UK struggling with climate change uncertainties

London – The government is struggling to graft the ’uncertainties’ of climate change onto today’s hard economic realities – reading between the lines of a speech (edited version below) by Chris Huhne, secretary of state for energy & climate change, to business lobby group the CBI.

While the agenda set by the 17 Nov CBI conference, titled ’Tackling climate change in the new economy’, posed a challenging dilemma, Huhne offered little of the clarity needed to underpin investment by industry in the so-called ’low-carbon’ economy.

The implications for the process industries, it seems, will be more half-baked measures from the Coalition – along the lines of its recent CRC scheme revisions – that will do little for the environment, but leave UK process industry at a disadvantage to overseas competitors.

Chris Huhne’s speech to the CBI:

Climate change poses a unique threat to our security, and our prosperity. From mudslides in China to forest fires in Russia, extreme weather events are becoming more frequent.

Food security, water shortages, climate-driven migration, energy conflicts; the potential knock-on effects are on a global scale.

The UK may be responsible for just 2% of the world’s carbon emissions, but the consequences of climate change will not respect our borders.

We also face a shifting landscape of public opinion; where doubt and disbelief in science itself threatens to undermine collective will for action.

7 in 10 people think ’it is too late to do anything about climate change’.

1 in 4 believe ’it is not worth Britain trying to combat climate change because other countries will just cancel out what we do”.

From carbon markets to emissions reductions targets, it can be difficult to pick a path when faced with uncertainty and risk.

Exactly how fast carbon emissions are changing our climate - and exactly what that change will mean - may be unknown.
But uncertainty is no excuse for inaction.

And actually, the search for certainty is misguided.

Rather than being caught up in absolutes, we should prefer to think in terms of probability - and risk.

One of the clearest lessons from the financial crisis was the importance of risk; understanding it, and planning for it. Business pages around the world have devoted countless column inches to risk management.

Around the world, companies devote time and capital to managing their risk portfolios. Increasingly, they include exposure to climate risk - a liability unknown just a few decades ago.

I believe in the power of the market to uncover the world of truth; what the American economist Paul Samuelson called ’revealed preference’.

And whatever the state of the public debate about the science, the state of the markets speaks for itself.

Investors are subjecting opportunities to ever greater environmental scrutiny. Sustainable investment, as Stephen Green made clear in a speech last summer, ’has joined the mainstream’.

We have the third largest insurance industry in the world. It manages investments comprising a quarter of the UK’s net worth. Risk assessment is at the very core of their business.

Last year, Stephen Hadrill of the Association of British Insurers said that ’our assessment of climate change convinces us that the threat is real and is with us now’.

According to the ABI, if global temperatures were to rise by 2 degrees, average annual insured losses from inland flooding would rise by 6%. And the losses from an extreme weather event would rise by 18%.

That would mean higher premiums for businesses and homeowners. But it could also restrict the flow of capital.

Insurers hold around 15% of stocks on the London Stock Exchange. The kind of flood that strikes once every 200-years, for example, would need over a billion pounds of additional capital to cover higher than expected losses.

With extreme weather events becoming more frequent, not less, those odds shorten dramatically.

According to the Economics of Climate Adaption Working Group, current climate risks cost emerging economies between 1 and 12% of annual GDP. If we exceed the 2 degree limit, that could rise to 19%.

The rise of specialist climate reinsurance by firms like Swiss Re is a sign of just how seriously businesses take climate change.
It is also a valuable indicator of the vitality of the low-carbon sector, a global market expected to reach £4 trillion by 2015.

Because after all, businesses tend not to commit capital to ideology. They are not investing billions in reinsurance and managing climate risk portfolios out of blind belief.

Instead they have judged, as we have, that the probability is so great that inaction is simply not an option.

Clearly, it is worth taking precautions. If science said there was a 90% chance of your house burning down, you would take out home insurance. And that is what climate change policy is - home insurance for the planet.

The challenge is to make sure we take the right policy measures. To protect not just our society, but our prosperity.
As we become more aware of the scale of the challenge and the size of the solution, so the unthinkable becomes a little more palatable.

That is why over the summer we published our 2050 Pathways calculator. It gives people the chance to figure out what kind of technology mix they would choose to help us achieve a sustainable energy supply.

Our job is to create the right framework. One that can meet our challenging emissions reductions targets, but also allow innovation and growth to flourish.

Not all the changes will be popular. But they are essential for a profitable and sustainable future …

But to secure energy investment on the scale we need to match our carbon reduction ambitions and keep the lights on, business need to know what kind of marketplace they operate in.

The current market framework is not fit to deliver the investment we need. That is why, later this year, we will set out our plans to reform the electricity market.

The challenges are huge. We must replace a quarter of our old power stations by 2020. Largely decarbonise the electricity sector in the 2030s. And prepare for a possible doubling in demand for electricity by 2050.

Left untouched, the electricity market would allow a new dash for gas, increasing our dependence on a single fuel, and exposing us to volatile prices. It would lock carbon emissions into the system for decades to come.

We have a once-in-a-generation chance to rebuild our fragmented market, rebuild investor confidence, and rebuild our power stations. Like privatisation before it, this will be a seismic shift; securing investment in cleaner, greener power.

Cleaning up the supply of energy is a huge part of my Department’s work. But we are also determined to do something about energy demand. Energy saving is the cheapest way of closing the gap between demand and supply.

Energy efficiency can also offer real opportunities for businesses to save money, increase competitiveness, cut carbon, and access new market opportunities.

The Green Deal is our answer to the challenge of our ageing housing stock; a nationwide refit to bring our homes up to 21st century efficiency standards.

Allowing businesses to pay for energy efficiency improvements through a charge on their energy bill, and with the level of expected energy saving being higher than the cost of repayment. Spreading the cost of repayment over time, and addressing capital barriers.

Better energy efficiency for small and medium sized enterprises can help reduce our dependence on expensive imported energy.

And after all, in a world of growing demand and finite resources, the pressures on fossil fuel supplies will only increase.

It is only 160 years since kerosene was first distilled from petroleum. Yet already we are drilling two miles beneath the ocean’s surface in search of oil.

It is a testament to the relentless pace of engineering, scientific, and economic progress. It also speaks to the power of scarcity.

The age of oil will last but a few centuries. So my challenge to you is this: commit to the industries of the future. After all, the low-carbon sector is still in its infancy. Its rapid growth - 4% annually - is testament to that.

Britain accounts for just £112 billion of the global trade in low-carbon and environmental goods and services. With our deep reservoirs of engineering and scientific expertise, we can do so much more.

As we begin to shift towards a new kind of economy, the smart money will be on emerging technologies. So be forward-thinking in your investment decisions.

And last but not least, don’t forget to challenge us. Speak up for your members, and for your businesses.

Global perspective

In Europe, where we will continue to push for a more ambitious emissions reduction target. That will firm up the carbon price and send clear market signals about the low-carbon economy.

And in the UNFCCC, where we will continue to make the case for a binding global agreement to halt runaway climate change.

Although we do not expect such a deal to come in December, it will come.

From trade to CFCs, the history of international agreements suggest that although the journey may be long, and the road may be arduous, the destination is worth it.