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Business Views on International Climate and Energy Policy
The UK Government commissioned a survey on the business views on international climate and energy policy to provide insight from different parts of the business community into the development of domestic and
international climate policy. The study was executed by the UK Business Council for Sustainable Energy (UKBCSE) and The Climate Group (TCG). JIQ spoke with Ms Kirsty Hamilton (UKBCSE) and Mr Mark Kenber (TCG)
on the study’s main findings.
The main aim of the study was to gain a better understanding of the drivers of both carbon markets and underlying business investment in low and zero carbon systems and how these are affected by policy. For the purpose of this study, fourteen UK-based companies were interviewed. Interviewees approached were chosen from the utility sector, financial services sector, oil & gas industry and energy-intensive sectors, including aviation.
Investment drivers
Although all respondents consider a price on carbon an important factor for business attention to climate change, it is concluded that carbon prices presently are insufficiently stable to be a major driver of investments into low(er) carbon technologies.
Instead, respondents consider the following factors of much larger importance for their energy technology investment decisions:
National Energy Policies;
Security of energy supply;
High and volatile natural gas and oil prices, which make renewables relatively more attractive, but also increase the interest in coal1 (coal- fired plants generated half the power in Britain during last year’s winter).
Respondents also conclude that uncertainty regarding the climate regime for the period beyond 2012 creates a ‘wait and see’ approach, directly affecting utility, airline and heavy industry investment decisions.
JIQ: Are these two aspects reconcilable?
Authors: Yes. Carbon pricing has led a wide range of companies to take climate change and GHG mitigation seriously. This is a key outcome of the Kyoto framework and its implementation. Those companies covered by the EU ETS have developed carbon management strategies and emission reductions plans. Financial services companies have developed tools to assess carbon and climate risk and a raft of new firms have emerged to serve the emerging carbon market. However, due to uncertainty over the longevity of carbon prices beyond 2012, companies are waiting to see how seriously governments will take the next round of cap-setting (at the EU and international level).
Therefore, at present, energy policy and regulation, such as direct support mechanisms for renewable energy, are more important drivers to longer term underlying changes. There is also sensitivity to forces which may influence the direction of energy policy, such as the response to current nervousness about energy supply reliability. With respect to the EU ETS, utilities, for example, are waiting for how governments will set caps in the future.
So, we can summarise the issues brought up, as follows:
Renewable energy incentives/obligations are certain and dedicated to clean energy.
The non-carbon/climate drivers (energy diversity, security, prices, etc.) are perceived to be long-term and even where direct incentives are only short-term, there is an assumption that they will continue;
The carbon price is at present insufficient (and not long-term enough) to bridge the cost gaps for many renewables technologies.
As a result, betting on higher cost technologies with long payback periods does not make sense. When there is greater certainty over the existence of a carbon price in the medium term, this will certainly be a significant part of the overall package of drivers. Longevity of the carbon price is crucial.
Competitiveness
‘Carbon leakage’ is often brought forward by companies opposing strict (regionally enforced) carbon constraints. According to this phenomenon, companies that face strict environmental regulations/commitments have an incentive to relocate their business to countries where such regulations/commitmens are absent or less strict.
JIQ: How do businesses assess their international competitive position in an increasingly carbon-constrained world?
Authors: The survey has shown that concerns about competitiveness depend on market positioning. A distinction can be made between intra- and extra-EU competitiveness. The former depends on the ‘fairness’ of national allocation plans (and market design issues being debated now, including how they are applied in different EU Member states), the latter on the reach of an international regime and the ability to make border tax adjustments with those trading partners that have not installed carbon constraints. Carbon regulation may make a difference, but depends on the carbon factor in energy price increases, compared to the impact of other market factors, and other issues that affect competitiveness.
There are clearly also broader ‘industrial policy’ matters: how much effort does the EU want to make to keep industries which may be looking to migrate or expand overseas? Competitiveness is also about being ahead of the game, in business terms, in whatever market you are in. Among respondents there is a widespread belief that market-based approaches to policy tend to keep costs down and their continued use is important for minimising competitiveness distortions, if implemented across the EU (in case of trading) in a predictable, uniform manner.
JIQ: One of your interviewees responded that the price of carbon should be kept within a reasonable band (e15-30/tCO2). How did interviewees respond to the ‘crash’ on the EU ETS market at the end of April?
Authors: Actually, interviews were finalised prior to the price fluctuations. However, the general response from carbon market players is that it is well within expectations of a new market to have such price volatility. In fact, many have been impressed (and surprised) by how well the market has stood up in the face of the price crash ahead of the data publication date: trading has continued without interruption and since the collapse, falling prices have remained fairly stable (with post-2008 prices holding up well).
