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The new economy: regulation

How companies that comply with

green legislation can maximise commercial


in association with


The new economy—a Director special report

in association with the Carbon Trust


Foreword 2

The time to think about climate change

regulation is now, says the Carbon Trust’s

chief economist, Michael Grubb.

Comment 3

Recent research found that directors think

“green” regulation is the most effective

method of changing behaviour—but is

that across the board or do more senior

executives need convincing

Regulation & compliance 4

Director provides a breakdown of all

climate change regulation—what it is, how

it affects your business and what you

should be doing to comply (including

ways of controlling the cost of compliance).

Plus, across pages 4-7, UK directors share

their experience of dealing with regulation.

Looking ahead 7

The Kyoto Protocol expires in 2012. What

has it meant for industry, how have things

changed since its inception and what

happens next—negotiations are expected

to start at a December meeting on the

Indonesian island of Bali.


Managing Editor Amy Duff

Writer Jessica Twentyman

Sub-editor Helen Sandler

Art Director John Poile

Designer Gary Lonergan

Picture Editor Jane Moss

Client Sales Manager Fiona O’Mahony

Production Manager Lisa Robertson

Production Controller Jim Campbell

Publishing Director Tom Nash

Group Editor Joanna Higgins

Deputy Editor Richard Cree

Chief Operating Officer Andrew Main Wilson

Published by Director Publications Ltd for the

Institute of Directors, 116 Pall Mall, London, SW1Y

5ED. Opinions expressed do not necessarily reflect

IoD policy. The IoD accepts no responsibility for

views expressed by contributors.

Editorial 020 7766 8950

Advertising 020 7766 8900

Production 020 7766 8960

Making an early start

on climate change


Directors must get to grips with the new rules

and adapt their businesses to fit. Those who do

will reap rewards, writes Michael Grubb, chief

economist at the Carbon Trust

Commentary on climate change and carbon emissions is everywhere. The

government has committed to significant shifts over the next few decades,

which will have an impact on how we consume and produce energy.

Underpinning this transformation are new regulations, so directors must

know how to comply and how to maximise new commercial opportunities.

The time to think about all this is now. This year has seen the

introduction of two key pieces of legislation for consultation. The draft

Climate Change Bill published in March—the first of its kind in any

country—set out a framework for moving the UK to a low carbon economy.

It includes binding, long-term emission reduction targets.

In May, the Energy White Paper announced the specific measures that

will ensure individuals, businesses and government reduce their emissions and

save energy. As part of this, a new Carbon Reduction Commitment was

proposed as a mandatory national emissions trading scheme. This would

require large non–energy intensive companies, such as retail chains, and

public sector organisations, to account for their full range of carbon

emissions and buy allowances from a goverment auction or trade on the

market to cover them. The EU Emissions Trading Scheme—already in

place—is one of the most significant pieces of legislation for energy

intensive businesses. From January 2008 it enters a new phase. Businesses

will have to manage their emissions or purchase additional credits.

Organisations such as the Carbon Trust can help companies to realise the

opportunities created by the transition to a low carbon economy—delaying

compliance could result in legal ramifications and loss of

confidence in the business by the consumer. Those left

behind will see their costs escalate and lose out on new

market opportunities for low carbon goods and services.

Companies that act now will strengthen their

reputations among discerning consumers, investors and

stakeholders. Small investments of time, planning and

money in the short term could lead to significant


This is a global issue in which the UK is fast

emerging as a front runner. There will be a

competitive edge for those companies that

take the lead on it.

Printed by St Ives Roche. Mailed by Priority Newstrade & Mailing.

Paper supplied by McNaughton Publishing Papers Ltd.

ISSN 0012-3242

Michael Grubb

Chief economist, the Carbon Trust


The new economy—regulation

Comment 3

Enlightened firms

think long-term

Businesses will go greener if

they can rely on government

to be consistent, writes

Jessica Twentyman


The debate on climate change has taken a

fundamental step forward. These days, the

question preying on the minds of

policymakers, business leaders and the

population at large is not whether global warming

is happening, but what should be done to tackle it.

