Environmental Valuation & Cost-Benefit News

Report summary:

The next two or three years will be critical. A much greater sense of urgency is required if the UK is to meet its targets for reducing greenhouse gas emissions at an affordable cost, and to establish an international leadership role in the low carbon economy of the future.

Already it is clear that the government’s targets for cutting greenhouse gases by 2020 are unlikely to be met solely through measures taken in the UK. Its longerterm goals for 2050 are also very challenging, and will not be achieved without significant additional effort. Failure to act now will mean that the costs of tackling climate change in the future will be much higher. The UK will also miss out on the commercial opportunities that will emerge on the pathway to a low carbon economy.

The CBI’s Climate Change Task Force has spent 10 months analysing this challenge. It is made up of business leaders from key sectors of the UK economy and whose companies globally employ nearly 2 million people, generating annual revenues of approximately £1000bn. Informed by a major study commissioned from McKinsey, the Task Force has assessed the economic benefits and costs of different options for reducing greenhouse gas emissions. We have focused on what needs to be done by 2030 to be on track for the government’s 2050 target.

And its conclusion is that substantial changes will be needed in the way the economy works if the UK is to meet its goals. Many of the technologies and solutions that will be required already exist but are not yet commercially viable. The pace and scale of implementation must now be accelerated.

The report shows that by 2030, moving to low carbon sources of electricity and improving energy use in buildings can each deliver about 30 per cent of the additional cuts needed, with the remaining 40 per cent coming from transport and industry. For the longer term to 2050, further change is needed to more than double the level of energy efficiency and halve the carbon content of the energy used in the economy compared with today.

But most taxes and regulations were designed for the old economy. The report calls for a shift to a world where carbon becomes a new currency – so that consumers and businesses are rewarded for making the right choices. Carbon has to be priced according to supply and demand, under a system which leads to lower emissions, crosses national borders, and rewards good behaviour.

According to the McKinsey analysis, additional action needed in the UK to meet the government’s targets implies a maximum price of €40 per tonne of CO2 equivalent (tCO2e) by 2030 provided that the full range and scale of initiatives are implemented. The maximum price would be higher in 2020 (€60-€90 per tCO2e and possibly more) given the higher cost of emerging technologies in the short term.

This translates into an investment of around £100 a year per household (under 1 per cent of GDP) by 2030. This investment will help pay for a more sustainable way of life and shift resources to those parts of the economy providing low carbon products and services. Some households would pay less than this, depending on things such as their current use of energy and how successfully they take up cost-effective measures to improve energy efficiency.

A much greater sense of urgency is required if the UK is to meet its targets for reducing greenhouse gas emissions

Changes on the scale needed and at affordable cost will only happen if government, business and consumers work together. Government cannot do the job by itself, nor can business: but together we can use our position as one of the world’s great trading nations to secure global action.

If we are to succeed, the climate change agenda must therefore become everybody’s business.
Our commitment is to help achieve that and work with others to implement the necessary actions at home and abroad.

