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Far from having ‘to cost the earth’ going green makes business sense

Climate & energy feature image© Phil Noble/Reuters/Corbis

Today’s intervention by leading businesses, investors and trade associations shows that far from being a drag on the economy, stable climate policies makes business sense.

In a statement out today, over 100 organisations comprising mainly of major businesses, investors and trade associations from various sectors of the UK economy called on the government to stick to ambitious emission reduction objectives for the 2020’s to give business the certainty it needs to commit significant investments to the UK’s promising low-carbon economy.

This statement coincided with the Committee on Climate Change (CCC) providing its latest recommendations today on the so-called ‘Fourth Carbon Budget’. This is the budget under the Climate Change Act that essentially governs the rate at which the UK’s emissions of greenhouse gases need to go down during the 2020’s for the UK to meet its legally binding goal of reducing emissions by at least 80% by 2050 compared to 1990 levels.

Back when the Act was passed with cross-party support in 2008, this goal was described as the ‘minimum conceivable contribution’ that the UK should make as part of a global effort to prevent dangerous levels of climate change.

The Fourth Carbon Budget was actually approved by the Coalition back in 2011, but following tense discussions between Government departments, it was agreed that the ambition set out in the budget would be reviewed in 2014.  This resulted in today’s report by the CCC, who were essentially tasked with reviewing whether there had been any material changes in economic, scientific or international circumstances to warrant changing the ambition set out in the budget.

Reinforcing a point made repeatedly in recent years by major organisations such as the International Energy Agency and the OECD, the CCC’s recommendations today make clear that delaying action to reduce emissions would be a false economy.  It would simply result in the UK leaving itself with a lot more decarbonisation to do and very little time to do it in, which would push costs up. Therefore – the CCC argues – the UK should stick with its current objective of reducing emissions by at least 50% by 2025, as this will be the most cost-effective way of meeting its long-term obligations under the Act.

But as today’s joint statement shows, supporting ambitious and stable climate policies isn’t just about cost-effectively reducing our emissions, it also makes business sense. Today’s statement follows growing recognition that the low-carbon sector already represents an important part of our economy. The latest figures from the Department of Business show that the UK’s ‘low-carbon environmental goods and services sector’ employs close to a million people and generated sales of £128.1bn in 2011-2012, growing 4.8% from the previous year.

And the CBI forecasted in a report last year that this sector “could roughly halve the UK’s trade deficit” in 2014 – 15, before pointing out however that lack of policy stability could also result in “a risk of losing almost £0.4bn in net exports in 2014 – 2015”.

Going forward, the growth opportunity for the UK economy should not be underestimated.  The UK is currently a leader in the development of new low-carbon technologies such as  offshore wind, wave and tidal power, carbon capture and storage and electric cars to name a few.  If seized upon, this position of leadership could provide significant macro-economic gains for the UK economy.

In a report last year, Cambridge Econometrics estimated for example that investing steadily in offshore wind power (currently one of the more expensive forms of renewable energy) over the next 20 years would provide the UK with higher net GDP and employment by 2030 than if the UK invested heavily instead in gas-fired generation, with minimal differences in electricity prices between both scenarios.

The potential for offshore wind technology to significantly go down in costs, provide savings on future fuel and carbon costs and create employment opportunities in the UK’s engineering, offshore servicing and manufacturing sector were key to the study’s findings. But as Terence Watson, UK President at Alstom said earlier today, attracting the investment needed to deliver such benefits requires policy stability and a move-away from “stop-go politics”, which deters investment and “raises costs for everyone”.

That’s not to say that the transition to a low-carbon economy is without challenges. The move towards a low-carbon energy system has important upfront costs and can in the short to medium term have impacts on the profitability of energy intensive firms. According to the Department of Business, these are firms that spend over 10% of their gross value added on energy costs and which represent around 2% of the UK’s workforce.

Where climate and energy policies in the UK put some of these firms at a disadvantage against international competitors, there is clearly a case for them to receive financial support during the transition to a low-carbon economy, as long as that is done in a way that is transparent and proportionate to policy impacts.

Climate and energy policies don’t just create a burden for energy intensive companies however, they could also create a significant opportunity for the sector and this should be recognised as well. The UK is currently a leader in the development of a wide-range of low-carbon technologies. If seized upon, these growth opportunities could have positive knock-on impacts for energy intensive sectors in the supply chain such as the chemicals, cement, electronics, heavy engineering and constructions sectors.

As a service-based economy that invests in and insures infrastructure globally through its influential financial and insurance sector in the City of London, we should also not forget that the UK will feel the economic impacts of unmitigated climate change far beyond the immediate physical impacts seen within its borders.

In this light, taking early action to reduce emissions and strongly urging the rest of the world to do so makes sense from a pure risk management perspective. As Steve Waygood, Aviva’s Chief Investment Officer, puts it: “as insurers and investors, we are quite accustomed to dealing with financial arguments that point towards the benefits of taking preventative and mitigating action before a much more expensive disaster unfolds.”

The Chancellor of the Exchequer remarked in his Autumn Statement last week that “going green shouldn’t cost the earth.”  Far from it, a long-term “going green” strategy could provide significant gains for the UK economy.  As Lord Adair Turner said earlier today, “the time has come to give to the decarbonisation agenda the importance and stability it deserves.”

What are your views on climate change policy? Leave us a comment and we will post it on our blog. Alternatively, if you have a question for Nick Molho, you can follow him on Twitter – @NickMolho

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