With the publication of the draft Climate

Change Bill in March 2007, the direction of UK

government thinking is a good deal clearer. The bill

places a mandatory duty on the government to

reduce net carbon emissions by 60 per cent by

2050 (from the 1990 baseline). It can only achieve

this goal by imposing emissions restrictions on

business and, in all likelihood, individuals.

It seems likely that the present and future

governments will seek to raise the level of “green”

taxes, while offering tax incentives to companies for

investing in energy- and water-saving equipment.

Geraint Day, who, as head of devolved

government and health policy at the Institute of

Directors, is in regular contact with its board-level

members, says the response of business leaders is

to focus on the long-term: “They take their

environmental responsibilities seriously but

they’re adamant that climate change won’t be

tackled through quick fixes and knee-jerk


He explains that business leaders want to see a

framework of regulation and taxation that is

“stable, consistent and carefully thought through”.

It needs to be communicated clearly and should

not impose unnecessary burdens in terms of cost

and administration, which could hamper overall


That view is echoed by a recent survey conducted

by consultancy PricewaterhouseCoopers (PWC).

While the majority of the 151 respondents said the

best way to reduce carbon emissions would be

through regulation, more than half had insufficient

confidence in the current framework to make longterm

decisions about reducing their carbon


“Business leaders recognise that customer and

investor pressure will not be sufficient to change

corporate behaviour, given the urgency and scale of

action required,” says John Manning, head of

environmental tax and regulation at PWC. “But

they are frustrated by a lack of ‘joined-up thinking’

among different government departments.”

Despite these misgivings, most companies are

already taking action. In the PWC survey, some 71

per cent of respondents said climate change and

environmental issues were affecting the way they

conducted business.

Others will soon be legally obliged to join them,

as the volume of environmental legislation

mounts. Companies that act now are at a distinct

advantage over competitors—strengthening their

reputations among investors, consumers and

stakeholders as well as preparing for further

regulatory changes on the horizon.

Useful contacts

The Carbon Trust

Tel: 0800 085 2005 or visit:

The Institute of Directors

Tel: 020 7839 1233 or visit

October 2007 DIRECTOR



The compliance challenge


Tony King CEO Powerlase

“As a company making high-powered lasers,

Powerlase uses two things in large quantities:

water and electricity. There’s no way around that.

In fact, our unique manufacturing approach is far

cleaner than alternative methods, which typically

use acid baths and are far more unpleasant and

environmentally damaging. If the government

decided to tax us on our use of electricity, for

example, that could make life very tough,

raising our cost structure and putting us at

a competitive disadvantage to overseas

rivals. I think that’s why politicians have

to be very careful that, in the course of

getting businesses to face up to their

environmental responsibilities, they

don’t stifle innovation.”


The new economy—regulation


Too many rules, too little time

This summary of the climate

change rules, by Jessica

Twentyman, is the first step

towards bringing your

company up to date


Andy Hood managing

“director Sarian Systems

“I want Sarian to be as eco-friendly as

possible. I certainly don’t throw up my hands

in horror at the prospect of environmental

regulation. We already comply fully with the

EC directives on WEEE and RoHS. But while I

applaud these measures, I have to say that

understanding our responsibilities and

complying with them has been an enormous

headache. I’d like to see more organisation in

the way regulation is introduced from the

policy-makers and also more emphasis on

educating the business community. I also

think business would benefit if more

thought went into setting up clearer

lines of communication between

government and industry.”


These are exciting times for lawyer Andrew

Waite, partner and co-ordinator within the

environment group at City law firm Berwin

Leighton Paisner. New rules designed to

reduce emissions are drumming up

business opportunities and require ever more

specialised understanding of the issues.

But what about the hard-pressed company

director, who has little time to pore over the latest

updates to environmental regulations Waite’s advice

is to do as much as possible to prepare. “Life is going

to get tougher for all businesses, regardless of size or

industry, over the next few years,” he warns.


