It's time for action stations.

It is one of immutable truths of the court of public opinion that you can not hold people's attention for more than six months. So, with six months to go to the Copenhagen culmination of the UN's seemingly never-ending climate change negotiations the various political, public, and corporate campaigns surrounding the talks have finally slipped into top gear.

In the past few weeks we have seen a flurry of climate change activity on both sides of the Atlantic (and some typical heel dragging from Australia's government, but we'll put that aside for a moment): both the US and UK released bone chilling climate impact reports painting the bleakest picture yet on the likely effects of global warming on the two countries; the White House launched an orchestrated campaign to secure support for the proposed US climate change bill, culminating in a direct appeal to action from Barack Obama; the UK announced plans to power 20m homes using offshore wind; the US issued $8bn of green car loans; the UK launched the world's largest electric car trial and kicked off its carbon capture strategy; and green groups the world over released more studies projecting a boom in green jobs than you can shake a wind turbine at.

And this is just the start. As the UK government confirmed last week, six months of high profile activity is planned in the run up to Copenhagen, all of which is designed to hammer home the message that aggressive and ambitious measures will be required to avert planetary disaster.

Meanwhile, arguably the most compelling stimulus for greener business models has quietly re-emerged with the realisation that oil prices are on the rise again. They may not be anywhere near the record highs of last year, but with the first green shoots of recovery slowly emerging economists are deeply concerned that oil supplies will not be able to keep track with the rising global demand that will come with any recovery.

Add in the fact that investment in carbon capture and renewable energy, coupled with expansion of carbon cap-and-trade schemes, will inevitably drive up long term energy prices and it becomes clear that energy efficiency initiatives still make a great deal sense regardless of the economic climate.

All of this presents a huge opportunity for green businesses - and an enormous headache for those firms yet to embrace more sustainable practices.

On a purely tactical level, the public awareness campaigns being orchestrated by governments and NGOs offer a one off opportunity for those businesses offering green products and services to push their message to a ready primed audience.

But on a broader level the next six months offer a great opportunity for green businesses to really open up a gap on their carbon-intensive rivals.

Regardless of how the US climate change bill goes in tomorrow's vote and regardless of how the Copenhagen talks eventually resolve themselves, the fact is that more environmental legislation is on the way, along with more low carbon incentives, higher energy bills, and ever increasing investment in low carbon infrastructure and technologies.

Those firms that seize on the opportunity presented by this six month long "perfect storm" and act now to prepare for the post-Copenhagen settlement will be the same firms that are rewarded with higher profit margins and lower risk profiles over the next decade.

Like I say, the time for action stations.

Posted by James Murray on June 25, 2009 | Permalink | Comments (1)

When does compromise become appeasement?

One is at the heart of all good negotiation, the other is so loaded with historical allusions that it has the capacity to destroy careers at a single mention - and yet the dividing line between the two is both vanishingly slim and subject to change.

The debate surrounding the two terms was thrown into sharp relief this week at the World Business Summit on Climate Change in Copenhagen, where the organisers were criticised by green groups for inviting along some of the world's most carbon intensive firms in the form of BP, Shell and Duke Energy.

Any attempt to win round detractors with the release of a statement calling for a meaningful climate change deal to be reached at the UN talks in Copenhagen later this year was quickly undermined by a disclaimer revealing that while the document reflected much of the debate at the three day event it did not "not necessarily reflect the views of all participants".

A cynic would argue that once again some of the world's most polluting firms were able to give themselves a green hue and gain access to key negotiators in the Copenhagen process without actually signing up to any tangible commitments.

It is easy to understand the criticism. For years, many of the world's most carbon intensive firms and given lip service to the idea of cutting their carbon emissions, while continuing to increase their carbon footprint and lock themselves ever more tightly into unsustainable business models.

Green groups have become understandably frustrated at seeing attempts to appease carbon intensive firms through voluntary targets and lax regulations fail to deliver the required emission cuts and are now calling for far more stringent legislation.

They have a point and there is no doubt that Copenhagen will be judged a failure unless it ushers in much more demanding climate change regulation and an unwillingness to compromise on deep emission cuts.

But at the same time Copenhagen will also fail if it can't secure support from many of those firms that will be required to drastically change their operations as the result of a global deal.

Like it or not, the oil, energy and aviation companies that helped get us all into this mess have much of the expertise that is required to get us out of it. Moreover, they have the political and economic clout to undermine any treaty through legal challenges, non compliance, and extensive lobbying of those governments that are already sceptical about the prospect of a global deal.

