An unhealthy scepticism

Those who scaremonger on the costs of fighting climate change are not just jeopardising the environment, they are in fact ignoring a raft of financial opportunities, writes Merlin Hyman, director of the Environmental Industries Commission

In a recent Parliamentary debate on the Climate Change Bill, Lord Puttnam compared "the dominant energy interests" who argue that hasty commitments to tackle climate change will be economically catastrophic to those who 200 years ago opposed the abolition of slavery.

As he pointed out, the abolition of the slave trade, in fact, was not only morally right but allowed Britain to leap forward economically.

A recent letter from The Alliance of Intensive Industries to the European Commission opposing reforms to the EU Emissions Trading scheme shows, however, that scaremongering from vested interests on the costs of tackling climate change is still alive and well.

More enlightened parts of business have long realised that a move to a low-carbon economy is not only environmentally essential but brings huge opportunities - even the CBI in its recent report called for a shift to a world where carbon becomes the new currency, and highlighted the UK's unique opportunity to prosper in these key markets of the future.

The Climate Change Bill can be seen as the official UK launch of this new low-carbon economy.

The Environmental Industries Commission (EIC) is now organising a major conference, The Climate Change Bill: Implications for Business, to help business understand the government's climate change policies and how they will need to change in order to ensure that they exploit the opportunities of a low-carbon economy.

The importance of this issue is reflected in the top-level line up headed by secretary of state for environment Hilary Benn. The bill puts into statute the UK's targets to reduce CO2 emissions by 60% by 2050 and 26-32% by 2020, on 1990 levels.

The bill does include a mechanism for the 2050 target to be amended in the future to reflect the most recent scientific understanding of climate change and the level of emissions reductions required. But this provision, as currently set out in the bill, does not limit amendments to an upward-only revision of the target.

Therefore, in theory, the bill gives the government the powers to reduce the target at anytime. The EIC believes that this should be amended to clearly state that only an upward revision of the target should be allowed.

The bill will introduce a system of five-yearly carbon budgets - starting in 2008 - to meet the long-term targets - a carbon budget will place a limit on carbon dioxide emissions over a specified period of time. In order to provide a degree of certainty for businesses, the bill will require the government put into statute three five-year carbon budgets at a time.

The EIC believes that the carbon budgets have considerable potential to give market signals about the true value (and cost) of carbon.

There is little doubt that the signals for a tight carbon budget would feed through rapidly into price with the benefit of giving long-term confidence to investors in clean technology. The EIC believes this could lead companies to consider carbon as an asset (or liability) to be reported in company accounts as a means of demonstrating robustness in carbon strategy to shareholders.

Furthermore, carbon budgets should be set at level that requires immediate action and encourages investment in low-carbon technologies now, rather than setting over generous caps in the early stages which will create a risk of lock in to high-carbon technologies.

The level of carbon budgets must, therefore, have regard to the latest scientific evidence on climate change and the reductions in emissions required. We have to set budgets that will make sure the UK plays its part in keeping temperature change to less than 2˚C.

Committee
The bill will establish a Committee on Climate Change, which will independently assess how the UK can achieve its emissions reduction targets.

The committee will advise the government on issues such as the level of carbon budgets; whether or not to make use of the banking or borrowing measures; and the extent to which carbon budgets should be met by domestic emissions reductions versus emissions reductions purchased overseas.

The bill will require the committee to provide advice to the government on the first three carbon budgets by September 1, 2008. In order to give the committee a head start to ensure that it can provide its advice in time for September 1, 2008, the government recently made the decision to set the committee up in shadow form - the EIC has submitted evidence to the shadow committee to inform its advice to government on the UK's first three carbon budgets.

The EIC believes that the Committee on Climate Change will help remove decisions on the level of carbon budgets from the traditional political process. But it is crucial to ensure that the committee has sufficient authority, independence and resources to make its advice very difficult for the government to ignore.

Banking carbon
The bill will allow for any emissions reductions that exceed those budgeted for to be "banked" for use in the next budget period. Furthermore, the bill allows the government to borrow CO2 emission reductions from future budget periods.

