A changing environment means change for business

Sustainability and climate change and how it will impact the UK economy

The environment continues to effect the way we do business. In the UK we have seen extreme weather conditions that have affected many industries. And green growth will remain high on the UK agenda and international policy on climate change will continue to effect businesses. Here we cover how economic growth will be effected by the changing local and global environment.

It will be time to plan for a warmer world.

A downward revision of projections for global temperatures over the next five years by the UK’s Met Office prompted claims of “we told you so” from climate sceptics over the New Year. But the projections still show near record temperatures in the next few years and don’t change the long-term prognosis. Meanwhile Australia continues to bake in record summer temperatures. So it is no time for complacency. Our own research suggests that even the 2 degrees target agreed by the international community looks highly unrealistic, based on the current rate of progress on global decarbonisation. In our view therefore it's time to plan for a warmer world.

The Government and Insurance industry will come together to consider how best to provide affordable insurance cover for high risk flood areas.

In the UK, it’s official: 2012 was the wettest year ever in England, according to the Met Office. The downpours caused widespread disruption with over 8,000 houses and businesses affected by flooding. According to our analysis, this has left the insurance industry facing claims of about £1bn and property owners with the prospect of significantly higher premiums. These may not be freak floods. Analysis by the Met Office suggests that the UK may continue to get wetter, as climate change causes warmer air to carry more water. One implication of this in 2013 is that there will be added impetus to the discussions between the Government and the Insurance industry about providing affordable insurance cover for the high risk flooding areas of the UK. The existing 2008 agreement is due to expire shortly without providing on-going insurance cover for those affected households.

Green growth will play a bigger role in the UK Growth Agenda.

Battered by multiple crises, the one idea that politicians everywhere seem to be able to agree on is the green growth agenda. The vocabulary varies – green growth, sustainable development, low carbon and the like – but the underlying ambition is the same: more sustainable economic activity and, particularly, more green jobs. It calls for a new approach to economic growth that is supportive of the earth’s ecosystems and contributes to poverty alleviation. Building green economies means changing the way we define and measure economic success and societal progress, so that they better reflect quality of life, social equity, and the need to maintain the natural systems and resources humans and other species need to thrive. We expect to see both countries and companies exploring new ways of measuring and reporting progress in 2013. We should also see low-carbon and environmental industries growing in importance to the UK economy. They already contribute 8% to GDP and employ almost a million people – more than the motor trade and telecoms combined. These sectors can be a catalyst for a sound and sustainable UK economic recovery. We expect that the business community will continue to invest more in clean energy, sustainable transport, and energy and resource efficiency in an effort to build resilience to rising global commodity prices while mitigating environmental risks to the business, not least those associated with climate change. One implication of this for 2013 is that there will be more discussions between the government and the industries on how to craft the right public policies and incentives to promote green jobs, technologies and infrastructure in the UK, and how to exploit the advantages in green development to expand the UK’s trading and investment opportunities worldwide.

Targets, finance and ‘loss and damage’ will be high on the agenda at the climate negotiations in 2013.

New findings from the IPCC’s fifth Assessment Report (AR5) will highlight the gap between current emissions pledges and what the science tells us is necessary for 2 degrees. At the next COP in Warsaw this November, countries are expected to propose measures to increase ambition in the short term, i.e. up to 2020, but it is likely that these discussions will remain largely qualitative in 2013.

Developing countries will call for more money to tackle emissions growth and the impacts of climate change.

This year, we can expect to see some forensic level analysis of what funding has been delivered and whether it is additional to existing aid. Developed countries are also expected to present plans in Warsaw on how they will scale up their current funding to mobilize $100bn per year by 2020. The Green Climate Fund, newly established in South Korea, will seek to define some of the rules and funding mechanisms for channelling climate finance. In 2013, though, it is likely that donor governments will use existing routes to deliver their financial commitments (i.e. through their own development departments or through the World Bank and similar institutions).

‘Loss and Damage’ becomes a central discussion in sustainability and climate change.

In Doha, governments agreed to establish a new institution or mechanism to address the issue of ‘Loss and Damage’. There is the risk that these discussions could be a drag on the negotiations in 2013. Loss and Damage could either become mainstreamed into climate finance, along with mitigation and adaptation, or descend into fractious and interminable discussions about liability and compensation. If Loss and Damage raises expectations about financial flows unrealistically, it is possible that it could increase mistrust among negotiators when these expectations are not met. By the time we reach Warsaw in November, we will see which direction these discussions have taken.

New coalitions of countries may emerge in 2013 which break down the traditional north south divide.

The EU, a self-proclaimed leader in the talks, may look to forge stronger links with other proactive developing countries such as the AILAC group (Association of Independent Latin American and Caribbean states which includes Chile, Costa Rica, Panama, Colombia, Peru and some others).

Climate science will become increasingly sophisticated though still contested in some quarters.

Early drafts of the IPCC’s landmark report will be widely leaked and critiqued in 2013. The Fifth Assessment Report is a comprehensive review of the science of climate change, its potential impacts and options for adaptation and mitigation. The three working group reports will be finalised in late 2013 and early 2014¹. Increasing sophistication in climate models will give more insight into climate forecasts for the coming decades and better geographical resolution in the longer term projections. In a recent summary of the science, the New Scientist’s prognosis on climate change was that “it’s even worse than we thought”.

The development of carbon markets will need bold policy intervention and economic growth.

In the spring this year, the EU is expected to agree on the so-called backloading proposal to delay the auctions of a portion of 2013 and 2014 allowances. Backloading could prop up prices in the short-term, but that prop will be removed later in Phase 3 as those allowances are reintroduced into the market. So this is temporary medicine when the EU ETS needs major surgery. Our analysis last year showed that both bold policy intervention and economic growth above 2% are needed to prompt the market to return to historic levels of €15-20. This suggests that the EU allowance price will stay in single digits over the course of 2013.

There will be a continued lack of demand for CER credits.

Nor will 2013 bring any relief to the CER market, where prices are now measured in cents rather than Euros. The chronic lack of demand for these credits is not new, but it has been exacerbated by the decision in Doha that only signatories to the 2nd Kyoto period are eligible to use CERs. It is easy to think with such low prices that the Clean Development Mechanism is broken and not worth fixing. But market mechanisms will continue to feature prominently in the negotiations in 2013. One bright spot on the horizon is work by the World Bank Partnership for Market Readiness to bring together major developed and emerging economies to support the implementation of new market mechanisms to tackle emissions growth.

¹_{Publications dates for the IPCC Fifth Annual Assessment Report: Working Group I – September 2013; Working Group II – March 2014; Working Group III – April 2014; Synthesis Report – October 2014}