Tempting as it can sometimes seem to ban Shell et al from the negotiations there is little to be gained and a lot to be lost by doing so.

Commitments from big businesses to support any global deal and the tougher regulations that ensue might be littered with get out clauses, but they all help shore up support for an international treaty and give politicians the visible support they need to drive through a meaningful deal.

Many of the world's most polluting firms may still be locked into carbon intensive strategies and some are undoubtedly still sceptical about the seriousness of climate change. But politicians, environmentalists and greener businesses are much more likely to win them round with a combination of tougher regulations, generous incentives and on-going engagement, than they are by simply excluding them from the debate over how best to build a low carbon economy.

Posted by James Murray on May 27, 2009 | Permalink | Comments (1)

Sometimes, industries die.

Like cherished pets, faltering relationships and bad jokes, entire sections of the economy and their associated ways of life can occasionally just give up the ghost.

It's sad, at times heart-breakingly so, but it is a fact of economic life as old as civilisation itself - there isn't much work for cave wall painters anymore.

Two events this week put me in mind of this sad reality. The first was the news that the US fossil fuels industry is outspending green campaigners by "10 to one" as it becomes increasingly desperate in its attempts to block US climate change legislation. And the second, somewhat bizarrely, was a trip to my local theatre to see a revival of Michael Frayn's 1970's comedy Alphabetical Order.

Characterised by a particularly English mix of comedy, pathos and unrequited love, the play is set in the cuttings library of an unnamed provincial newspaper. Consequently, the most remarkable aspect of the performance is the sense that you are watching a world that in less than 30 years has simply disappeared from the face of the Earth.

At a time when the outlook for local newspapers has never looked more ominous, it is strange to remember that once, not so long ago, every newspaper had a comprehensive library and employed librarians to manage them. A sizable chunk of a global media industry was killed at a stroke with the advent of Google, and one of the many interesting components of Frayn's play is his accurate prediction of its slow decline and eventual demise.

I doubt he took pleasure in being proved right. There is nothing particularly edifying about watching the slow death of an industry. The biggest emotional punch of the play (and if you can spoil the ending of a 30 year old play, this is a spoiler alert) is reserved for the announcement that the paper is to close. Whenever industries become outdated, people lose jobs, communities are damaged; some take decades to recover, others fall into permanent decline. It is undoubtedly tragic, but that will never stop it happening.

Which brings us neatly to the fossil fuel industry's increasingly desperate attempts to head off climate legislation in the US.

You can't really blame them, when you consider how many livelihoods are on the line, but at the same time the whole exercise is a Canute-like denial of their inevitable decline.

The simple fact is that if carbon intensive industries accept the scientific realities of global warming (and if they don't can they just come out and say, so that the rest of us know where we stand) then they must also accept that they are doomed in their current form. They might give birth to cleaner offspring before they expire, but they can not expect to survive in their current guise.

This is not a particularly pleasant reality for the miners, factory workers and pilots whose jobs are on the line (and I write this as someone who is employed in a publishing industry where there are similarly grave doubts about the viability of current business models), but denying the poor medium to long term prospects for these sectors helps no one.

The best those carbon intensive industries lobbying against carbon legislation can ever hope for is to delay the inevitable for a few more years (perhaps for long enough to ensure that the rest of us are doomed to dangerous levels of climate change). Every dollar they spend on lobbying is a dollar that could and should be spent reinventing themselves to cope in a low carbon economy.

Ultimately, regardless of whether or not they are successful at watering down climate regulations, Darwinian forces will win out and it is those who that can't adapt to cope with global warming who will suffer most.

As the final scene of Alphabetical Order hammers home, the cutting librarians with flexible skills would have survived, while those who failed to adapt would have faced the axe.

It's sad, but any industry that refuses to adapt to the changing realities of a low carbon world is simply storing up a whirlwind of redundancies, bankruptcies and heartache for both its employees and the communities in which it operates. In the long term, even the people who the fossil fuel industries argue they are trying to save from unemployment will have no cause to thank the companies that seek to delay the advent of the low carbon economy.

Posted by James Murray on May 14, 2009 | Permalink | Comments (1)

Amidst all the encouraging reports of improved relations between China and the West in the run up to this year's crucial UN climate change talks in Copenhagen, something rather large and important seems to have been forgotten. It's called India.

