguments and strategies.

For more information on the European Chemicals Regulation environment and the likely changes happening in the UK, please contact Chris Morris.

September 15th, 2017 by Liam Herbert