The government indicated yesterday that a raft of new environmental regulations and taxes are on the horizon in the wake of Sir Nicholas Stern's report into the potentially disastrous economic impact of climate change.
The 700-page report from the former World Bank chief economist warns of a global economic downturn worse than the Great Depression if moves are not taken to limit climate change.
The report warns that failure to limit carbon emissions and reduce the level of global warming would wipe out up to 20 percent of global GDP as floods displace up to 100 million people, one in six become affected by water shortages and droughts lead to hundreds of millions of "climate refugees".
The study predicts action now will prove far more cost effective than attempting to maintain economic growth when faced with these apocalyptic scenarios. Stern argues that investing just one percent of global GDP in green initiatives now could head off the global economic collapse.
Tony Blair endorsed the report claiming that "Investment now will pay us back many times in the future, not just environmentally but economically as well… For every £1 invested now we can save £5, or possibly more, by acting now".
The report has won praise from environmentalists for its hard headed approach, eschewing talk of moral imperatives in favour of the economic necessity of action. Stern's focus on economics undermines previous objections (which stopped the US ratifying Kyoto) that action on climate change would damage the economy, arguing instead that inaction will cause far more economic harm.
The big question now for firms is what does this report mean for them?
Perhaps the most interesting aspect of the study is its analysis of how environmental damage represents a market failure. Stern argues that green house gasses are what are known in economic terms as an externality, meaning that those producing gasses impose costs on the rest of the world in the form of climate change, but do not directly face the consequences of those costs themselves.
As the environmental costs are not borne by the producer they are not incorporated in the end-product or service and as a result those products or services are more attractive to the consumer than they should be. If market mechanisms were working perfectly the costs of pollution would impact the producer and they would be forced to raise prices, prompting the consumer to look elsewhere for cleaner, and cheaper, products.
Stern argues that if you put a price on carbon - either explicitly through taxes, or implicitly through regulation – then those market mechanisms will kick in and force businesses and individuals to switch away from high carbon goods and services.
There is nothing new about this analysis (I remember being taught about externalities and the tax mechanisms that can correct them during A-Level economics classes) but what is new is that the government is being recommended to lead corrective market action on a global scale.
The government has all but fully endorsed Stern's recommendation and that means one thing – more taxes and regulations.
A leaked memo from environment secretary David Miliband has revealed the scale of some of the green taxation measures being considered, including increasing fuel duty, taxes on high emission vehicles, road pricing, increased tax on air travel and fuel, and increased VAT on high energy consumer products. Chancellor Gordon Brown has said taxes would be just part of a wider green economic programme but many of these green levies now look inevitable.
Politically, Brown has timed his green push to perfection. By waiting a year for his rival David Cameron to fully tie the Tories to green issues Brown can launch any green tax initiatives with a guarantee of cross party support.
The Tories or Lib Dems may be keen to contest the measures for political purposes given the Sun and the Mail on Sunday have already attempted to whip up populist opposition to what many see as stealth taxes. But any move to do so would allow Brown to accuse Cameron of supporting green causes while being unwilling to take the tough decisions to bring about change.
These imminent green taxes represent a cost and an opportunity for UK firms.
Firstly firms must act to minimise the costs. That means adopting business models that limit carbon emissions and doing so as quickly as possible. Waiting until the taxes are in place will be too late to avoid increased costs and will result in your company looking to invest in lower carbon technologies at a time when similar interest from rivals is likely to push up prices.
Any firm that has already considered investing in more energy efficient products - be they new servers, green energy suppliers, video conferencing systems, or a fleet of low carbon corporate cars – and decided that the cost could not be justified, should urgently revisit their ROI calculations, because with green taxes forcing the cost of business as usual higher the returns on these investments will look far more attractive.
However, it is not all about costs, a major opportunity also comes in the huge lobbying power held by business leaders.
The government is right to pioneer green taxes in an attempt to rectify the market failure Stern has outlined and lobbying against them is likely to prove fruitless – particularly as long as this rare period of political unanimity lasts. However, businesses should note that taxation and regulation are not the only ways of correcting market failures. Incentives can also manipulate markets and businesses should be pushing hard for not just taxes that hit when they damage the environment, but incentives for when they develop sustainable processes.
UK governments have developed a congenital distaste for incentives over the past few decades, tending to associate them with the subsidies that Thatcher so fiercely eradicated in the 80s. This disapproval for properly instigated incentive schemes was highlighted recently when the Low Carbon Buildings Programme (LCBP) – a grant scheme for installing renewable energy generators on your home – saw its annual budget run out after six months. The budget has since been topped back up but the overall three year allocation of £80m for the LCBP is remarkably small given the government's desire to drive adoption of solar panels and wind turbines.
But whether the government approves of subsidies and incentives or not there is hardly a single industry that did not rely on handouts early in their development – indeed the agricultural sectors in France and the US still do, but that's another issue. Business leaders should be making this point and arguing that if the government wants behaviour to change quickly there needs to be a big carrot as well as a big stick.
They should also articulate that a failure to offer incentives as well as taxes would play into the hands of the right wing press who have already attempted to paint the Stern Report as a harbinger of higher taxes. Brown must be willing to take with one hand but give back with the other.
Developing and policing effective incentive schemes is tricky but tax breaks, grants, interest free loans and subsidies should all be made available to firms to help them make the long term investments required to implement green technologies. Fail to do this and the Stern Report's legacy is likely to be higher taxes and little impact on global warming.
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