This is not to suggest that recent statements from Chinese officials indicating that they are increasingly likely to sign up to a deal are anything other than encouraging. But in the rush to talk up the chances of a meaningful deal now being agreed, there seems to be a collective desire to ignore the fact that without a similarly sense of conciliation between Indian and the West the whole process could still be easily derailed.

The last reports I read on India's position in the Copenhagen process suggested that it was taking a significantly tougher line than China on the central topic of emission targets and climate adaptation funding.

Indian officials have said they too take climate change extremely seriously and have also hinted that they are willing to subscribe to some form of targets if developed nations sign up to deeper cuts. But they have also been pretty vocal in declaring that they will not to sign up to any deal that would undermine efforts to tackle poverty (and why should they?).

There is also an awareness that the retreat of Himalayan glaciers coupled with the potential inundation of Bangladesh means that India will require billions of dollars of assistance if it is to prepare for the inevitable impacts of climate change.

Equally, while China has made high profile investments in clean tech and rolled out a raft of new environmental regulations in recent years, progress in India has been far more patchy.

Even if China signs up to meaningful emission targets, there are no guarantees that India will simply follow suit.

You can understand the predicament faced by the Indian government.

Unlike its Chinese counterpart, it is democratically elected and will find it far harder to roll out climate change policies that might prove unpopular in the short term. Moreover, while China has famously spent much of the last two decades investing in the hard infrastructure that has underpinned its export-led economic miracle, India tended to focus more investment on the soft infrastructure of education. Consequently, it now boasts a world-renowned IT and outsourcing industry, but can not match the manufacturing expertise that should make it easier for China to build a clean tech sector.

You could not blame India if it decided that the financial support being offered by richer nations was insufficient to allow it to simultaneously meet emission targets while continuing to pull communities out of crippling poverty.

The problem for the Copenhagen process is that despite the understandable challenges India faces, any deal will be pretty much meaningless without its involvement.

The whole reason everyone is so desperate for a global deal is that without it some firms will simply relocate to countries without emission targets. I'd bet good money that there are already some morally and financially bankrupt governments calculating how much they would stand to gain by refusing to sign up to a deal and establishing themselves as "carbon tax havens" capable of attracting the world's most polluting industries.

There is a disproportionate focus on China given its status as the world's largest polluter, but India is not that far behind and as the second most populous country on Earth will almost certainly become the second largest emitter of carbon over the coming years.

Pressure will undoubtedly be brought to bear and any country that fails to sign up, even one as powerful as India, can expect to face carbon tariffs and sanctions, as well as international condemnation. But it would be far better for US and EU negotiators to now emulate the efforts they have apparently made with the Chinese, and ensure that India feels it will receive the financial support and realistic targets it needs if it is to sign up to a deal.

I don't doubt that the Indian government wants to see an agreement reached and it may well do so in the end, but there needs to be an acceptance that it could find it even harder than China to accept the terms currently being offered by developed nations.

Posted by James Murray on May 7, 2009 | Permalink | Comments (0)

So, was it green enough for you?

Was the budget's support for green businesses "timid" and "inadequate", as Adrian Wilkes of the Environmental Industries Commission argued, or was it, as Solar Century's Jeremy Leggett observed, a pretty good deal given the context of significant tightening elsewhere in the budget?

The answer, as is so often the case, contains both points of view.

The sad reality of the climate crisis is that we are already locked in to pretty dangerous levels of global warming over the next few decades. The most sensible course of action from a purely climatic perspective is to turn everything off and stop emitting greenhouse gases right now. Consequently, governments and businesses will never be able to secure unconditional praise from some green groups - the need to decarbonise the economy is so urgent means that whatever they do they could, and some will argue should, do much more.

Even measured against more pragmatic goals of cutting carbon emissions 34 per cent by 2020 and 80 per cent by 2050, the budget is a big disappointment.

Lord Stern has said that at least a fifth of countries' recovery packages should be earmarked for environmental spending, but even with the additional £1.4bn in funding announced in the budget yesterday the UK still fails this test. As Wilkes observes, other countries such as the USA and South Korea are investing far greater sums in clean tech and are threatening to leave the UK at a competitive disadvantage as new low carbon industries emerge.

Ministers claim time and time again that the UK has a leadership position in sectors such as offshore wind and CCS, but despite timely boosts for both technologies yesterday we still import all our offshore wind turbines and have no idea where our first CCS demonstration plant will be built. Other countries are forging ahead and there is a real chance that the UK will look back in ten years time and ask why the billions of pounds invested in renewable energy has been sunk into the pockets of European and US firms.