The report sends out five clear messages:
• The government’s targets for 2050 are stretching but achievable and at a manageable cost – provided early action is taken. The three interdependent players are consumers, who drive change; government, which sets the framework and works with other countries to build international agreements for reducing emissions; and business, which invests and delivers.
• In the run up to 2020, the emphasis must be on much higher energy efficiency together with
preparations for a major shift to low carbon energy sources in the years to 2030 and beyond. The big opportunity here is that a third of our generating capacity will become obsolete over the next 25 years, and must be replaced. This opens the way to a smaller carbon footprint.
• Technology has a vital part to play in opening up sustainable solutions. The UK has a unique opportunity to prosper in key markets of the future by taking a lead in the development of low carbon technologies and services in power, buildings, transport and industry. Government must give higher priority to existing research and technology programmes in these areas, and support the launch of new programmes to develop emerging solutions.
• Empowering consumers to make low carbon choices is equally vital. Business and government must work together not only to encourage take-up of greener products, but also to promote new ways of doing things (such as smarter ways of working) which can help improve our quality of life as well as cutting emissions.
• Market forces will drive big changes, but they will not by themselves be enough to do the job. The full range of public policies must be deployed to create the right incentives. Priorities include promoting an effective market price for carbon; revenue-neutral tax reform (such as changes to business rates and council tax) to reward greener behaviour; and bigger, more focused research and development (R&D) programmes to finance new technologies and solutions until they become commercial.
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Consumers are the essential driver for change. Combining the emissions for which they are directly responsible with those that they influence through their purchasing decisions, they have an impact on some 60 per cent of UK emissions. As voters, they have a powerful influence on public policy. They need the information, the incentives, and the opportunity
to make low carbon choices. They will require:
• Reliable and consistent information about the consequences of their choices.
• Much wider access to low carbon products and services than is on offer today.
• Incentives to make low carbon investments. For example, consumers could already be making
worthwhile cost savings through improved insulation of their homes – but they do not, because for them the payback period is too long. Government and business must look for creative ways to bridge this timing gap.

The UK government has done more than most others to set a framework for change. We welcome the proposals in the Climate Change Bill as important elements of a framework to promote significant cuts in emissions. But it must now focus on implementation as a matter of urgency. It must go with the grain of the market wherever possible, by removing barriers to
change. This means it must:
• In the coming 12 months, pass the legislation needed to rebuild the UK’s power generation capacity in a timely manner, with a diverse, low carbon energy mix. All options will have to be available, including renewable energy and nuclear. Early reform of the planning system is essential.
• Push for agreement early next year on the post-2012 design of the EU ETS, which will be vital in establishing an effective long-term carbon price.
• Prioritise investment in relevant research and technology. That means re-allocating existing resources, and adding new funds where necessary. The aim should be at least to match the EU average for investing in energy and climate change technology.
• Empower consumers through education, communications and incentives.
• Provide incentives, regulation and tax structures which stimulate a low carbon economy, and ensure consistently supportive policies.
• Take a leadership role in international negotiations for climate change agreements.

Business has already made significant progress in responding to the climate change agenda. It is well placed to make an early and decisive contribution to finding and implementing solutions to the challenge of climate change. Its priorities now must be to:
• Incorporate climate change policies into its DNA. Consumer demand will stimulate competition to produce greener alternatives to current products and services, and reward those businesses that take a lead. In the low carbon future, companies will have to be green to grow.
• Redouble efforts to improve energy efficiency, by focusing on areas such as transport and buildings.
• Work with employees and the supply chain to reduce emissions, and adapt the current workplace to cope with the climatic and other changes that are already likely as a result of past CO2 emissions.
• Measure its carbon footprint, and develop reporting systems to benchmark performance.
• Provide consumers with the reliable communications and product developments they will require.

Members of the Task Force are committed to meeting the challenge. With a global carbon footprint from their operations of close to 370 mtCO2e, or roughly 1 per cent of global emissions, they readily accept their responsibility to take positive action.

The main focus of this report is the reduction of greenhouse gases in the atmosphere (mitigation of climate change) which at its simplest can be achieved by reducing the carbon emitted from use of energy and improving energy efficiency. The report analyses which technologies can save carbon (abatement measures) and what financial incentive (price of carbon) is required to encourage take-up of these technologies. In some cases, such as home
insulation, the technologies will not have any overall cost to society, but for others, such as wind power, there will be an additional cost (or marginal cost of carbon) for using carbon-saving technologies over more traditional technologies such as fossil fuel-fired power stations.

To a lesser extent the report also deals with reducing the inevitable impacts of a changing
climate (adaptation) such as building flood defence barriers or locating infrastructure away from vulnerable areas like flood plains or coastal lowlands, and in particular, the need for a better understanding of what effect these impacts might have on business.

Confederation of British Industries (CBI) www.cbi.org.uk
http://www.avtclient.co.uk/climatereport/docs/climatereport2007full.pdf