Therefore, the government can increase the current budget by a certain amount, and reduce the next period's budget by the same amount. The bill will set a borrowing limit of 1% of the subsequent budget period.

While the EIC supports the proposed limit of 1% on the borrowing of CO2 emission reductions from future budget periods, our members do not support the widespread use of banking. The banking of reductions should be limited as large-scale banking has the potential to reverse trends away from a path that reduces emissions towards one of stagnation or reversal that may not become apparent until after the banked units have been used.

Exogenous credits
The bill includes measures to allow the UK to use the Kyoto Protocol flexible mechanisms to count towards the targets and budgets, however there is no limit on the extent to which this can occur. A key issue, therefore, surrounding the bill is the extent to which the emissions reductions have to occur through domestic action and how much can be met through the purchase of overseas credits.

The EIC believes that the use of international credits provides a significant opportunity to credibly and robustly achieve emissions reduction targets at the same time as minimising cost. But we believe the bill must set a specific limit on the proportion of carbon reductions from overseas projects that could count towards meeting the UK's targets.

It is crucial that purchase of international credits does not become the answer to meeting the UK's carbon emission reduction targets. Instead, credits from overseas projects must be supplemental to domestic action.

Trading schemes
The bill will introduce powers to make it easier to implement new trading schemes as well as consolidate, and extend trading schemes. The EIC believes that enlisting the carbon market/s will help the development of low-carbon technologies through establishing clear pricing signals for carbon. Once a robust and rising price of carbon is established, new technologies will be helped as their commercial viability is strengthened by the cost of carbon to older technologies.

The first of these domestic schemes is the Carbon Reduction Commitment (CRC) - a new mandatory cap-and-trade scheme, under which some 5,000 large non-energy intensive organisations will be required to purchase sufficient allowances either from the auction, the secondary market, or via the safety valve to cover their annual energy use CO2 emission.

The EIC welcomes the introduction of the CRC and believes that it will encourage the management of those organisations that will operate under the scheme to focus on the issues of energy use and the benefits of energy efficiency measures. But the EIC believes that the CRC is lacking in ambition.

The Committee on Climate Change will advise government on the level of contribution that CRC should make towards meeting the UK's Carbon Budgets. And the EIC believes the committee must ensure this contribution reflects the full potential for energy efficiency.

While it is technically and economically feasible to achieve the emissions reductions outlined in the bill, it will require a high degree of consistent vigilance to ensure that the UK does achieve them.

The EIC believes the government should, therefore, have a legal duty to stay within the limits of its carbon budgets. This legal duty to remain within the budgets will also, to some extent, help to future proof the legislation against governments that may for whatever reason be less engaged with climate change issues than the current one.

Ensuring the government has a legal duty to stay within the limits of its carbon budgets will also increase confidence in the bill and the current - and future - government's commitment to tackling climate change.

Without a legal duty to stay within carbon budgets the targets set in the bill will become simply aspirational and lack teeth, and as such runs the risk of simply being ignored. For example, the government's manifesto commitment to reduce CO2 emissions by 20% by 2010, which, without a legal duty to be met, is looking increasingly likely to be missed.

The EIC also believes that the bill should quantify the specific legal consequences for failing to stay within the carbon budget.

Implications
Climate change is widely accepted to be the greatest environmental challenge facing the world today. The importance, therefore, of making the transition to a low-carbon economy cannot be over emphasised.

While the government already has a wide range of policies in place for reducing carbon emissions across the economy - with further measures coming from the EU - a statutory framework requiring radical cuts in carbon emissions will inevitably lead to further policies requiring deep carbon reductions in all sectors of the economy.

The EIC's forthcoming conference, The Climate Change Bill: Implications for Business, will feature a unique line-up of top policy makers, regulators and business leaders to assess the government's rapidly developing climate change policy and its impact on business.

The gun for the start of the low carbon economy has been fired - it's time for businesses to ensure they are in the race.

Merlin Hyman is director of the Environmental Industries Commission (EIC). The EIC, with over 330 member companies, is the lead association for the environmental technology and services industry. For more details on EIC's conference, The Climate Change Bill: Implications for Business, call 020 7935 1675 or visit www.eic-uk.co.uk/ccb.cfm

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