Climate change policy - first mover advantage for what benefit?

Paul Boughton
Simon W Holden reports on how the UK is attempting to lead the way in the fight against global warming.

Global initiatives to tackle climate change are gathering pace. Governments across the world are increasingly less likely to adopt a 'wait and see' strategy and are eager to be at the forefront of plans to head off a looming environmental crisis (one need only have seen Al Gore's well publicised documentary An Inconvenient Truth to get an idea of the potential crisis facing us all).

Scientists believe that to escape the most devastating effects of climate change, average global temperatures must rise no more than 2°C.

The UK Government has published two White Papers called The UK Low Carbon Transition Plan and The UK Renewable Energy Strategy 2009, in which it announced that on current levels of emissions global temperatures could rise by up to 6°C by the end of this century. Such a rise in temperatures would be potentially catastrophic.

The UK is attempting to lead the way in the fight against global warming. In November last year, it became the first country in the world to impose legally binding limits on greenhouse gas emissions (or 'carbon budgets') when it introduced the Climate Change Act. The first budgets set by the Government require a 34 per cent reduction on 1990 carbon emission levels by 2020 (1990 being the baseline year for comparison purposes, which was accepted by a Conference of the Parties of the UN Framework Convention on Climate Change).

The sheer enormity of a 34 per cent reduction is put into perspective when one realises it is the equivalent to approximately six tonnes of carbon dioxide per person resident in the UK.

The Transition Plan details the UK's encouraging progress towards reaching its carbon budgets; current greenhouse gas emission levels are around 21 per cent less than 1990 levels (nearly double what was promised at Kyoto); equivalent to cutting emissions entirely from four cities the size of London.

Also, the Transition Plan contains a detailed list of over 40 policies designed to achieve the necessary further reductions. The targets are very ambitious and the White Papers represent a wide-ranging attempt to deliver.

Via the Climate Change Act, the Government committed itself to publishing a plan detailing how it intends to meet these carbon budgets and, ultimately, tackle climate change; culminating in the release of the plan.

The Transition Plan lays out a five pronged strategy, which is comprised of: (1) protecting the public from immediate risk; (2) preparing for the future; (3) limiting the severity of future climate change; (4) building a low carbon UK; and (5) supporting individuals, communities and businesses to play their part.

The Renewable Energy Strategy is geared towards meeting the European Union target of having 15 per cent of all energy produced by renewables by 2020. This means that the 2 per cent contribution that renewables currently provide to our energy production has to increase seven-fold in just over a decade.

However, the UK Government has been candid about the implications these combined measures will have on household bills.

When announcing the publication of the White Papers, the the Environment Secretary, Ed Miliband, said bills are likely to rise. There has also been a frank admission by the Government that its involvement alone will not be enough to ensure carbon budgets are met.

Private sector investment

Private sector investment will be crucial. The precise breakdown of the 2020 renewable energy target between technologies will depend on how investors respond to Government incentives.

Similarly, the UK has sought to make the private sector a key player in reducing carbon emissions. The White Papers demonstrate the UK's broad strategy. Legislation will be introduced to tighten environmental standards; for example, by limiting the permitted average tailpipe emissions for new cars.

More importantly, however, in tandem with issuing levies against polluters, the Government is creating economic incentives and opportunities to those embracing the green agenda.

For example, the Carbon Reduction Commitment (CRC) announced in the Climate Change Act has been incorporated into the Transition Plan. Designed to target organisations not covered by the similar EU Emissions Trading Scheme (eg, supermarkets, hotel chains and government departments), the CRC imposes a mandatory cap and trade scheme whereby organisations consuming a certain amount of electricity (equivalent to a yearly energy bill of around £500k) are allocated a prescribed level of permitted energy usage. Exceeding that level will lead to large fines.

There are two ways to avoid the fines; reducing energy consumption and selling your unused allowance, or increasing your own allowance by buying it from another organisation.

The trading of carbon allowances is therefore set to become big business. This is perhaps the most interesting element of the UK's approach; reducing emissions while encouraging industries to facilitate the green agenda.

The economic opportunities created by such an approach are compelling. If the Government's current strategy succeeds then the UK could find itself as a world leader in a low carbon and environmental goods industry already worth approximately £3 trillion worldwide.

The UK could also insulate itself from fluctuating commodity prices, seen most notably in last year's spike in the price of oil.

Green industries are set to grow significantly in the future as countries strive to reduce their emissions and carbon trading becomes a more prevalent and lucrative marketplace.

If public money and private investment combine effectively to stimulate innovation and new technology, the Government estimates that there could be more than 1.2 million 'green collar' jobs in the UK by 2015.

Notwithstanding the positives, there are some potentially significant negatives which can be associated with the carbon reduction commitment - not least of which is, where will the required funding come from?

The Government does well in setting out the business case for adopting a whole new thought process to the climate change issue, most notably the economic benefits on offer, but it comes up woefully short in detailing what incentives will be offered to companies and investors (ie, in the form of tax breaks, etc.) that help us achieve our carbon reduction targets.

Coupled with the lack of any clearly designated funding sources for clean energy alternatives is the argument that penalising current forms of energy production is unhelpful.

Why tax the affordable forms of energy we have today to subsidise forms of energy that may not be able to compete in the marketplace?

Economies riddled with subsidies are sometimes viewed as less efficient, less competitive and slower growing.

The argument, and a convincing one at that, is that we should instead focus on making our existing energy sources cleaner.

Unfortunately, the White Papers do not touch on this potential dichotomy.

Challenges into opportunities

The challenges in meeting the UK's ambitious climate change goals are numerous and significant. However, the recurring theme in the White Papers is that the potential benefits make it possible to turn these challenges into opportunities.

Strong and immediate remedial action can still head off the worst effects of climate change while improving the security of the UK's energy supplies and bringing wider economical benefits.

Only time will tell where the UK ends up in its quest to be the leading country in the fight against climate change, although by the Government's very own admission, time is not something we have.

- Simon W Holden is an associate in the London, UK, office of international law firm Faegre & Benson LLP.