Meetings with UK Businesses on Climate Policy

On Thursday, we met with the CBI, the main UK business lobbying organization that is equivalent to the U.S. Chamber of Commerce and National Association of Manufacturers. Unlike their counterparts in the U.S., CBI has long been supportive of climate change regulation such as cap and trade schemes. When I asked them to explain the different reaction in the UK, they pointed to three main differences: 1) Strong political leadership in the UK pushing for action on climate change, dating back to Margaret Thatcher (which surprised me); 2) The UK had a much easier time meeting its Kyoto Protocol greenhouse gas emissions reduction targets; 3) UK businesses much earlier saw the "green jobs" business opportunities related to addressing climate change (in part because its financial community was supportive of creating new carbon trading markets, and in part because its manufacturers were already quite efficient and lean). CBI is currently focused on meeting with their counterparts in the US, China, and India to encourage them to be supportive of climate regulatory policies - it will be interesting to see if they have any success.

To address competitiveness concerns, CBI advocates for free allowances for particular sectors that have genuine international competitiveness concerns (such steel and cement production - which could be easily pushed to other countries if carbon costs were added to their products). On the other hand, CBI advocates for auction-based allowances in other instances when the markets are not particularly subject to international substitution, such as the electricity market. They, like nearly everyone I've spoken to over here, have said that giving free allowances to the electricity sector in the EU ETS was a big mistake because it didn't result in lower electricity prices like some politicians might have thought, it merely gave utility companies what everyone here calls "windfall profits." Once they were given an allowance, the utilities rationally priced the opportunity cost of selling the allowance to another industry group, and put that opportunity cost into their electric sales prices. This is economically predictable. Whether the same costs would be passed on to consumers in a regulated market like Michigan's might be a different question, however. I guess I need to think more about this.

I asked them what they thought of border adjustments or tariffs as another way to address competitiveness issues, which has also been discussed in the US. While noting they were theoretically able to address competitiveness concerns, CBI did not support these measures, noting they would be incredibly difficult to administer in practice. They further thought tariffs could be used to obstruct free trade and possibly could lead to trade wars (noting that France's strong support for such measures made them a little nervous about its trade implications, given France's penchant for protectionism)

As there will be in the US - there is a big battle in the UK and EU about where the proceeds of auctioned emissions rights will be spent. In the EU, about 80% of the auction revenues are retained by the individual home countries that conduct the auctions for their domestic emitters, with the remainder used by the EU to help some of the very poor EU countries adapt and develop to the increased costs imposed by the regulation. Within the UK, there is currently a battle between the Treasury (which wants no restrictions on the use of funds for general government purposes) and a coalition of business and environmental groups, who prefer that the proceeds be used for investing in low carbon adaptation (like the obvious need for government funding of projects and pipeline infrastructures if CCS is ever to become commercial in the short term).

I also asked what CBI thought of having some sort of safety valve or cost cap mechanism in a cap and trade scheme, which has often been proposed in the U.S. legislation. Once again, I was surprised that they opposed such a measure. They preferred to have a pure market mechanism with clear, certain rules that was not easily subjectable to political pressures once it was up and running. They believed it was much more important to give investors certainty in the system, which to some degree paradocxically (in my mind) results in some uncertainty in the carbon price because it can fluctuate greatly based on supply and demand. I guess those price risks can be managed and hedged through the use of options and derivatives.

After CBI, we met with Jeff Kenna, the CEO of Camco, a leading carbon project developer. He and a colleague gave a very informative presentation on the various factors that affect the carbon prices (global recession, prospects for a Copenhagen deal, prospects of over-allocated AAU's flooding the carbon market, prospects of US and Australian cap and trade schemes entering the market, fossil fuel prices, weather, banking and borrowing practices of emitters, the supply of CER's, China's price floor for CDM projects, renewable and nuclear capacity, marginal abaatement costs, etc, etc). We also went through the nuts and bolts of going through the UN's process of certifying a CDM carbon offset project. All in all a great discussion with lots of informative give and take. Once again, it looks like the carbon markets are going to be pretty quiet for the next year or two, while the international scheme and potential US policies are debated and decided. Camco noted that one bottleneck in the market currently is a shortage of skilled people working for UN-appointed "designated operational entities" - which serve as the auditors and verifiers for CDM projects.