Talking point
Responses to Environmental Risk

Paul Johnson, Andy Gouldson, Merlin Hyman and Andy Stirling discuss regulatory strategies for the reduction of carbon emissions as well as the potential risks of regulation, and the benefits or expected effects of target regimes.

Are reductions in carbon emissions best achieved through direct regulation or through competition and innovation?
Paul Johnson (PJ): The answer is, rather boringly, that you need to use the whole range of instruments to achieve carbon reductions. It is obviously important to use the price mechanism, as we do to some extent through the EU Emissions Trading Scheme, so that users are internalizing the external cost created by emissions. But that need not of itself have the required effect. And we know that in two important senses it won’t. First, there is likely to be a need for support of technology which the market of its own volition, even with price incentives, won’t necessarily bring forth. By far the most important technology here is Carbon Capture and Storage.

Second, for a range of reasons, consumers are not terribly price sensitive when it comes to using energy and simply raising the price by the external cost of carbon will not reduce emissions to acceptable levels. In this case regulation, for example of product standards or design standards for new homes, is likely actually to be the most efficient instrument available.

Andy Gouldson (AG): Most evaluations tend to show that changes in behaviour are best secured when the range of imperatives, incentives and capacities that stem from governments and markets coincide and become self-reinforcing. Certainly, climate policy involves much more than just direct regulation – in the UK for example the climate change levy interacts with sectoral climate change agreements, and these exist alongside emissions trading and all sorts of awareness raising and capacity building measures. However, these instruments are far from being fully coordinated and there is much to be done to introduce innovation friendly combinations of policy instruments.

Merlin Hyman (MH): In a market economy innovation and technological development take place in order to exploit market demand. As Professor Stern sets out in great detail the market fails to capture the huge costs of pollution and it therefore takes action by governments – acting as society’s representatives – to create a demand for reduction in emissions.

That can be achieved by a number of tools of which direct regulation in one and the use of fiscal measures to create a carbon price is another. The idea of a global carbon price sending signals through all purchasing decisions is every environmental economists dream and the EU Emissions Trading Scheme is the most ambitious attempt to move towards this approach. However, there are many areas where a more traditional regulatory approach will be required. For example, any realistic carbon price is likely to have little impact on energy efficiency in new homes – however, the government mandate for zero carbon homes has had a dramatic impact on the house-building and construction industry.
So regulation and innovation are not alternatives, competition to produce solutions to carbon emissions will only take place once a demand has been created by government regulation/fiscal policy.

Andy Stirling (AS): An obvious initial observation is that these are not mutually exclusive. Innovation can be driven by challenges exerted by regulation as much as those from competition. This doesn’t deny that there are tensions. Rather than a general choice between regulation or competition, though, the real potential for positive (or negative) outcomes rests in very specific features of interactions between the two. These concern particular instruments, technologies and practices in specific contexts. There is no escaping ‘devils in details’. A further problem with this simple dichotomy is that it is incomplete. Innovation achieved through conventional competition or regulation alone, is typically too path-dependent and incremental for global challenges like climate change, inequality, insecurity and environmental degradation. As a complement, then, we need a third governance strategy – focusing on deliberate initiatives for radical system-level change. This includes more ‘joined up’ policy for ‘technological transitions’ (building entirely new trajectories from selected successful niches). It also involves concerted action in domains like public investment, taxation, infrastructure design, government procurement, education, popular culture and civil society. This means moving away from set-piece technical debates over regulation, to more pervasive, visionary and overtly political discourses over possible futures.

What are the risks of environmental regulation? What are the risks of not regulating?
PJ: The biggest risks here are about getting regulations, or other policies, wrong in the sense that they impose greater costs than are necessary or than consumers are willing to bear. Professor Nick Stern showed in his review [the Stern Report] that carbon emissions can be reduced at modest cost to the global economy if something approaching an optimal policy is followed. If not the costs can rise rather fast and public support for action will dissipate. Not regulating, even with price incentives, is likely to leave economically efficient abatement possibilities not being taken advantage of.

AG: Most debates tend to focus on the risks of restricting growth or undermining competitiveness, but there is also an argument that if designed and delivered in the right way innovation friendly regulations can enhance competitiveness. The competitive implications of regulation can be reduced if most of a country’s competitors adopt similar standards – which is a major benefit of the EU, and a major impetus for global agreements on climate change. Classically, the risks of not regulating are that public goods are under-provided and that common property resources are over-exploited. Leaving it to the market with no protection against free riding means that only those changes that have private rather than social benefits are likely to be explored.

MH: After decades of environmental regulation, each one introduced in the teeth of scaremongering on the costs by vested interests, I have yet to see a single piece of research that shows that any environmental regulation has had a significant impact on economic competitiveness. The reality is that (1) the costs are imposed by such regulation are small (2) environmental regulation stimulates efficiency savings, waste reduction and innovation and therefore has positive economic impacts and (3) environmental regulations stimulate the development of an environmental technology and services sector – one of the great economic opportunities of the twenty-first century.

