Prepare for rule by regulation

The planet is hotting up. And so is regulation aimed at getting companies to cut carbon emissions. But, Mike Scott discovers, many of the new rules can also lead to intriguing business opportunities

Like temperatures, the amount of regulation aimed at making businesses cut carbon emissions is rising.

From carbon labelling, to the EU's Emissions Trading Scheme (ETS), companies are under pressure to account for their carbon emissions - and to reduce them.

Low-carbon regulation is an area where the UK leads the world. It introduced the world's first emissions trading scheme in 2002, which is one reason London is the global hub of the burgeoning carbon market. It will also be the first to introduce climate-change legislation that will commit the government to a carbon budget - the Climate Change Bill is scheduled to receive Royal Assent in early summer.

There are regulations on improving the energy efficiency of appliances, homes, commercial buildings, energy generation, and transport. On top of that, there are EU rules on disposing of electrical and electronic goods (Waste Electrical and Electronic Equipment Directive), vehicles (End of Life Vehicle Directive). The challenge of dealing with climate change requires that we "completely change the way we produce and consume energy," says Paul Dickinson, head of the Carbon Disclosure Project, which represents investors who see the carbon emissions of the companies they invest in as an important risk issue.

One new piece of regulation to emerge from the UK ETS is the Carbon Reduction Commitment. This will cover large businesses and public-sector bodies that are not energy-intensive enough to be in the EU ETS, but still have a significant carbon footprint, such as supermarket groups, hotel chains, universities, hospitals and government departments. The CRC, which will start in 2010, will apply to about 5,000 organisations that use more than 6,000MW hours a year of electricity - equating to an electricity bill of about £500,000.

Like the EU ETS, the CRC will be a cap-and-trade system, but it is a UK-only scheme. In the first phase, which will run to 2013, businesses will have to buy allowances at a fixed price, likely to be about £12 a tonne, says Jonathan Farr, a Defra spokesman. From 2013, the scheme will run in line with the EU ETS, and allowances will be allocated through auctions with a diminishing number of credits available over time, encouraging those involved to reduce their energy use. While participants will, potentially, be able to buy EU ETS allowances to meet their emissions cap, they will not be allowed to sell allowances into the EU scheme, so as not to cut the price of carbon for the heaviest emitters.

The scheme should save four million tonnes of CO2 a year by 2020, says Farr, and should be revenue-neutral, with any payments on allowances being recouped by savings on energy bills. "It is not meant to punish business, we simply have to reduce carbon emissions," he says. There will be a league table of CRC performance, which is likely to see companies using efforts to cut energy use as a marketing tool.

The Confederation of British Industry is supportive of the scheme. "It is tackling the right part of the problem," says Matthew Farrow, head of environment policy, "and it is an emissions-trading scheme, which we are keen on". However, Farrow warns the government is in danger of confusing business. "It has been pretty complicated for the amount of carbon savings it will deliver." While business was keen for the scheme to be as simple as possible, "one of the lessons learned from the UK ETS is that a degree of complexity, or at least completeness, is essential to preserve a trading scheme's environmental integrity," Defra said. Simon Briault, of the Federation of Small Businesses, says the plethora of regulations is a real problem for smaller companies.

The main regulations affecting SMEs, he says, are the WEEE Directive, the REACH regulations governing chemicals and the Landfill Directive, which is drastically increasing the cost of waste disposal. "The government has not done enough to let SMEs know what their obligations are under these directives," he says. "Businesses are facing fines or sanctions over issues they know nothing about."

The information on the various regulations is all in different places, Briault says, and it costs time and money, that small businesses can ill afford, to work out what their obligations are. He stresses that SMEs are not against tighter carbon regulation - "we support the aims of these regulations, it is just the way they are implemented, which often takes no account of the way SMEs operate."

Businesses keen to cut their emissions are subject to conflicting policy pressures, says Mr Farrow. The EU's End of Life Vehicle Directive, for example, demands that the materials used in cars are recyclable. This makes it difficult to make vehicles lighter and therefore less gas guzzling, because many of the lightweight materials are difficult to recycle. However, a number of small businesses are well placed to profit from the proliferation in regulation - one such is Advanced Plasma Power, a waste treatment and energy generating company that turns pre-treated waste into two recyclable products - a hydrogen-rich synthetic gas and a vitrified material suitable for use as a replacement aggregate or building material.

Andrew Hamilton, chief executive, says the key driver for his business is the EU Landfill Directive, which imposed the landfill tax because landfill produces methane, which is 21 times as potent a greenhouse gas as CO2. In April, the tax jumped from £24 per tonne of waste going to landfill, to £32 per tonne, and it rises by £8 per tonne every year until at least 2010/11, when it will be £48 per tonne. Councils will also be fined £150 per tonne for exceeding targets for biodegradable waste under the Landfill Allowance Trading Scheme. "This pushes the cost of landfill up very considerably, but it gives alternative technologies a real economic opportunity to compete with landfill and offer a better and cheaper solution," says Hamilton.

He is confident the regulatory forces that bolster his business will not go away because they are underpinned by not just a need to tackle climate change, but also the increasing scarcity of fossil fuels and fears over energy security. "I cannot see any political party moving away from that policy," he says. The rules in place give the company two potential revenue streams - one from disposing of the waste and the other from generating renewable energy, which also attracts ROCs (Renewable Energy Certificates).

"Our business opportunity has been created by regulatory change, so we are very supportive of the direction of regulation around waste and renewable energy," Hamilton says.

Even though the CRC is not due to come into force until 2010, companies need to be preparing now, says Angus Evers, head of environment at European law firm SJ Berwin, because an organisation's electricity use during 2008 will determine whether it is caught in the scheme from 2010. "Many businesses may not yet realise that the scheme will affect them," he adds. "Mandatory emissions trading, in the form of the CRC, is an entirely new policy instrument for mainstream UK business to get to grips with. The CRC will have potentially significant implications for participants - including financial, practical and reputational impacts. Given that this year's electricity use will determine whether an organisation is in the scheme when it starts in 2010, businesses should be asking themselves now 'will this affect me?'"

Along with measures such as the CRC, which directly affect businesses, they will also have to get to grips with the world's first climate change bill, due to come into force some time in 2008. This will commit the government to a carbon budget for 2008-2012. "It does not have a direct effect on companies, but it helps them to focus on the fact that there are going to be meaningful carbon restraints in future," says Farrow.

This trend is likely to be strengthened by the European Commission's plans for the third phase of the EU ETS, starting in 2013, which are likely to include a more rigorous cap, a centralised scheme run from Brussels (which should ensure national allocation plans are not tweaked to the advantage of certain countries) and a number of new sectors, such as aviation, brought into the scheme. Companies need to be aware of what policies are coming their way. "We are in a very significant two- or three-year period where there will be a lot of policy coming out at UK and EU level,"

Mr Farrow says. But equally, they should be looking for the business opportunities.

"There has been a shift in consumer attitudes and the world market for low-carbon technologies is going to be huge."

Mike Scott is a freelance journalist

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