Mainstream politics has gone seriously green. After years of being a marginal concern, the environment has become a key political issue, and politicians of all persuasions are embracing the more uncertain global environmental agenda. In recent years, environmental policy and regulation such as that affecting air and water quality, contaminated land and the use of hazardous substances has changed the cost structures of industry. With the environmental priorities increasingly being led by policy makers and pressure groups, more and more businesses are now facing a loss of predictability and control over their traditional profit making activities, says Niki Leahy, senior FSN writer.
Last week the Government published its draft Climate Change Bill, and not to be out done, David Cameron announced a Conservative commitment towards the increased use of environmental taxes. All politicians are becoming bolder in proposing the use of economic instruments such as taxes, permits and trading schemes so as to measure more closely our individual and organisational environmental impacts - and in proposing that we pay according to our level of environmental damage.
The Government's draft Climate Change Bill attempts to take forward the findings of the recent Stern Review, which highlighted the importance of international as well as domestic measures to combat climate change. The Bill focuses UK Government efforts on reducing national carbon emissions via increased energy efficiency, increased use of renewable energy and by reducing total energy consumption via carbon pricing – notably in the use of emission trading schemes.
The content of the draft Climate Change Bill also matches binding targets agreed by EU leaders on the 9 th March for reducing greenhouse gas emissions, increasing energy efficiency and developing renewable energy sources.
Key points of the draft UK Bill include the setting of clear targets of reducing carbon dioxide emissions, with a system of legally binding carbon budgets, new powers to extend emission trading schemes and a new statutory body to provide independent advice and guidance to the Government. Beyond the emphasis on home insulation, eco friendly light bulbs and changes to VAT on energy efficient goods lie the possibility of more fundamental policy developments in personal carbon allowances and the greater use of carbon capture and storage technology. Interestingly, the Government has published a "Climate Change Strategic Framework", as part of the Bill's consultation process. This would appears to be an attempt by ministers to "join up" the environmental policy making agenda by ensuring that climate change legislation will be directly related to the forthcoming Energy White Paper, the Waste Strategy and the Planning White Paper. Quite how the Bill's objectives will be reconciled with the Government's proposals for the expansion of air transport remain unclear.
In addition, the Climate Change Bill seeks to compliment the current direct regulation of environmental impacts by extending the use of economic instruments or market based mechanisms, notably emission trading schemes. Other economic instruments loosely proposed in the consultation document include green taxes, subsidies and tax incentives, and changes in direct and indirect charges for environmental services. All these should, in the short run, result in the producer absorbing the increased environmental costs by reducing other costs. In the medium term, businesses will look for substitute products and or processes that have lower environmental costs, and in the longer term consumer behaviour will change, reflecting the full environmental costs imposed.
The Climate Change Bill proposes extending the indirect regulation on business of its output of carbon via the use of carbon permits and emissions trading schemes. The immediate effect of this will be to drive up supply side costs in the absence of carbon neutral substitutes by increasing the costs of polluting activities, and increasing the costs of using carbon based energy sources. This is far less visible change in cost and prices than would result from more direct forms of environmental taxation to effect behaviour change – which we saw in the 2007 Budget announcements last week. Direct environmental taxes, such as vehicle excise duty levied on cars and vans usually has a more immediate effect on consumer and organisational behaviour
The Government's emphasis in the Bill on tighter regulation of emissions standards, emission trading schemes and other incentives to reward green behaviour has left the Conservative party to focus their policy proposals on a wider reconfiguration of the tax system in order to shift the burden of taxation onto environmental "bads" – a position traditionally expounded by the Liberal Democrats. Environmental taxes are principally designed to capture the external environmental costs borne by the third party, by placing these costs directly on the user, thus driving up prices, reducing quantity demanded and affecting consumer income. Tory policy proposals include replacing the Climate Change Levy with a carbon tax as well as increasingly tougher regulation on pollution and waste. Increased green taxes on business would be mitigated by reductions in other business taxes. Whether through direct taxes or more indirect charges, business costs are going to rise as environmental impacts are increasingly priced into materials, waste, products and processes. These costs will feed into higher purchase and usage prices, as well as disposal charges. Environmental taxes such as a carbon tax are unfortunate in that they have more obvious economic consequences for stakeholders than do emission trading schemes and economic subsidies and incentives, as proposed in the Bill. However, taxes have more obvious or visible income generating abilities, which can be used to mitigate the social and welfare costs that arise.
The detailed content of the draft Climate Change Bill and Conservative policy proposals has yet to be developed. Therefore their direct impact on both business and consumers remains uncertain. However, all greenhouse gas emissions, not just carbon dioxide are likely to be priced in future, at higher levels than at presently set, and more business sectors will be required to participate in cap and trade schemes. Retailers and the public sector can expect to be incorporated in UK and EU greenhouse gas emissions trading schemes in the near future, with the aviation sector joining from 2011. This trend towards the greater regulation and charges levied on outputs of carbon emissions is reflected in the growing numbers of companies voluntarily producing carbon labels for their products. These labels should enable them to differentiate themselves according to the carbon intensity of their products.
As the Climate Change Bill passes into law in 2008, energy costs may well rise as a result of the requirement to increase the use of renewable energy sources. This is because renewable energies have higher production and distribution costs and lower economies of scale. Stricter standards of energy efficiency to be imposed on some equipment and new homes may well increase fixed or upfront costs but reduce user running costs. In pricing carbon, the environmental costs of energy production, private transport, commercial distribution and product waste disposal costs are all set to change, and many businesses are going to have to reduce the environmental impact intensity of their processes, systems, products and services, as well as at look at their product replacement cycles.
Business in sensitive sectors such as road and air transportation services will want reassurance from Government that they will not be unfairly discriminated against, and the Climate Change Bill recognises the responsibility that the domestic sector has in reducing the national output of carbon emissions. However, winners and losers will emerge, within and between commercial sectors depending on the degree of carbon intensity in different business practices, and whether the business faces increased regulation, as well as increased taxes and charges. This is because higher environmental regulatory standards increase costs on the supply side, while environmental taxes and charges have more immediate affect on the demand side.
Future prices for carbon permits are certainly going to be sufficiently high so as to ensure that all businesses will find it cheaper to reduce carbon emissions than to purchase permits to pollute. It is currently cheaper for utilities to burn coal with higher carbon emissions, and to buy the permits to allow them to pollute than it is to buy cleaner fuels such as natural gas.
What can business expect in future, other than higher or at least more uncertain cost structures? They will need to take advantage of the setting of concrete technical goals and investment in environmental technology development by Government. Technical innovation will be instrumental in reducing environmental damage and risk, as well as creating business value by improving processes, reducing inputs and removing damaging outputs.
Businesses should also look to reduce the "switching costs" to consumers, as economic incentives and penalties are increasingly used by Government in order to change discretionary behaviour and reduce collective and individual environmental impacts. We are entering an era in which all Governments will in future attempt to decouple resource consumption, energy usage and emissions output from economic activity. The UK is seeking to take a lead in this area by setting specific targets for the reduction in greenhouse gas emissions. Technological incentives will certainly help increase the efficiency of our energy usage, as well facilitate the development of less carbon intensive energy sources. Organisations that capture productivity increases from knowledge based innovation will undoubtedly be winners".
Other related FSN articles:
Marks and Spencer's environmental accounting is 'made to measure,