The commitments to deliver three quarters of a billion pounds for emerging technologies, over £400m each for energy efficiency and green manufacturing, £525m for offshore wind, £4bn from the European Investment Bank, and fresh funding for CCS, look impressive. But in a world where a single CCS demonstration project will cost £1bn and experts reckon we need £37bn to upgrade the grid, this new money is not going to stretch very far.

Moreover, new investment for clean technologies is undermined by the government's refusal to call an end to its love affair with carbon intensive industries. Money for green technologies is all well and good, but the attempt to pass off the £300m scrappage scheme for the car industry as an environmental initiative is simply cringe-worthy. It is a bail out pure and simple and the carbon savings will be somewhere between negligible and non existent.

And yet, despite its myriad failings, I'd argue that the environmental commentators lining up to knock the budget should also accept that there are a fair few positives to be found.

The green spending commitments may be insufficient, but given the woeful state of public finances they are still far greater than expected.

There are sweeping cuts (sorry, efficiency savings) on the horizon for large sections of the public sector, and as such it is encouraging that the Chancellor has ring fenced clean tech, health and education as a sheltered triumvirate, protected from the cost cutters. It is a case of being grateful for small mercies, but the fact that green businesses managed to wring any new money out of the Treasury in the current climate provides more evidence of the government's commitment to the sector than a hundred ministerial speeches on "green collar jobs" and "industries of the future".

The focus of the spending is also encouraging. The £45m earmarked for onsite renewable technologies through the Low Carbon Building Programme is hardly an earth shattering sum, but it shows that the government listened (albeit belatedly) to the industry's concerns about a funding gap and acted appropriately. Equally, the increased subsidy for offshore wind farms through the Renewables Obligation and new financing from the European Investment Bank, reveal that the government accepted the concerns of the wind energy sector and moved to avoid a potential crisis.

The government faced calls from thousands of vested interests in the run up to the budget and it is encouraging that the renewables industry appears to have the ear of at least some of Whitehall's power brokers.

Finally, and most importantly, the combination of the fiscal and carbon budget once again serve to hammer home the direction of travel for the UK's climate change strategy.

We may have to wait until the summer to find out exactly how the government plans to meet its target of a 34 per cent cut in emissions by 2020, but we know that the target is legally binding and will be used to inform all future policy and regulations, just as we know it could well be tightened further.

Equally, we know from the increase in the subsidy mechanism for offshore wind and the new proposal to support CCS plants through a feed in tariff that energy bills will inevitably continue their upward trend over the next decade. Just as we know that the planned increase in landfill tax will make recycling and waste-to-energy plants more financially attractive.

All of this means that firms are once again left in no doubt that efforts to enhance energy efficiency, tackle waste and curb carbon emissions will deliver long term returns, and make as much sense from a financial and risk mitigation perspective as they do from a purely environmental outlook.

Yes, it would be great to have seen plans for high speed rail and a commitment to ditch the third runway at Heathrow. Yes, it would have been nice to hear the government was willing to do something about the low price of carbon and limited availability of credit for green projects. And yes, it would have been fantastic to have seen a hand out to the auto industry replaced by a genuine green vehicle incentive scheme.

But all in all, this budget was greener than expected and proved once again that it is environmentally sustainable businesses that will prosper the most when the recovery eventually materialises.

Posted by James Murray on April 23, 2009 | Permalink | Comments (0)

Every year it's the same. A motley crew of applicants turn up, deliver their best performance in front of a dismissive panel of ill-tempered judges, and wait to see if they have secured the opportunity to have a minor impact on the national consciousness.

No, I'm not talking about the Apprentice, but the run up to the budget.

For Sir Alan, Nick and Margaret, read Gordon Brown, Alistair Darling, and Mervyn King (I'll let you decide which is which). And for the wannabe apprentices, read the army of lobby groups that stalk Westminster.

This year the show seemed to start even earlier than normal with countless groups pleading their case and promising to deliver 110 per cent if only Chancellor Darling (Nick/Margaret?) and Prime Minister Brown (Sir Alan, surely?) would give them their big chance.

In the environmenal sector alone, we've seen car firms propose a "green" scrappage scheme, electric car firms call for the immediate introduction of planned incentives; the construction sector demand further financing for green building makeovers; the wind industry request urgent assistance to ensure expansion does not stall; energy firms make the case for more funding for carbon capture and storage; the microgeneration sector warn immediate action is required to plug a potentially catastrophic short term funding gap; and various environmental, business and political groups recommend everything from the launch of a national green infrastructure bank to the development of a high speed rail network.

