E3G

The implications for business of climate policy

By Tom Burke

The danger for business with this approach to climate change is that the cost of coping with it goes up dramatically with time. The later we start taking serious action, the steeper the necessary fall in emissions, the greater the dislocation of business and the higher the cost.

To meet their climate change goals governments basically have four tools. They can set a price on carbon by taxes or cap and trade policies. They can set technical standards. They can provide investment incentives and they can give sermons.

To date, sermons have been by a long way the preferred tool with cap and trade policies second. The sermons have had little effect and the difficulties with cap and trade policies have now been well rehearsed. Getting national, let alone, international agreement on what the caps should is proving to be what might kindly be called a tortuous process. The result has been a carbon price too low and too volatile to make any difference to the long run, high capital investments that will be necessary to render the global energy system carbon neutral.

It turns out that putting a price on carbon is much easier to do in an economic model than it is in the real world.

This means that governments will increasingly need to develop technical standards and to deploy investment incentives if they wish to respond successfully to the challenge of climate change. On the whole this may be much better for business than the current climate policy chaos.

Setting technical standards provided they are done with a long enough lead time and appropriate supportive policies for adjustment have the considerable advantage of certainty both for the environment and for business.

Providing investment incentives to support their adoption encourages rapid take up which will help to drive down costs for newer technologies. Financing those incentives by a relatively low carbon tax – hypothecated to the investments – may breach economist’s orthodoxies but has political attractions and again brings a much higher certainty to climate policy.

The business community faces a very uncertain future with respect to climate change as it finds itself caught between the growing urgency of the problem and the reluctance of governments to act effectively. Business would be very unwise to assume that left to itself governments will resolve this dilemma.

Contrary to popular suspicion, on an issue such as climate change, businesses are more likely to be policy takers than policy makers. Without a sharper and more thought through message from business to government the current drift will continue.

One way or another getting to a carbon neutral energy system is going to cost everyone money. The sooner and smarter the response from governments the smaller the share of those costs that will fall on business.