The Stern review on the economics of climate change received massive coverage, not just in the UK but around the world. The issue has stopped being just environmental policy for ministers. It threatens greater economic damage than the two world wars and the Great Depression put together. That makes climate change a central matter of

economic policy.

Just as the definition of environmental policy is changing, so too should the definition of environmental industry. In the future, every industry should be an environmental industry – just as environmental issues are moving out of the confines of environmental ministries, so too should environmental principles permeate beyond traditional environmental sectors. In a world where energy and carbon emissions are constrained, every business must take resource productivity seriously as a source of competitive advantage. As the Chancellor has said in the past, we have an opportunity to build a low-carbon economy that is pro-environment and pro-growth.

New principles

Turning every industry into an environmental industry will involve applying new principles. First, we need to make more with less.

Prior to the industrial revolution, the limiting factor in production was the scarcity of people. The rapid mechanisation of industries transformed the productive capacity of the economy. Today, we must address the scarcity of natural resources. We must think how to make dramatic reductions in our use of electricity, gas, transport fuels, water and other materials. Some improvements in resource productivity are already under way. For instance, a hybrid car is about 30% more efficient than its petrol-only equivalent. Within the home, new appliances are also driving up efficiency. A refrigerator rated A+ is 46% more efficient than one with an A rating.

Second, we need to design out waste. In many countries, products – from cars to computers – are being designed with a view to disassembling the parts as well as assembling them. Waste management should not be seen as something that is done downstream as part of rubbish collection, but upstream in the choice of materials and the design of products and services.

Third, we must begin to decarbonise and decentralise our energy supply. Renewable electricity sources are becoming more widely available at reasonable prices.

Decentralised power, including solar power, wind turbines and combined heat and power stations could make a major contribution to meeting out future energy needs. Transport is further behind, but potential exists to switch to bioethanol and other renewable fuels.

The transition to a low-carbon economy relies on private-sector innovation and investment but it will not happen without government intervention. The Stern review says climate change is the definitive example of market failure, but it is a government failure to establish the right frameworks as well. Government can play a direct role in helping with the transition.

Through procurement, the government can provide the certainty of large-scale demand to catalyse new products and services, transform markets and bring forward investment. We have already committed to moving the government estate to carbon neutrality by 2012. But we also want to use the £150B spent on procurement to drive the development and scaling up of technologies. For instance, English Partnerships will run a second phase of the Design to Manufacture competition, building on the lessons learned from the competition to build a £60,000 house, but this time pushing the boundaries further. Using six sites across the country, we want to challenge the industry to build low-cost, low-carbon and zero-carbon homes, this time looking at the whole developments rather than individual homes.

Through public R&D investment, the government can complement private investment that will be under-supplied because of the “knowledge spillovers” that occur from the innovation process. That is why we created the UK Energy Technologies Institute, a public-private partnership that will potentially generate £1B of investment over the next ten years.

But while direct intervention by government is important, the biggest contribution government can make is through carbon pricing. For the past 150 years, we have emitted greenhouse gases without thought to the cost these gases are imposing on future generations or the developing world. Those who have produced pollution have not faced the full cost of their actions. If we are to channel investment into a low-carbon economy, we must begin to put a price on carbon dioxide and other greenhouse gases, equivalent to the damage these gases will cause.

The mechanisms for doing this include a combination of emissions trading, taxation, and in some cases, regulation. For instance, we have created a Landfill Allowance Trading Scheme for biodegradable municipal wastes that is putting a price on methane emissions. The landfill tax has the same effect for all waste streams.

Producer responsibility obligations for packaging, end-of-life vehicles and electrical and electronic equipment are helping to design out waste.

Emissions trading

Our ambition must be to create a global carbon market, building on the EU’s Emission Trading Scheme (EU ETS), covering the vast majority of emissions in our economy. The EU ETS is still in its infancy but already it covers nearly half the emissions within the EU. We now need to look at how to extend and improve the scheme in future phases. We must secure its long-term future beyond 2012 so that investors have confidence to invest. It needs to be extended to cover aviation and potentially surface transport. Mechanisms for allocating permits need to improve. And the scheme should be linked to other emerging emissions trading schemes around the world, such as the recently announced Californian scheme.

The EU ETS covers energy intensive industries in this country. But, as set out in the Energy Review, we are also determined to reduce emissions from large non-energy intensive businesses and public sector organisations.

At current prices, this generally refers to firms with annual electricity bills of more than £250,000, including supermarkets, rail operators, large offices, universities, central government departments and large local authorities.

Our analysis suggests that this group of organisations have significant potential to achieve cost-effective carbon reductions. The sector, comprising around 5,000 large, non-energy intensive organisations, is responsible for about 15M tonnes of carbon a year by end use. And the sector could cost-effectively save 0.5M tonnes of carbon a year by 2015, rising to 1.2M tonnes of carbon a year by 2020. At this stage, our approach is based on delivering net present benefits to participants rather than costs.

In light of this analysis, we have published a consultation to invite views on possible measures to help deliver cost-effective emissions reductions in this group of organisations. The consultation proposes in detail two options for particular consideration. One is a set of proposals for an Energy Performance Commitment (EPC) – a cap-and-trade scheme for the sector. The other is a system of voluntary benchmarking and reporting.

The EPC would be an auction-based cap-and-trade scheme. Participants would be required to purchase allowances corresponding to their emissions from energy use (either at the auction or from each other) and then surrender them to a co-ordinator.

Government would cap total energy use emissions by deciding on the number of allowances issued for auction. The revenue raised by the auction would be recycled to participants, so the proposal would be revenue-neutral to the Exchequer. The proposal would provide a financial signal to participants to improve energy efficiency, and aim to stimulate greater awareness of energy use within an organisation’s senior management. Analysis suggests that the net present value to participants would be nearly £1B over 15 years as they would save money through lower energy bills.

The second policy option is a system of voluntary reporting of emissions and energy performance and voluntary benchmarking of this performance against comparable activities. Participating organisations would agree to report their energy use as well as other information required to make a comparison relative to an energy or emissions performance benchmark.

Like all epidemics, environmental policy is becoming contagious – it has spread rapidly across the political spectrum, across departments, across citizens, business and investment communities. Environmental concerns are no longer confined to environmental industries or environmental departments.

The change is not happening gradually, but dramatically. The challenge in the next year is to turn the fear of climate change into hope, and awareness into action. It is to mobilise self-interest alongside moral duty, and to turn every industry into an environmental industry.

It is a challenge I look forward to addressing in the coming months.

This article is taken from part of a speech given by David Miliband at the recent Environmental Industries Commission conference, Environmental Policy – at a Tipping Point? conference held in London. Visit

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