And that's just the calls for additional green funding. When you consider that every single sector has a similar number of lobbyists meeting with ministers to set out their own budget wish lists you start to understand why MPs given themselves that three month summer holiday.

So, what can green businesses expect when the Chancellor finally opens his red box tomorrow?

Unfortunately, the answer is not a huge amount.

There will, of course, be the UK's first carbon budgets, setting carbon targets for the next 15 years. But as has been well documented, the public accounts will make for deeply depressing reading and as a result the Chancellor will have his hands tied as he seeks to deliver the investment that will required to ensure the new carbon budgets are met.

While South Korea tucks into its £23bn green new deal and US clean tech firms line up to apply for some of Obama's $100bn in new funding, UK companies can expect significantly less munificence.

The net result is that the really big ticket projects that the government has been mulling for years - high speed rail, smart grids, marine renewables and so on - will once again be kicked into the long grass. The best they can hope for is to be namechecked by the chancellor alongside vague promises for reviews or consultations - but they might not even get that given the necessary focus on the state of the short term economy.

Where progress is more likely is with those proposals that promise to cut emissions and bolster low carbon technologies without recourse to immediate direct government funding.

For example, there is an acceptance amongst ministers that urgent action is required to ensure that wind farm development does not stall as a result of the recession. It is not in a position to hand out grants to improve the viability of projects and, given the current economic climate, it will be reluctant to increase incentives that result in higher energy bills for consumers. But some form of loan guarantee scheme is more likely to gain approval and could help onshore developers' in particular access finance without forcing the Treasury to put its hand in its pocket.

Similarly, a low interest green home loan scheme that could actually make the government money in the long run has a better chance of getting the thumbs up than yet more grants for home insulation.

There could also be some direct funding for a number of sectors.

Darling has reportedly searched behind the sofas and been able to rustle up £500m in additional funding for green initiatives. It amounts to peanuts compared to some of the green stimulus plans proposed by other countries and would not even pay for half a CCS demonstration plant, but it should prove sufficient to keep the grants for onsite renewable technologies in place until a feed in tariff comes into effect next year. The money could also be used to fund some sort of green car incentive scheme or further accelerate the government's green home programme.

However, £500m in new funding is insufficient to resolve the uncertainty swirling around the government's largest and most vexed low carbon projects. Offshore wind and CCS - two of the most important pillars of the government's low carbon strategy - both look dangerously under funded at present and with each passing month the UK's claims that it retains a leadership position in these essential technologies look more and more shaky. The government may be able to keep pushing plans for smart grids and high speed rail ever further into the future, but we need these projects up and running sooner rather than later if there is to be any chance of meeting the UK's carbon targets.

The BWEA reckons somewhere in the region of £2bn in grants, tax breaks or incentives is needed to make increasingly vulnerable offshore wind projects viable, while a further £2bn is likely to be needed to make Ed Miliband's plans for an extra two CCS demonstration plants a reality.

The Treasury simply does not have that kind of money at its disposal, so while tomorrow will inevitably be characterised by the now traditional claims that we are getting a "green budget" the likelihood is that the really ambitious low carbon projects needed to ensure demanding emission reduction targets are met will be left in their current state of limbo.

Unless Darling pulls off some huge surprises, the large scale low carbon projects that the UK needs most urgently are the very projects that are going to get, if not fired exactly, then certainly sent on extended sabbatical.

Posted by James Murray on April 21, 2009 | Permalink | Comments (0)

If I worked for a tabloid I would, at this very moment, be putting the finishing touches to a front page scoop - after all what else is there to write about, besides more moaning about the snow.

Earlier today, Jonathon Porritt, former director of Friends of the Earth, co-founder of Forum for the Future, chair of the Sustainable Development Commission, and arguably the government's most important green advisor, said that what we needed to shock us out of our complacency over climate change was at least "four Katrinas in one year".

In fairness, he did qualify his comments to say that they should not all hit America, but did argue that it would be handy if at least two hit the developed world as Europe and the US had an unfortunate habit of ignoring disasters in poorer nations.

He then admitted to occasionally dreaming of Miami getting wiped out - you can kind of see why the guy so often finds himself mired in controversy.

Taken out of context, Porritt's comments are just the kind of thing that gets environmentalists their reputation as callous doom-mongerers who take a perverse delight in natural disasters that vindicate their world view.

