I talked two weeks ago about the key things that UK industry might hope would come from Copenhagen. In the event, it appears that there were just too many different and diverse vested interests to achieve consensus. The central requirement from this pivotal Climate Change summit was clear: a global cap on carbon and a mechanism for putting a price on each tonne produced. What we got was agreement that temperature rises should be limited to 2 degrees above pre-industrial levels, some welcome progress on deforestation control and some expressions of intent on financial support to developing nations by 2020. Despite the spin and the up-beat press conferences on Saturday and Sunday, this was so much less than most had hoped for.
As far as UK consumers, tax payers and businesses are concerned, I think the following are some key consequences from the lack of any binding international agreement:
1. No change, at least in the short term, in the cost of compliance with UK government policies set out in the recently published "Low Carbon Transition Plan". In the absence of a global carbon price, the patchwork of consumer or tax payer funded incentives combined with new regulation will continue to try and encourage renewable energy generation and more efficient use of energy.
2. Interestingly, the UK government has said that after Copenhagen it still supports the EU raising its emissions reduction targets to 30-per cent (below 1990 emission levels) from the current 20 percent. This despite the steadfast refusal of developing nations, most notably China and India, to agree to any cuts. I spoke last time about the real risk to industry and jobs of "carbon leakage", where the carbon burden causes our steel, cement, glass manufacturers amongst others to close EU plants and open carbon free activities in the developing world. I can't see the results of the last two weeks making Corus review it's decision to close its Teesside steel plant for example, and indeed we should fear that others closures will follow.
3. The Accord does nothing to set the long term price signals needed to encourage low carbon investment, crucial if we are to get anywhere close to our targets. Rather than creating an environment where carbon is capped and priced by a new enduring mechanism outside of the clutches of fickle nation states, the onus is now back on individual countries to decide what's best for them. In the UK, this means government allocating tax payers money to provide comfort for renewable investors. I predict that the UK government (of whatever persuasion) will come under pressure to provide longer term solutions and that 15/20/25 year "feed in tariffs", or legally binding financial support from the state to guarantee power revenues will be called for from wind and nuclear generators alike. Only then will investors believe that a change in government won't move the goal-posts.
4. I suspect that the prospects for global free trade have not been in as much peril for some time. With developing nations not succumbing to emissions reductions, then developed economies will look at protectionism as one option to defend industries and jobs from cheap imports. Carbon levies/tariffs on goods imported from nations with weak or unverified emissions reduction performance may be seriously considered by the US/EU. This would be a retrograde step which can only damage world trade and the prospects for UK export markets. A better outcome would be if developing nations open up their economies so developed countries can invest in low carbon projects, contributing know-how and skills and earn the necessary return. Tax on extraction and repatriation of profit from these ventures will need to be light touch. IP protection also needs to be strong so that UK industry can take full advantage of the huge opportunities for innovation and technology that must follow.
5. The UK has joined other developed nations in a commitment to provide (ominously through a combination of "public and private sources") funding of $100 Bn per year by 2020 to assist developing nations reduce their emissions. The key question must be,where does this money come from? I seems difficult to imagine that additional sources of "carbon" revenues are not needed. I expect that the EU and the UK will turn its attention to shipping (bunker fuel taxes?), aviation (bringing emissions into EU Emissions Trading Scheme?), road transport fuel duties and early removal of free issue EU ETS carbon to heavy industry as ways to meet its "commitments" under the Accord.
Now attention moves toward Mexico 2010 a year from now and prospects for something a little more substantial in terms of international agreement. Stock markets didn't react too much to Copenhagen's failure to radically change the landscape. Probably because not much has changed.
Ian Plunkett is an Audit Partner within Manufacturing and Industrial Markets. He can be reached at firstname.lastname@example.org