Can water leapfrog carbon?

Looking back on the UK's 40-year journey developing carbon reduction and climate policy to encourage business to become more sustainable,AEA Europe director Robert Bell asks if there are lessons that can be learned and applied to the challenges of water management.

The oil-price shocks of the 1970s put carbon management on UK Government’s policy agenda and, since then, a complex combination of policies, programmes and market interventions have emerged. Although the outcomes of past approaches proved successful as a whole, the journey saw successes and failures, and was long and challenging. Are there lessons that can be learnt from our transition to a low carbon economy that can be applied to improve water management in business?

Global water supplies are under stress. Change is required to secure future water resources while tackling increasing world population and climate change. Just like energy, water is now part of Government agendas and will aim to bring about change in business behaviour.

In the UK, challenges relate to the requirements of the Water Framework Directive. In December 2011, the Government published Defra’s Water for Life white paper. This document outlines the requirement to reform the current water abstraction regime to tackle over-abstraction and meet necessary ecological quality standards.

Experience shows us that the businesses which succeed in adapting to change are those who understand the targets and requirements that will affect them, and give themselves sufficient time to complete the research and development activities required to adapt. To succeed, they need consistency and stability in long term policy planning – and a combination of policy approaches, robust data and appropriate institutional frameworks.

Looking back over the past 20 years, we can identify three approaches from the carbon-related agenda that can be adopted by government to help businesses adapt:
·Advice and support
·Market mechanisms

Experience also shows us that political will and persistence is essential.

Advice and support programmes have been a major tool used. This ‘carrot’ approach is particularly useful in helping government raise awareness of sustainability issues. It can also provide tools and facilitate knowledge transfer. In isolation, advice and support programmes do not tackle all of the barriers; it is very difficult to reach all appropriate stakeholders and even more difficult to convince them around return on investments from, for example, energy efficiency.
Examples of these programmes include those run by the Carbon Trust and the Energy Saving Trust, and we can already see this method being used in the water field with programmes such as Rippleffect and Waterwise.

Regulation, the ‘stick’, has proven effective in bringing about business change. Regulation can be used in combination with ‘carrot’ approaches to re-enforce changes in behaviour.

For example, while the introduction of the Climate Change Levy coincided with energy price increases of 25%, energy intensive industries were given the opportunity to reduce their levy by 65% by signing up to energy reduction targets.

While effective, we have seen that regulation is not without its problems. Asymmetry of information can make comparisons, and risk analysis very difficult.

Setting optimal targets is equally difficult. When setting targets, it is important to ensure that they are at a level where businesses can still compete and contribute to the economy after the regulation has been introduced. But it is also important to consider that there will be little incentive for businesses to go beyond what is required by law, and there is a danger that weak targets will produce inadequate results.

Work in carbon management has taught us that market mechanisms are fundamental to driving change, provided they are supported by regulation. Carbon taxes, cap and trading systems et cetera can be used to nudge the market towards specific objectives, but care should be taken to ensure that markets are not constricted, and are allowed to evolve.

Interventions can be used to tweak the journey to meet these objectives if required. In response to water-intensive sectors, the government has already started to put in place these mechanisms. For example, the Water Technology List, which offers business an Enhanced Capital Allowance, or tax incentive, encourages innovation and investment and helps to move business towards water efficient technologies.

In general, well designed market mechanisms ensure that commodities like water are used efficiently. Unlike regulation, market mechanisms do not always prescribe individual performance levels and instead provide opportunities for businesses to maximise their return on investment.

Over the past 30 years we have seen the importance of liaising with business prior to implementing chosen methods to bring about change. When setting targets, it is important to understand that businesses are not always aware of their costs, and do not always see the cost-effective savings that can be implemented.

This market failure was highlighted in the early 2000s when a point was raised during a consultation on the setting of new energy reduction targets. Industry lobbying proposed that already significant improvements had been made since the industrial revolution, and there were no more opportunities for energy reduction improvements. While a reduced target was eventually agreed, the initial target was surpassed in six years. Targets will therefore drive discussion at boardroom level and business can run ahead of Government once they see potential for a competitive advantage, as long as there is adequate time for adaptation.

Institutional frameworks can play a crucial role in business liaison. They can help to manage and breakdown the complex issues. By taking the issues out of the hands of government and into the hands of the right business and technical experts, institutional frameworks provide respected and independent advice.

The pioneering work in developing carbon policy has resulted in an effective but complex mix of carrots, sticks and market mechanisms and we can learn from this. From this experience, we can see the pitfalls and the methods that can be used to bring about change, and we can use this knowledge to tackle complex issues within the future water management regime.

But we must remember that business needs to be heavily involved in the consultation process, and robust data and an in-depth understanding of the overall objectives should be used to provide a rational approach to policy and target setting. Get it right, and government interventions can be much more cost effective for both business and industry than with the carbon policy agenda.

This article develops ideas from a presentation made by Robert Bell at the International Water Security Conference held 16-18 April at the University of Oxford.

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