Like I say, a tabloid hack would have gone to town on Porritt's speech, delivered at a conference on carbon management hosted by business software company SAS (not content with talk of deadly hurricanes, he also touched on the need for huge cuts in aviation and meat consumption and declined to distance from his controversial view that there is an environmental case for seeking to limit population growth).

But taken in context, Porritt's comments follow an indisputable, if slightly morbid, logic.

The point he was making (and elaborated on in an interview with BusinessGreen.com which we will post tomorrow) is that all the climate change models now point to an era of "radical discontinuity" characterised by increasingly frequent "climate-induced shocks".

Be they devastating events like Katrina or slower-moving shocks such as droughts or carbon feedback loops there will be increased pressure on societies, governments and businesses to somehow prepare for the unpredictable.

As Porritt puts it: "There are businesses working on models that are not worth the paper they are written on. Whether you are talking from the perspective of demographics or technology change or the environment or changing consumer expectations the reality for business now is one of radical discontinuity. So smart management teams are already thinking how do we proof our business against that discontinuity? How do we build resilience in the company so we are better equipped to deal with all that?"

This resilience will have to take two forms. Firstly, there is the urgent need to make businesses and their supply chains more physically resilient to climate change threats, but secondly there is the need to create resilience against the legislative and market changes that will accompany any increase in the frequency of climate shocks.

Porritt noted that while carbon cap-and-trade schemes may have their flaws one advantage they do boast is flexibility. As a result governments are in a position to lower emission caps as soon as public opinion becomes fully aware of the need for greater action on climate change - most likely in the wake of a flurry of climate-related disasters.

Consequently, businesses need to prepare for not just increased climate instability, but also potentially sharp changes in the legislative environment that would drive up energy prices and require dramatic reform of business models. As with any such systemic changes, it is those firms that prepare earliest that will prove the most resilient and best equipped to prosper in the new low carbon economy.

It might not grab as many headlines as hypothesising over the potential up-side of Katrina-scale disasters, but this is the message business leaders should take from Porritt's all too real warnings.

Posted by James Murray on February 4, 2009 | Permalink | Comments (1)

For much of the past two years one of the most compelling drivers behind green business investments has been the soaring cost of energy. So what happens when those energy costs begin to fall?

As the UK today has its recessionary status officially confirmed, businesses are facing a new energy landscape where bills are falling for the first time in years.

The price of oil has slumped, and even green energy providers such as Good Energy are now lowering their tariffs alongside conventional players such as British Gas. Moreover, the fall in industrial output has pushed the price of carbon to record lows, putting still more downward pressure on energy prices.

For business leaders falling energy bills mean the temptation to push energy efficiency issues back to the bottom of the corporate in-tray will become ever more beguiling. Many will understandably ask why they should fork out for more efficient technologies or buildings when their bills are already falling and capital is unbelievably hard to come by.

And yet there are compelling reasons for businesses to continue to curb energy use that go far beyond the obvious truism that during a recession you should look to control all operational costs as tightly as possible, even if they are already falling.

The fact is that those firms that don't address their energy use now could recover from the credit crunch and find themselves thrown right into an energy crunch characterised by soaring power bills.

There are already signs that a perfect storm is brewing that could well break just as we'd hope to see the economy surging forward again.

The most obvious basis for this prediction is the simple reality of supply and demand. The price of oil may have fallen over a $100 from its peak of around $140 last year, but that collapse in price is the result almost entirely of falling demand, not an increase in capacity.

When demand recovers to pre-recession levels or above - and while it might seem hard to believe at the moment the history of recessions tells us this will happen - then the oil price will soar again. In fact, with many of the oil giants scaling back investments in new capacity as the recession bites the situation will likely be even worse than it was in mid-2008 as supply inevitably struggles to keep pace with rising demand.

Rising oil prices would not only lead to increased transport fuel costs they would also have a knock on impact on wholesale electricity prices that will already be being forced upwards again as a result of the raft of green regulations that are scheduled to converge upon the energy sector between 2010 and 2013.

As a leaked Whitehall memo revealed this week, the UK government is concerned new EU legislation designed to limit air pollution from power stations could add as much as 20 per cent to energy bills. And that is before you even begin to consider that EU targets requiring the UK to cut emissions and generate 15 per cent of energy from renewables by 2020 mean that by the early 2010's work on a huge expansion in renewable and nuclear capacity will be well underway, leading to a predictable impact on energy bills.

Meanwhile, the current low price of carbon in the EU's emissions trading scheme is subject to much the same rules of supply and demand that will impact the oil market once the recovery materialises.