Clearly, that regulation should be designed to have maximum impact at least in cost in red tape and be outcome focused to give companies the opportunity to respond as best suits their business.

The risks of not regulating are spelt out in numerous scientific reports – devastation of vulnerable communities and a threat to the viability of human life on earth.

AS: All markets are inevitably structured by vested interests and institutional attitudes and by existing distributions of resources, property and information. The idea that ‘not regulating’ somehow yields transcendently optimal outcomes is therefore misguided. The risk here is ‘business as usual’. Yet – though markets are poor masters – they can be powerful servants. If regulation reduces to monolithic central planning then it also risks reinforcing incumbents and lock-in. Working with the grain of market dynamics can inject vital diversity, vigour and rigour. Questions over regulatory risks thus concern not whether, but how, markets are shaped by society. The key lies in recognizing that technology – and innovation more generally – are not as homogenous as conventional undifferentiated policy language suggests. Both hold the crucial quality of direction. This encompasses many contending orientations for carbon reductions (including emissions capture, atmospheric fixing, nuclear power, centralized renewables, distributed energy, transforming infrastructures or reorganizing energy services). Limited resources, time and political attention mean that we cannot equally pursue all strategies. Ironically, ‘no alternatives’ or ‘do everything’ rhetorics on climate change both risk (in different ways) simply reproducing existing industrial prejudices. The real risks are therefore not just over how much to regulate, but that different kinds of regulation foster alternative directions of innovation. The biggest risk of all is that we forget the role of democracy in choosing which direction.

What are the benefits to business of reducing carbon emissions?
PJ: Businesses are unsurprisingly focused on profit though some are increasingly seeing reducing emissions as part of their marketing and corporate social responsibility strategies. The latter is only possible because of the high public salience attached to the issue and is one of the important by-products of keeping the issue in the public eye and gaining public support for policies to counteract climate change. Public support can be lost if policy is not well designed. In addition, reducing carbon emissions is in many cases the same thing as reducing energy use which itself saves money. It is interesting that there does seem to be a need to for some external stimulus to persuade business to do that, but that is not to say that regulation to force business to do it will be costless.

AG: Obviously there could be massive benefits relating to reducing the risks and impacts of climate change. But there may also be some private benefits – for example through improvements in energy efficiency and improvements in levels of social acceptance of and trust in business.

MH: Carbon emissions result from the use of energy. Energy has a cost which is rapidly rising. Reducing emissions bring rapid improvements direct to the bottom line. As regulation/fiscal policy tackles carbon emissions this cost is odds on to continue rising. More broadly, customer-facing businesses, such as the retail sector, can gain market share by being in tune with their customers and reducing emissions. These companies will increasingly pass on their requirements to their supply chain creating an incentive for further companies to reduce their emissions.

AS: This is a curious question. Business interests cannot be detached from – still less opposed to – those of wider society. Despite insulating institutions like property rights, limited liability and insurance, business is still a part of the world. Averting potentially catastrophic climate change is therefore also a business agenda. This aside, experience across different industries shows repeatedly how environmental drivers can serve to promote efficiency and competitiveness. In the event that global markets evolve on a low-carbon path, then early experience and leadership can yield additional commercial benefits.

Do mandates to reduce emissions stimulate innovation? What are the consequences of leaving this to unregulated competition?
PJ: Forcing industries to find ways to reduce emissions can stimulate some innovation. This has been seen in the motor manufacturing sector and in some areas of renewables. Because some important innovation has high up front costs and uncertain returns, and learning curves especially in energy can be quite long, unregulated competition even with price incentives will not always do the trick. But note, mandating incorrectly – and there is at least debate over, for example, the value of mandating use of a certain amount of biofuels or indeed over the EU renewables obligation – can be very expensive indeed. We should not be looking for innovation at all costs.

AG: Under some conditions they can do – but the conditions are not always met by any means. The better regulation debate is very much focused on finding ways to secure social objectives whilst minimizing business burdens – and this is leading to more and more thinking on innovation friendly forms of policy. Also, the emergence of debates on non-state governance suggests that market or civic actors can also play a role in regulating production and consumption and in enhancing the prospects for technological and behavioural change. There is a growing range of voluntary initiatives designed to promote more climate friendly forms of production and consumption. Many of these are in their infancy though and it’s not yet possible to tell whether or how much and for how long and under what conditions they might work.

MH: As set out above government regulation/fiscal policy is required to create market demand for emissions reduction that will stimulate innovation. However, the way that action is taken is key to stimulating innovation.
A key feature of ‘innovation friendly’ policy is to focus on outcomes rather than prescribing the path to get there – allowing the market to find the best solutions. Policy also needs to be ambitious to create sufficient market demand and long term to provide an attractive proposition to investors. The phrase ‘loud, long and legal’ is sometimes used to set out the key characteristics of a successful policy framework to stimulate environmental innovation.