The EU Emissions Trading Scheme (EU ETS) covers

Europe’s largest emitters in energy-intensive sectors

including cement, glass, pulp and paper, and oil

refineries. It is likely to create a robust price for

carbon and a need for businesses to efficiently

manage their CO 2 emissions or purchase

additional credits.

The UK government has made a commitment to

address the greenhouse gas emissions of

non–energy intensive companies, too. The Carbon

Reduction Commitment (CRC) is a new scheme,

announced in the Energy White Paper 2007. (CRC

is the new name for the Energy Performance

Commitment proposal on which the government

consulted in 2006. The name has been changed to

avoid confusion with Energy Performance

Certificates, below.)

The CRC will apply mandatory emissions trading

among large commercial and public sector

organisations (including supermarkets, hotel

chains, government departments and large local

authority buildings) of 1.1mtc (million tonnes of

carbon) a year by 2020. From around 2010, the

CRC will apply to organisations whose annual

mandatory half-hourly metered electricity use is

above 6,000mwh (megawatt-hours).

The Climate Change Levy is a tax on energy

delivered to non-domestic users. The levy does not

apply to the domestic and transport sectors.

Electricity generated from new renewable energy

schemes is not taxed, but that from nuclear power

is, even though it causes no direct carbon.

When it was introduced, the CCL was frozen at set

rates per mwh for electricity, coal and gas. But in

the 2006 Budget, it was announced that the levy

would rise annually in line with inflation from

April 1, 2007. An 80 per cent rebate on the levy is

available to energy-intensive users that sign a

Climate Change Agreement (CCA) to reduce


Wood for the trees: energy

intensive sectors such as

paper come under the EU

Emissions Trading Scheme

October 2007 DIRECTOR


EPCs will be required for the sale or rental of

commercial properties over 500 sq m and for the

construction of all new commercial-use buildings

from April 2008.

Charles Macdonald, buildings strategy manager

at the Carbon Trust, says that creates some great

market opportunities for property owners and their

lessees. “These EPCs enable the objective

measurement of performance, and if performance

can be measured, it can be managed and priced,”

he explains. Well performing buildings will attract

higher rates and more responsible occupants, but

will offer those occupants lower energy bills.

Public sector buildings over 1,000 sq m will be

required to make a Display Energy Certificate

(DEC) accessible to visitors and occupants. The

certificate will give energy ratings for the building.


The furore surrounding the introduction of home

information packs for residential properties has

diverted business attention away from the fact that,

under the European Performance of Buildings

Directive (EPBD), the need to obtain an Energy

Performance Certificate (EPC) will soon apply to

commercial properties too, grading them on their

“greenness” on a scale from A to G, much like a

fridge or tumble dryer.

In fact, according to the government’s timetable,

Team effort

James Greenbury CEO DX group

“We do our best to combine running an efficient mail delivery

business that relies on vehicular transport with minimal

environmental impact. We’re very aware, for example, of the 2002

legislation that introduced company car tax based on CO2

emissions and we await any extension to cover vans.

But red tape is always a concern for chief executives

and the proposed expansion of the European Union

Emissions Trading Scheme would have a severe

impact on many businesses that were previously

unaffected. Big business is often unfairly

scapegoated by climate change campaigners. I

believe it’s important that we all work together—as

individuals and as businesses—towards reducing our

energy dependency and reducing climate change.”

Driving change: in his last

budget, Gordon Brown

announced a two per cent

discount from 2008 for

company cars that run on

bioethanol fuel


Since April 2002, company car tax has been based

not on mileage, but on the car’s list price and

carbon dioxide rating. Most diesel cars, meanwhile,

attract a three per cent supplement on the

equivalent figure for petrol cars, while hybrids and

those that run on liquefied petroleum gas (LPG)

attract discounts of three and two per cent


In this year’s Budget, it was announced that a

two per cent discount will be on offer from April

2008 for company cars that run on E85 high-blend

bioethanol fuel.


■ Packaging If your business handles more than 50

tonnes of packaging in a year and has a turnover of

more than £2m, you must comply with the

producer responsibility obligations. These require

you to register with an environmental regulator,

and recycle and recover certain amounts of

packaging waste.