Prices have dropped in recent months because heavy industries are producing less, releasing less carbon into the atmosphere and therefore require fewer emission allowances. The number of carbon credits issued between now and 2013 however remains constant, so as the recovery materialises and production and emissions increase again the price of carbon will also rise placing further cost pressures on energy producers. Again, these pressures will become more pronounced from 2013 when the EU moves to impose still tighter emission caps on heavy polluters.

The net result is that companies that fail to address their energy use could find themselves climbing out of the credit crunch only to find themselves locked into an energy crunch characterised by 100 per cent plus increases in energy costs and fuel bills.

That is why businesses such as Tesco and Sainsbury's this week announced new stores and initiatives that display a continued commitment to addressing energy issues despite tough trading conditions, and why those companies that really want to position themselves to fully exploit the inevitable economic recovery would do well to follow their lead.

Posted by James Murray on January 23, 2009 | Permalink | Comments (4)

So it looks like Europe will get its climate change package after all.

According to various reports, heads of state will today agree a compromise deal, dispelling fears that intransigence from Poland and Hungary, and to a slightly lesser extent Germany and Italy, would scupper legislation that has been years in the making.

And yet even before the deal is finalised the chorus of disapproval from all sides has already begun.

Green groups have slammed proposals that would allow countries to meet large chunks of their emission reduction targets using carbon credits bought in from overseas, while the industrial lobby will undoubtedly claim that they deserved still more free pollution permits under the emissions trading scheme.

Friends of the Earth's climate campaigner, Robin Webster, led the catcalls, claiming that "huge loopholes" would allow big energy-users "to carry on polluting and nations to buy offset 'credits' from abroad".

The concerns over imported credits are undoubtedly valid, particularly given the mechanism for buying these credits, the UN's CDM, is itself still struggling to iron out some pretty fundamental flaws. Moreover, the whole package is likely to be dogged by similarly unsatisfactory compromises with many of the original proposals - such as the fines for car firms that fail to meet new emission standards - having already been watered down.

But politics is about nothing if compromise and there is a strong case for the green movement to focus on what is in the final package as opposed to what has been removed.

It is easy to forget when looking at the minutiae of the proposals exactly how historic they are.

The binding targets to cut greenhouse emissions by 20 per cent, generate 20 per cent of energy from renewable sources, and deliver a 20 per cent improvement in energy efficiency have been retained and will drive massive changes in the way Europe operates over the next 12 years. They really will provide the foundations on which the low carbon economy can be built.

New car emission standards, for example, mean that in five years time many of the vehicles on the road will have to be far greener than they are today, while the way we generate energy and use much of our energy is likely to change beyond recognition over the next 12 years.

Across the entire green business movement concrete certainty that there will be demand from government for low carbon products and services will allow clean tech firms to invest with more confidence than ever before. Wind turbine and solar manufacturers can continue to scale up production capacity, smart grid innovators can accelerate development plans, electric car firms can press ahead with new models, and green consultancies can start hiring, all relatively safe in the knowledge that demand for their products will strengthen.

There have also been some improvements to the package resulting from the lengthy negotiations.

The electric car sector has received an unexpected boost from its inclusion in the targets for renewable fuel use, and the proposed "solidarity fund" that has been designed to help poorer eastern European states build low carbon infrastructure is entirely right and proper.

Even where it looks like the proposals have been watered down it can be argued that the deal is not as bad as it first seems.

Allowing governments to buy in billions of euros worth of carbon credits from overseas should not become an excuse for inaction at home, but the model, flawed as it is in practice, does help accelerate the transfer of low carbon technology to the developing world.

Equally, the likelihood that more industries than originally expected will receive free pollution permits under the EU's emissions trading scheme will weaken the carbon market and deliver huge windfalls to some pretty undeserving industries. But the emission caps imposed under the scheme will still be much lower in the next phase than they are at the moment and the fears that some sectors would simply decamp to China, where they would carry on polluting at will, were genuine and had to be addressed.

But most of all, detractors should remember that any deal would have been worthless if it did not include the whole bloc.

As the UK's increasingly assured climate change secretary Ed Miliband has been keen to explain of late the low carbon revolution cannot happen unless you bring everyone with you.

Concessions simply had to be made to get everyone on board.

Deep down those politicians who believe the scientists warnings know the 20 per cent target does not go far enough, just as they know that some of the compromises agreed over the past two days are unsatisfactory. But they are equally aware that they will never get anywhere if they set targets so ambitious that some countries and businesses immediately dismiss them as impossible to achieve.