Another concept increasingly being promoted is that of government action to create ‘lead markets’ where businesses can use niche markets to scale up environmental technologies and gain economies of scale to compete in mass markets. An example of this was the Californian mandate for a certain percentage of vehicle fleets to be zero emission.

AS: I argue above that emission reduction can stimulate many different kinds of innovation. Without regulation in the widest sense, there is little prospect of achieving any radical shifts in direction.

Should all countries be mandated? What different factors should emission targets take into account?
PJ: As a global problem one clearly needs as a global a solution as possible to climate change. Greenhouse gases emitted in the UK do exactly the same damage as gases emitted in India or Australia. But there is not likely ever to be a mechanism which mandates all countries.

We are likely to need a mixture of global agreements and trading systems and, importantly, significant flows of money to the developing world.

Targets for different countries should be very different. We in the UK will need at least 60 per cent reductions in emissions by 2050 as part of a global effort. Developing countries need targets that allow some increase over that period taking account of their space for growth and catch up. For the UK itself we will need a flexible system of targets which allows some adjustment for what others are doing. What is clear is that there is no value in having aggressive targets if no other country does.

AG: Not necessarily – there is an argument that a global agreement would be much easier to reach, and would perhaps be much fairer, if obligations to reduce emissions were focused on the relatively small number of countries that have long been industrialized. Also, if obligations were based on consumption rather than production, it is likely that countries like the UK would have a much bigger carbon footprint while countries like China or India would have a much smaller one. Attributing climate impacts in this way might suggest a different allocation of the burdens for emissions reductions.

MH: It is unarguable that the developed world is largely responsible for climate change and, therefore, has responsibility for leading the fight to reduce emissions.

It is equally clear that a global deal that does not restrict emissions from China and India will be meaningless.

The developed world must, therefore, take on the lion’s share of emission reduction, but all countries will have to accept limits.

Furthermore, to help developing nations improve the living standards of their populations whilst limiting emissions the developed world must help by providing efficient low-polluting technologies.

AS: There is no country where properly implemented carbon abatement measures in particular areas cannot realize wider benefits. Target-driven policies are thus applicable everywhere in some form. The qualifications lie in priorities, capacities, resources and opportunity costs – and the availability of international co-ordination, verification and support. Mandates should therefore take into account present capabilities. Since these are partly built on past economic activity, associated historic emissions are also relevant. Responsibilities should be established on a per capita basis – to avoid unfairly penalizing large poor countries. National targets should also include carbon consumption embodied in imported goods and services. Without this, powerful rich countries will simply export their responsibilities. The driving aim should be one of global equity in cumulative carbon emissions. This is not just about justice, but also practical efficacy. Building new trajectories is highly uncertain, with a need for potentially costly experiments and failures. This way, burdens are concentrated on those economies most deserving and able to bear them.

What are the expected global effects of local emission targets?
PJ: Local targets will, individually, have almost no global effect as a result of locally reduced emissions. The UK is responsible for only 2 per cent of emissions and even if we meet the most stringent of targets can have only infinitesimal effects of global warming. Targets are valuable both as a way of signalling to others that we are doing something, and therefore encouraging wider action, and to provide some certainty to domestic investors and consumers. But we should never lose sight of the fact that this is a global problem and anything we do needs to be seen in that context.

AG: They’re not yet clear – it seems plausible that in many contexts emissions reductions of say 20 per cent can be reached through incremental changes and through the adoption of technologies that already exist. But it really isn’t clear yet whether targets for emissions reductions of 60 per cent or more can be accommodated within existing systems and structures or whether more radical changes will be needed. Many people would suggest the latter is more likely.

MH: If the question is whether it is worth setting targets without a global agreement then the answer is someone needs to take a lead and show what can be done – without economic damage – to encourage others.
If the question is, what will be the effects of tackling climate change across the globe, then it’s clear that a rapid re-engineering of our economy will be required. Within that there will be winners and losers. Those who can predict which are advized to visit their stockbroker.

AS: Finding new pathways for human progress is not a mechanical matter, governed by additive arithmetic. It is about nurturing exponential shifts in cultural discourse, social networks, market structures and technological trajectories. Because these are all fundamentally non-linear processes, apparently minor interventions at critical junctures can be disproportionate in their dynamic effects. This is why there remains a crucial global role for national policy and community initiatives and for behavioural change and political engagement by individual citizens.

Participants:

Paul Johnson, Research Fellow, Institute of Fiscal Studies and Associate,
Frontier Economics.

Professor Andy Gouldson, Director of the Sustainability Research Institute at the University
of Leeds.

Merlin Hyman, Director of the Environmental Industries Commission.

Professor Andy Stirling, Director of Science for the Science Policy Research Unit (SPRU) at
Sussex University.

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