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Time for Leadership

15 March 2007

The Stern Review on the economics of climate change might seem a little rarefied and of no practical consequence to data centre managers but that may prove to be a rather short-term view. Simon Napper explains the context of the climate change debate around the world

FOR THE GOVERNMENT, the Stern Review document provides something of a 'missing link' in the climate change issue. The science has been pretty conclusive for some time, but the economic analysis has been missing. A Parliamentary Select Committee recently savaged the economic statements in the Third Assessment Report of the Intergovernmental Panel on Climate Change (IPCC). The Stern Review, prepared by a team working for the head of the UK Government's Economic Service and expressly commissioned by Gordon Brown, is more difficult to dismiss.

In essence, Sir Nicholas Stern says we cannot wait any longer before taking concrete action against climate change. He recommends an immediate investment of one per cent of GDP - by no means a small sum - in order to head off the worst effects of global warming. With an economic justification to taking immediate action, the Government is now taking its message out to the wider world. And if they are successful, we should see the beginnings of a large shift to a low-carbon world in the near future.

Carbon costs
Stern identifies four ways to cut emissions: reducing demand; improving efficiency; using lower carbon technologies; and tackling nonenergy emissions (primarily by curtailing deforestation). Part of the initial Government response to the Review was to promise a new commission to spearhead investment in green technology with the aim of creating 100,000 jobs. One of the important aspects of the Stern Review is his assessment of costs and benefits. Within that, the cost of carbon plays a major part. If the key element is to reduce emissions, then the cost of emitting is going to rise.

The main international focus for action is currently the G8 leaders of the industrialised nations. It is widely understood that a major reason for the study was the refusal of the US Government to take action on the grounds that it was too expensive. This Review will form the basis for some hard bargaining at the next G8 summit. Interestingly, Germany currently holds the chairmanship of the G8 and simultaneously the Presidency of the European Union, a similar situation to 2005 when the UK held both posts. The 2005 event, at Gleneagles, adopted a statement on the response to climate change, signed by the G8 leaders and those of Brazil, China and India - the developing world's largest emitters.

The German Chancellor, Angela Merkel, said at the beginning of February that climate change was a key priority for both 'clubs'. She announced that there would be a G8 conference in May to discuss the technical details so that an agreement on climate change could be signed at the full summit in June. Prime Minister Tony Blair was quoted on 19 February as saying that he thought there was a real chance of getting outline agreement at the summit on 'a proper stabilisation goal for the climate, a framework within which we set a carbon price'. He also expected agreement on issues relating to technology transfer.

Success depends ultimately on the willingness of the US to sign up to a successor to the Kyoto agreement. The Bush administration is increasingly isolated in its resistance to action. California and the North Eastern states have their own emissions trading schemes in place - and there hope that these can be linked to the EU Emissions Trading Scheme at some point in the future. Big American corporations are also frustrated at the inability of the White House to sense the signs of times. An informal meeting in Washington on 16 February of legislators from around the world, which included American presidential hopeful Senator John McCain, agreed on the principle of a global carbontrading scheme. McCain told the forum: "I am convinced that we have reached the tipping point and that the Congress of the United States will act, with the agreement of the administration." Senator Joe Lieberman said he believed that Congress might even pass a law on emissions reduction this year.

The Stern Review will also impinge on some of the inter-departmental disagreements within the UK Government. The Treasury has been slow to appreciate the need for fiscal measures on emissions reductions. The Climate Change Levy (CCL) with funds recycled into the Enhanced Capital Allowances (ECAs) has been one of the few overt attempts to cut emissions in buildings. The Carbon Trust and the Energy Saving Trust have grant schemes for energy technologies but these are very small beer in the grand scheme of things. The Stern Review, however, is a Treasury-sponsored study, so they can hardly disagree with the main thrust of it. That having been said, Gordon Brown's first Pre-Budget Statement after the publication of the Review displayed little enthusiasm for the one per cent investment advocated by Sir Nicholas.