What they have delivered is a set of goals defined not just by the art of compromise but also the art of the possible - and for that this agreement should be welcomed.

Posted by James Murray on December 12, 2008 | Permalink | Comments (1)

Amidst the tumult afflicting the world's financial market, it is perhaps unsurprising that the fact the price of carbon in the EU emissions trading scheme (ETS) has hit an 18 month low has not earnt much of a mention.

But the slump in the price of carbon from a high of around €25 a tonne earlier this summer to just €18.10 today should give serious pause for concern to many operating in either the carbon market or the wider green business movement.

The reasons behind the slump are not hard to identify.

Oil prices have fallen as the global economic slow down begins to bite and as a result gas prices have also dropped. This means it is cheaper for energy companies to burn gas compared to the more carbon intensive coal and as a result their carbon emissions are lower than expected meaning they have to buy fewer EUA carbon permits.

Meanwhile, heavy industries such as steel, cement and aluminium are also expecting production to fall as a result of the recession, meaning they too are demanding fewer EUAs.

With the supply of credits largely in line with expectations (despite some drop off in the flow of credits through the UN Clean Development Mechanism) and demand lower than expected, the price of carbon has inevitably joined the downward trend.

This raises two sizable concerns.

The first is that having been originally hailed as a success the second phase of the ETS could replicate the failure of the first phase with companies being left with far more carbon credits than they actually need.

If we do indeed experience a lengthy and deep recession then emissions from energy firms and heavy industry could even drop below their emissions caps leaving them with a glut of permits. In such a circumstance, the price of carbon would once again gravitate towards zero.

It could be argued that if firms are coming in under their emission caps then who cares how it is achieved.

But the point of a cap-and-trade scheme is that it is meant to incentivise firms to come in below their emission caps by investing in cleaner processes and technologies. They are not supposed to meet their emission targets by succumbing to a recession-imposed fall in production, on the simple grounds that under this scenario emissions will simply rise again as soon as the economy picks up.

In short, the longer the price of carbon wallows below the €20 mark the harder big polluters will find it to make the case for investment in cleaner technologies and processes. Meanwhile, capital intensive green projects such as plans for carbon capture and storage systems will find it ever harder to find funding when the low price of carbon means that conventional fossil fuel technologies remain a cheaper alternative.

Thankfully, these are likely to prove relatively short term concerns.

The economy will recover eventually, although it might not feel like that at the moment, while the EU still looks committed to tightening the cap-and-trade regime further post 2012 - a move that should push the price of carbon ever higher. Moreover, both presidential candidates have vowed to introduce a similar scheme in the US, suggesting that cap-and-trade and carbon pricing is here to stay.

Consequently, the biggest concern arising from the recent fall in the price of carbon is not the short term implications, but the fact that no one saw it coming.

For most of this year analysts have been predicting that the average price of a tonne of carbon in the ETS for the 2009 to 2012 period will be somewhere between €35 to €40. Well, it's currently at around €18 and doesn't look likely to head north any time soon.

Even after global financial markets collapsed this summer, analysts Point Carbon upgraded its price expectations for EUAs predicting that a reduction in the availability of UN-backed CER credits would more than compensate for any recession-related drop in demand.

Meanwhile, New Carbon Finance similarly predicted the global carbon market will continue to expand rapidly, partly on the back of the rising price of credits.

These organisations were not alone in subscribing to a bullish outlook and it is worth pointing remembering that not many people have covered themselves in glory trying to second guess financial markets in recent months. But in many ways it is this fact that is at the heart of the problem.

Carbon markets may have been constructed by regulation, but regardless of the legislative framework that is put in place any market will inevitably contain a degree of volatility - and it is this volatility that will always make it hard for long term investors to attain the reliable long term outlook they crave.

Unless the EU sets a floor price for carbon, something it is loathe to do, how can an investor in a new power plant or industrial facility predict returns on investment from clean technologies with any confidence?

The simple answer is they can't. They are at the mercy of informed guesses, which as recent events have shown can prove badly wide of the mark.

They might have plenty of other concerns on their minds at the moment, but those politicians who have touted carbon markets as the best mechanism for driving the transition to a low carbon economy should be asking themselves how they are going to ensure the lessons from the collapse of the financial markets are learnt and the new breed of carbon markets do indeed end up serving the purpose for which they were designed.

Right, I'm off to try and track down those three MPs who voted against the climate change bill.

Have a good weekend.

Cheers,

James

Posted by James Murray on October 31, 2008 | Permalink | Comments (0)