Towards a properly functioning market

EnergyThe government could be forgiven for thinking that industry is sending it different messages over climate change. Shortly after a barrage of lobbying from energy intensive groups about the cost of carbon abatement schemes – which led Climate Secretary Chris Huhne to publicly promise his support – a group of more than 70 of the largest companies in Europe asked governments to sign up to a commitment to cut emissions by 30 per cent by 2020.

Those urging for a 30 per cent cut, including Marks & Spencer, BT, Vodafone, National Grid and Scottish & Southern Energy, call for “a European policy framework that will spur innovation and investment, notably in renewables and energy efficiency, to ensure European energy security”. They go on to say that “research shows that by increasing the target, imports of oil and gas could be reduced by €45.5 billion in 2020” quoting an internal European Commission study.

Charlie Mayfield, chairman of the John Lewis Partnership, was quoted as saying: “We believe that a greater level of ambition for EU emissions reduction will provide incentives for innovation and investments, helping us maintain a competitive position in the low carbon economy and stimulating sustainable growth.”

Conversely, the energy intensive industries are concerned that unilateral action by Europe will add to their costs and make them uncompetitive on the world stage and do long term damage to the economy. So who is right?

A low carbon future
Well, if the world’s future is a low carbon one, then it surely makes sense to be among the leaders. The development of low carbon products and services will only develop though if there is a market. Traditionally, export markets in new technologies develop after a secure home market has been established. And this has been a focus of both the current and the previous administration.

In addition to arguments about climate change, we should also recognise that within the next few decades we need to be as self-sufficient as possible if we are to minimise the risks to both the energy price and energy supply from external sources. Indeed, in 20 years’ time, a decision to invest heavily today in indigenous low-carbon sources, may look very different in hindsight. It may well make us more competitive going forward – not less.

The government’s public commitment to a green economy and impending schemes like the Green Deal have created a great deal of interest in developing new products and services. Schemes like the EU Emissions Trading Scheme and the CRC Energy Efficiency Scheme have made consumers more aware of opportunities to cut energy consumption and emissions, as well as providing technology developers with opportunities to create and sell new products and services. Automatic Monitoring & Targeting (aM&T) and lighting control systems are two developments that have been able to expand and develop because of greater focus on energy efficiency and climate change.

The alternative view is that, in traditional markets, added costs in the way of extra taxation (like emissions allowances) add to the cost of the finished product and make global customers less likely to buy. But in the words of a previous industry minister, Lord Sainsbury, surely that is a “race to the bottom”?

Of course some heavy industry cannot just up sticks and relocate to a lower tax area. Energy companies cannot move away from customers and some forms of generation would benefit from a higher carbon price (renewables and nuclear in particular) – which is probably why some of them are in the group asking for the 30 per cent cut in emissions.

Making it happen

So, governments at national and European level must make their policy goals clear. Once that policy is set, they must put in place the frameworks to achieve their goals. The UK, for example, has set a 50 per cent target by 2025. But just naming the target will not make it happen – the policies set in place must be consistent too and not send contradictory signals. Unfortunately, here we are doing less well.

The review of Feed In Tariffs (FITs) has not been well-explained and seems a bit confused. Larger photovoltaic projects will not receive the same subsidy as very small ones. The idea is that much of the money should be reserved for small, domestic installations – single households, effectively. But that means that larger installations, which have economies of scale, and even community projects, are ruled out. Is that the most effective way of promoting renewables?

It has also become apparent that the government’s quest to simplify regulation may be doing away with some of the rules that promote more environmentally-friendly behaviour. Already smaller builders are exempt from some of the requirements of the Building Regulations. Now there are signs that the coalition partners are shaping up for a row over how far deregulation can go. There is a policy of one-in, one-out – meaning that a new regulation must be accompanied by the repeal of an old one. But as Climate Secretary Chris Huhne noted in a recent speech, some environmental regulations are in new areas and cannot replace old ones – he quoted the Montreal Protocol, which phased out CFC ozone-depleting substances as an example where new environmental regulation had made a positive difference to our world. The differences between partners in government could have quite an impact, especially as one of the areas of regulation being suggested for review is the Climate Change Act itself.

Benefits of regulation

While no-one wants regulation for its own sake, it can be beneficial in some areas. Emissions of carbon dioxide have an impact on our environment and over recent years environmental economists have begun to put a cost on that impact. Environmental taxation has then sought to ensure that the polluter pays. Only with accurate price signals can we make rational decisions about our options.

‘Good’ behaviour can be incentivised through regulation while ‘bad’ behaviour can be discouraged. So installing insulation in a home is encouraged through the Carbon Emissions Reduction Target (CERT) and wasteful use of carbon-based energy penalised through the CRC Energy Efficiency Scheme. The installation of automatic Monitoring & Targeting (aM&T) systems qualifies users for a relaxation of the designed carbon targets in the Building Regulations while the sale of inefficient GLS lamps is now banned.

Regulation has an important role to play where the market does not yet reflect full economic reality: the impact of carbon dioxide on the ecosystem is a case in point. It may also be used to incentivise different behaviours: so subsidies are introduced for renewables while the market becomes more mainstream and can compete on equal terms with established industries like the fossil fuel providers.

Influencing decisions

We live in a market economy. The rules of the market influence the decisions we make. But those rules and regulations are not some abstract universal truths: they are choices made by politicians based on their vision of society – and a vision that is tested at the ballot box.

If we want a low-carbon, sustainable society as well as greater energy security and reasonable energy prices in the future, then we need a framework that promotes it. More than that we need the framework to be consistent, clear and transparent. That is not yet the case here in the UK.

The Energy Services and Technology Association (ESTA) represents over 100 major providers of energy management equipment and services across the UK.

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