There have also been long-standing tensions between the Department of Trade & Industry (DTI) and the Department for Environment, Food & Rural Affairs (Defra) over climate policy. While Defra is primarily responsible for cutting emissions - it deals with the Emissions Trading Scheme - the DTI is keen to prevent any Government action from damaging UK competitiveness. Energy policy is also a DTI responsibility, not Defra's. The Stern Review, arguing the economic case for early action on climate change, can only strengthe the hand of David Miliband at Defra.

In Europe, Stern's arguments have been picked up enthusiastically. European energy policy is increasingly driven by the twin priorities of achieving security of supply and of reducing carbon emissions. The fact that the lights keep going out in different parts of Europe is a continual reminder of how dependent the continent is on external supplies - and of internal infrastructure frailty.

At the beginning of January, the European Commission launched its new 'Energy Policy for Europe', a suite of documents covering everything from climate change and renewables to nuclear and infrastructure measures. These are designed to set targets for energy efficiency, renewable energy, etc, and also for carbon reductions. On 20 February, the EU's Council of Environment Ministers adopted the Commission's proposals on greenhouse gas reductions. The decision commits member states to reducing carbon dioxide emissions by 20 per cent (from 1990 levels) by 2020 and to make a cut of 30 per cent if this is matched by other developed nations. It has to be said that some EU states are not very happy with this position as some are struggling to meet their existing commitments for the period up to 2010.

There are several means that will be used to achieve this aim. The primary instruments are: energy efficiency, renewable energy and emissions trading. For some countries an expansion of nuclear power may also feature.

The Energy Performance of Buildings Directive, a piece of European legislation which should have been introduced into UK legislation by January last year, has resulted in the revised, and much more stringent, Building Regulations. Over the next year or two, regulations will be introduced that will mean all buildings will have to have a certificate of energy performance. Buying, selling and letting of premises will not be possible without it. Energy certificates will be introduced for domestic buildings from June. The Eco-Design Directive will affect the design of energy-consuming products. The UK consultation on implementation ended a couple of months ago and new products (and the regulations will be introduced on a category-bycategory basis) will have to be much more energy efficient.

The share of renewables will be ramped up considerably. The EU Environment Council has proposed a much higher proportion of renewables. Stern suggests that non-fossil fuels should make up 60 per cent of energy supply by 2050. In fact, the new Building Regulations already assume that 10 per cent of a new building's energy consumption will be met through the use of renewables - often on-site. Much research is going into the integration of renewables into building energy systems (and also into the fabric of buildings).

The UK is busy developing new wave and wind power - at least at pilot project level - off the coast of Scotland. Currently, only onshore wind farms compete on cost with conventional fossil fuels, but the newer technologies are coming down in cost.

Emissions trading is the central plank of the EU's strategy for reducing emissions. It is favourite tool of economists because it is economically very efficient. Those that can make savings do, those that cannot effectively pay the others to do it for them. That way the savings are made at least cost to the economy. However, in order to encourage emissions reductions, there must be a real pressure on business. In a cap-and-trade system like the EU Emissions Trading Scheme, this is done by ensuring that the number of emissions allowances are less than in the business-asusual case. Scarcity drives the price of surplus emissions up.

Future investments in equipment - even in power stations - will be affected as the carbon price goes up. As most of the restrictions on emissions are being placed on power suppliers (rather than energy-intensive industries trading in the world market), this is driving - and will continue to drive - energy prices upward. If the US, with its high emissions economy were to become involved, carbon prices could rise rapidly, making energy more expensive but making investments in renewables (and nuclear) much more attractive.

Data centres are power-intensive. The main impact is likely to be the impact of the carbon price on electricity production and supply. However, it must be remembered that a major part of the volatility currently experienced by energy buyers relates not to the cost of carbon but to geo-political instabilities in key areas of fossil fuel production. The interim technologies are likely to involve some form of carbon capture and storage (CCS). Unfortunately, these methods reduce the efficiency of production so prices will still rise.

If the EU manages to reduce its dependency on imported fuels, prices could well stabilise in the medium term. With stable fuel prices and stable carbon prices (if the ETS works properly) we could face a future where prices are more predictable and perhaps not as high as today in real terms. Stability is the key to business success. That having been said, no-one expects us to switch from a fossil fuel economy for several decades.

.. Simon Napper is a freelance journalist and former editor of Climate Change Management. He specialises in energy and environmental issues

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