Legislating for Carbon - Who will pay for a Greener Britain? - Ian Plunkett

From being a near irrelevance 10 years ago, Carbon policy and legislation are now boardroom issues.  The development of energy and environmental policy in the UK over the course of this parliament will define whether the UK is a winner or a loser in the neo-industrial revolution, an age defined by expensive energy and complex anti-emissions regulation in developed nations. 

The argument goes that, as long as fossil fuels, the main source of greenhouse emissions, are relatively cheap, regulation is needed to reduce their use and encourage alternatives. With the EU preparing to table proposals to take over environmental tax raising powers across the continent, what will the Coalition government do with climate change policy?  On an international scale, will there be ever more direct intervention and legislation by governments if voluntary and market-based approaches fail to achieve their goals?  If so, is this a necessary evil or is there another way?  Can UK industry afford to do the right thing if US and Asian competition play by different rules? 

UK on a global stage

What happens internationally is of critical importance. In influencing national policy and legislation it will affect businesses operating in domestic as well as international markets.

The US have now got in on the act - "The American Power Act", to be precise.  This is a bill to create clean energy jobs, promote energy independence, reduce global warming pollution and enable the transition to a clean energy economy. It seeks to reduce greenhouse gas emissions through a cap-and-trade system and sets challenging reduction targets.  However, the Americans are only targeting less than a 5% emissions reduction by 2020 against a 1990 baseline - the UK Coalition government is backing a new, larger 30% reduction target for the EU.  Is the US standing up for its industry and the UK sacrificing our competitiveness when the competitive threats from China and India are as formidable as ever?  Or are these laggards bound to lose economic ground in the long run to nations that embrace new technologies, reinvent old industries and establish the energy efficient society?

It is of real importance to UK industry which direction the new government choose to take.  The previous administration took an international lead in efforts to reduce emissions and stimulate low carbon markets and passed a raft of legislation. Established schemes include the Climate Change Programme, the Climate Change Levy, Climate Change Agreements and the UK Emissions Trading Scheme with new schemes being added including the Carbon Reduction Energy Efficiency Scheme (CRC) and amendments to Climate Change Agreements. The Coalition has outlined its policy on climate change and renewable energy, including:

• The establishment of a smart grid and the roll-out of smart meters;
• The full establishment of feed-in tariff systems in electricity – as well as the maintenance of banded ROCs;
• Measures to encourage marine energy; and
• Increasing the target for renewable energy subject to the advice of the Climate Change Committee.

The coalition will also look at introducing a floor price for carbon and to persuade the EU to move towards full auctioning of ETS permits, and to mandate a national recharging network for plug-in hybrid vehicles.  Whilst there are divisions over nuclear, support for replacement of the existing fleet remains, albeit subject to demonstrating that decommissioning costs won’t rest with the taxpayer.  A carbon floor would be welcomed by the nuclear industry and probably secure its role in the energy mix post 2020.

There is still uncertainty over energy policy affecting our industrial markets. Will there be cutbacks in CCAs and R&D Credits and other carbon “carrots”? How generously will renewable heat incentives be funded?  Will there be specific incentives for energy efficient technology?  There’s no money to throw around so with fewer carrots we can expect bigger sticks.  How will a floor in the carbon price feed into energy costs for consumers and industry?  Are we seeing signs that the burden of emissions reduction is being shifted from the tax-payer to the energy consumer?

Is "Protection" ever a good thing?

The basic question is who pays? Should emissions be allocated at the point of consumption, or at the point of manufacture?

There is intense political debate and differing positions on what ‘polluter pays’ means.  China argues that western countries should pay for its carbon emissions in making products for export. Some in developed countries, concerned at being out-competed by developing countries without emissions legislation, are proposing taxes on carbon-intensive imports. This is the US approach, where the new bill allows for tariffs on such imports from nations without credible greenhouse gas abatement targets.

There seems a risk that the West is inexorably heading towards trade disputes with China over the carbon issue.  A trade war would be unwelcome, although ever stricter emission targets without some protection poses a threat to the UK industrial base.  Acting in its self interest can China itself delay a full commitment to a Kyoto replacement? Would realistically priced carbon make China uncompetitive and what would that mean for global trade and economic stability?

Death, Legislation and (Carbon) Taxes…

The only certainty is that businesses will have to live with increasing carbon legislation and costs.  There will be winners.  UK businesses that succeed will be those with a supply chain that is low in carbon, industrial processes that are efficient and international markets for goods and services that meet energy efficiency/low carbon needs.  Winners will include those that are thinking now about how to ensure the business can evolve to be competitive on a global scale... and how to mitigate those carbon taxes.