JIQ: To what extent are companies deploying the Kyoto flexibility mechanisms, e.g. through the Linking Directive?
Authors: Some of the companies interviewed had failed to undertake CDM projects and were of the view that it is “a dangerous waste of time.” Others merely recognise that there are ‘start up hurdles.’ A third group of respondents view the system as being strong. Only the renewable energy companies expressed little interest in the CDM as it is not a major driver for investment due to its short time horizon (i.e. up to 2012). All-in-all, the majority of companies see the CDM as a positive thing. It appears to most that the CDM’s institutional infrastructure is now beginning to function reasonably well.
Nevertheless, several firms expressed concern regarding the project approval process and the present absence of the International Transaction Log. The most important issue for the ongoing development of the CDM is generating greater confidence that the mechanism will continue beyond 2012 and so investments made now will generate CER returns beyond the next six years. In particular, the 5-year target setting in the Kyoto Protocol is much shorter than the average investment cycle (which may cover 25 years). Therefore, the CDM would become more attractive if it would be clear that the emission reductions would be credited for a longer period of time.
Aviation
Although only one (major) carrier was interviewed, its responses very much resembled those of energy intensive industries. Note that aviation is not (yet) covered by the EU ETS. The company expects to be included in the scheme after 2012 (based on the assumption that the EU ETS will continue) or possibly already as of 2008 with intra-EU flights. In this respect, the company also emphasised the need for long-term certainty as fleet purchases have long-term paybacks.
According to the authors, the company is very concerned about how policy has been developed and what impact this would have on competitiveness: “The major challenge is to avoid leakage and competitive distortions.”
ICAO, the International Civil Aviation Authority, has a formal responsibility through the UNFCCC to help governments define how bunker fuels (i.e. fuels associated with cross border travel and transport) will be dealt with at the international level and the airline agreed that this opened the opportunity for a global agreement which might minimise competitiveness impacts.
Post-2012
The main message is that long-term certainty needs to be provided today rather than tomorrow as policy time frames directly influence investment decisions. The study shows that uncertainty about the period beyond 2012 already creates a ‘wait and see’ approach, directly affecting utility, airline and heavy industry investment decisions, and the CDM project pipeline.
Two main timing matters identified in this regard, are:
The need to align commitment periods with investment horizons, i.e. from a business perspective, the next phase should have targets out to 2020 or 2025 (see also above).
The need for early clarification on the validity and value of CERs from 2013 on (including the validity of reductions of other GHGs than CO2). Indeed, given project preparation and project lead-time, project proposals will start to decrease as returns will have to be achieved by 2013.2
JIQ: What should governments learn from the study results?
Authors: In this report, we have focussed on how the Kyoto Protocol and its implementation policies, such as the EU ETS, currently drive, and can continue to do so, investments to reduce GHG emissions, looking in particular at ‘carbon market continuity’, but also at whether this is starting to influence underlying energy infrastructure changes. The results suggest that the emergence of a carbon price could be a key factor for business to take climate change seriously (see also Box 1, ed.).
Governments really need to listen to early market movers in order to understand how policy translates into business decisions and identify the elements that are most likely to accelerate investment.
Key lessons for both domestic and international post-2012 policy are that:
It is unwise to radically change the architecture of the international regime now that business is just getting used to Kyoto as a driver of new markets and as a driver of domestic policymaking;
Companies need certainty regarding longer-term policies so that they can build their investment decisions on these;
Consistency with other regimes and policies, such as national or regional responses to energy security concerns, are essential to avoid sending mixed signals.
For further details, please contact:
Ms Kirsty Hamilton
UK Business Council for Sustainable Energy
UK
tel.: + 44 7986 355561
e-mail: kirsty.hamilton@bcse.org.uk
or
Mr Mark Kenber
The Climate Group
UK
tel.: +44-1483-719402
e-mail: mkenber@theclimategroup.org
1 Coal emits twice as much CO2 as natural gas. Although prices have risen as well for coal over the last few years, its price formation is less volatile than that of natural gas.
2 Note that CERs generated in 2013 can still be used for compliance as it concerns a ‘true-up’ year.
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Mr Ash Sharma on the Testing Ground Facility
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Ms Tine Heyse on the first Belgian JI/CDM Tender Programme
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Mr Nikolaus Müllebner on the Austrian JI/CDM Tender Programme
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Ms Ulla Blatt Bendtsen on the Danish - Russian cooperation
Mr Sünnen on the KfW Carbon Facility
Interviews in previous JIQ Issues
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