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A climate for change Al Gore described climate change as a “true planetary emergency”, but no one country can deal with this emergency on its own. John Hutton MP, Secretary of State for the Department for Business, Enterprise and Regulatory Reform, looks at the opportunities to succeed in global energy and carbon markets for businesses with the imagination and innovation to make the most of them

Over a year ago, the former Chief Economist at the World Bank, Sir Nicholas Stern, published an independent review of the economics of climate change. He concluded that the scientific evidence was now overwhelming. Climate change is a serious global threat that demands an urgent, collective global response.

Sir Nicholas Stern described climate change as the biggest market failure of all time. And in the UK we see properly structured, well-regulated markets as a significant component of our long-term answer to climate change. But, of course, markets function well by design rather than by accident. The government, and regulators, have a role in building and sustaining them, and in removing the barriers to innovation, so that entrepreneurs can deliver the solutions to meet our energy and climate change goals. There are a number of areas where we need to take action. We need to speed up the adoption of the technologies that are most effective in cutting emissions. We must reward those who take action to reduce their emissions, and impose a cost on those who do not.

And whether through tax, regulation, or cap and trade, emitting carbon must have a cost. In the UK, we believe that legallybinding carbon targets and an effective cap and trade scheme which establishes a price for carbon are necessary and will produce real emissions cuts in the most cost-effective way. We are clear that emissions trading can contribute to the government’s emissions reductions commitments, with our long-term goal to reduce CO2 emissions by 60% by 2050. I am proud of the fact that the UK government introduced the world’s first economy-wide greenhouse gas trading scheme in 2002 and UK business has had emission reduction targets under the European Union Emissions Trading Scheme since January 2005. These schemes gave UK industry early experience of emissions trading and carbon finance.

There needs to be more speed in adopting the technologies that are most effective in cutting emissions

Five years ago, the carbon market didn’t exist. Today London is the pre-eminent location for carbon trading, a market which is already worth over £9bn. In 2006, the UK had 50% of the Clean Development Mechanism market, and is estimated to be involved in 80% of EU ETS trading. The value of the 2006 carbon market was three times higher than the previous year. We expect this growth to continue.

We will continue to encourage the development of a market that puts a price on carbon; ensuring energy prices reflect the true cost, including the environmental costs, of energy production and consumption. This will help the market send the right price signals to incentivise the adoption of climate-friendly energy policies and technologies. Any such scheme has to be transparent, based on full and accurate information on emissions, and be free of unnecessary political interference. We know we need to do more to reduce uncertainty in the carbon price under the EU Emissions Trading Scheme, to create long-term confidence.

The UK’s Phase Two cap level has been set at 237 million tonnes of CO2 per year, representing a saving of 29 million tonnes against projected “business as usual” emissions. We will take into account lessons so far from the trading scheme, working closely with the Commission and other member states to deliver a revised EU ETS Directive from 2013. Our priorities are clear. We need a robust overall cap that delivers real emission reductions, but within a system that impacts as little as possible on competitiveness. We need to set targets further ahead, and look to link the ETS with other emerging trading schemes around the world. Internationally, interest in mandatory cap and trade schemes is growing, as is the interest in linking domestic schemes together.

The formation of the International Carbon Action Partnership is an extremely important contribution to the global effort to solve the urgent problem of climate change. ICAP is aiming to link together regional trading systems, such as the EU’s trading system, US state-level schemes, and those in New Zealand and Norway. Business tells us they want clarity on what they will be asked to do, and that they prefer a market-based approach. That is why the global carbon market will be fundamental in the move to a low-carbon economy, and why ICAP is such a valuable forum, with its practical emphasis on collaborating and sharing experience and expertise. It was brought home to me very clearly when I attended the launch of ICAP on 29 October that we now have a powerful and growing coalition of states, countries and regions driving forward with this approach.

As part of our negotiations for 2013 and beyond, we are also pushing for carbon capture and storage (CCS) to be recognized. In the UK we are demonstrating global leadership by being the first country in the world to support a commercial-scale CCS project using post-combustion capture on a coal-fired power station. The project selected through the competition will be operational by 2014. The role of new technologies will be crucial. One of the most exciting developments, and something which the Stern Report singled out as particularly significant at the global level, is carbon capture and storage (CCS). We believe, as do many experts, that development of CCS technology is absolutely vital if we are to meet the twin challenge of secure energy supplies and reductions in emissions. This is because, unlike all other low-carbon technologies already developed or being developed, it would permit us to continue to use fossil fuels to generate electricity.

Those who take action to reduce emissions should be rewarded – and those who don’t should be penalized

Capture and storage would enable us to reduce CO2 emissions from fossil fuel power generation by around 90% – and this is vital in a world where, for example, global demand for coal is set to grow by over 70% between 2005 and 2030. Nobel Peace Prize winner, Al Gore, has described climate change as a “true planetary emergency”. No one country can deal with this emergency on its own. It demands that governments and businesses work together. Genuine opportunities exist to succeed in energy and carbon markets for businesses with the imagination and innovation to make the most of them.

The window of opportunity to prevent dangerous climate change is closing rapidly. The time for action is now.

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