■ WEEE Waste Electrical and Electronic Equipment,

or WEEE, is the fastest growing waste stream in the

UK. The WEEE Regulations aim to reduce the

amount going to landfill, and increase recovery

and recycling rates. The rules came into force on

January 2, 2007 and apply to any manufacturer,

importer or rebrander who puts such equipment

on the market here. Full responsibility for treating

and recycling household WEEE, meanwhile, began

on July 1.

■ RoHS The Restriction of the Use of Certain

Hazardous Substances in Electrical and Electronic

Equipment Directive (RoHS) came into force in

June 2006 and applies to the same constituency as

WEEE. It bans the placing on the EU market of any

equipment containing more than agreed levels of

lead, cadmium, mercury, hexavalent chromium,

polybrominated biphenyl (PBB) and

polybrominated diphenyl ether (PBDE) flame



The new economy—regulation

Regulation 7

Kyoto and


when environment ministers

from more than 100 countries

meet in Bali in December, one of

their priorities is to start

hammering out a successor to the Kyoto Protocol,

which expires in 2012.

Participants will be looking at ways to address

Kyoto’s shortcomings—in particular, the nonparticipation

of the US, as well as large developing

nations such as China, India and Brazil. But they

will also be looking to build on Kyoto’s

considerable achievements, several of which have

already had a profound effect on the way UK

businesses operate.

Now 10 years old, the protocol agreed reductions

in emissions of six greenhouse gases between 2008

and 2012. The European Union committed itself to

an eight per cent target, but the UK government

went further, promising a reduction of 12.5 per

cent by 2012.

One of the first manifestations of that

commitment came with the introduction of the

UK Climate Change Levy (CCL). Devised to

promote energy efficiency, the CCL is an

environmental tax imposed, at the time of supply,

on all non-domestic consumers of electricity, gas

and coal. There are some exemptions. Energyintensive

companies that enter into a Climate

Change Agreement (CCA) with the government,

under which they commit to carbon-saving

reduction targets, qualify for an 80 per cent rebate

on the CCL.

In turn, the CCA system has enabled some—but

by no means all—energy-intensive businesses in

the UK to opt out of the first phase of the EU

Emissions Trading Scheme (EU ETS). But these

companies will largely be obliged to take part in

the second phase, starting in 2008.

Under the EU ETS, participating companies are

issued with government permits to emit carbon


The trickle-down from the Kyoto

Protocol is having quite an impact

on business. Jessica Twentyman

looks at the effects and at what

comes next

dioxide. They can then trade these with other

companies, according to whether they have a

shortfall or surplus.

Already, 11,000 installations across the EU are

covered by the scheme, accounting for around 40

per cent of emissions, according to James Wilde,

director of Insights at the Carbon Trust. “This is a

considerable achievement,” he says, adding: “The

influence of Kyoto will continue in the form of the

draft UK Climate Change Bill, which was

published in March.”

Due to come into effect next year, the bill

reiterates the UK’s firm commitment to reducing

carbon emissions. But more important for

businesses, it sets the stage for new regulations and

taxes that will enable the economy to deliver on

that commitment.

“Gas-elec group

The world’s a stage: the UK

has shown a firm dedication

to reducing carbon

emissions. The Arc building

in Hull (page 4) shows how

new buildings can minimise

their CO2 emissions through

efficient design and use of

renewable energy


John Davidson managing director

“Gas-elec has been in the business of safety-testing gas

and electrical installations for over 10 years and I’ve visited

businesses where the levels of energy waste are

absolutely unbelievable. I don’t think businesses

should be too negative about climate change

regulation. Take Energy Performance Certificates

(EPCs): once these are extended to commercial

properties, businesses will have an enormous

opportunity to save costs by occupying the most

energy-efficient premises available. To my mind,

that’s no bad thing. What’s needed is a good

balance between encouragement and

enforcement, because this isn’t just a

matter of red tape—there’s a real

necessity here.”

October 2007 DIRECTOR

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