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Last Updated: Wednesday, 16 February 2005, 08:04 GMT
Q&A: Business and Kyoto
Smoking chimney
Business wants consumers to pay their share, too
The Kyoto Protocol on climate change comes into effect this week, and business feels under pressure.

Companies produce most pollution, and activists say they should be made to pay for the damage they do. But business lobbyists argue that competitiveness will be damaged by well-meant legislation, and say that they are far from being the only polluters.

So what will change on 16 February?

Nothing much, in fact.

This week, the protocol comes into legal effect in the 141 countries that have ratified it so far.

But this is a separate matter from the variety of legislation and regulation needed to achieve Kyoto goals in each signatory country - and in particular, the 35 industrialised countries that are being made responsible for the bulk of emissions reduction.

In some of these countries, such as Canada, almost nothing has yet been done to introduce new Kyoto-friendly laws.

In others, Britain among them, governments say everything legally necessary is already in place.

What are these new rules?

In Britain, there are two key elements.

The Climate Change Levy, a sort of quasi-tax on energy use, was announced in the 1999 Budget and has been operating relatively smoothly since.

More contentiously, there is an ongoing process of allocating emissions credits to companies that use fossil fuels - effectively, vouchers entitling them to emit a certain amount of pollution.

An EU-wide trading system was launched this January, which should in theory allow firms to buy and sell these credits.

So companies that reduce their emissions will be able to make money by selling their surplus credits, and those that prefer to pollute will have to pay for permission by buying credits.

Sounds complicated. Will it work?

Nobody's certain. Economists like the idea of market-based incentives, since establish the right price for polluters to pay - in theory far more efficiently than bureaucratic fiat.

The problem, though, is in setting the right level of allocations.

If governments hand out credits too generously, companies will be able to go about their dirty business without having to buy extra credits, and the market will fall flat. If the hand-out is too stingy, meanwhile, the escalating cost of carbon credits will seriously ramp up the cost of doing business.

In Britain, the government has raised allocations in the teeth of furious opposition from Brussels, and the row could spread if other EU member states rebel.

Will power prices have to rise?

Almost everyone says so, although the amount varies according to the lobbyist.

Most predictions tip price rises for industrial consumers of 10-40% in the UK over the next seven years.

This has worried business, but it has also spooked the power generation industry, the biggest source of hydrocarbon emissions.

Utilities are heavily regulated in the prices they charge consumers, yet are being urged to promote renewable generation technology - which inevitably results in higher costs per kilowatt-hour, at least in the near term.

Experts say government policy is pulling in two different directions.

What does business think of all this?

Firms are keen to play ball, but there have been increasing rumbles of discontent.

There is an assumption - not altogether unjustified, economists say - that companies are having to bear an unfair burden, because their behaviour is easier to change than that of consumers.

Although the direct Kyoto-related rules are not overly complex, they are only part of a swathe of environmental legislation and guidance, covering everything from building regulations to calls for disclosure. Sir Digby Jones, head of lobby group the CBI, calls this "a confusion cocktail".

Many would like to see more onus put on individuals: raise value-added tax on energy use, for example, or provide tax breaks for things like solar panels.

Why don't we scrap all these complications and just raise energy taxes?

The notion of a carbon tax is highly seductive. Polluters would pay, and there would be a clear-cut incentive to reduce fuel use.

The system would also have the benefit of being transparent, and far easier to understand than a complicated web of cross-subsidies and traded credits.

But most analysts seem to think it's a no-go. Tax on fuel is highly politically sensitive, among businesses as well as militant motorists.

More to the point, economists worry that such a blunt instrument might erode Britain's competitive position, and encourage companies to shift overseas.

If the tax is set at the wrong level, companies will either be penalised unfairly, or will choose to pay and carry on polluting.

And there's no guarantee that the state will spend the money earned any more wisely than the private sector.

Is there an upside to all this for business?

The Carbon Trust, a body set up by the government to work with business, insists the issue could spark a "new industrial revolution".

British companies spent about 250m last year on energy efficiency, and produced cost savings of about 600m. "That's good business," says Michael Grubb, Carbon Trust policy director, who insists that there is a lot of value to be unlocked in corporate energy bills.

More ambitiously, activists hope to push Britain to the forefront of the global renewable technology business - a market seen as potentially worth $500bn a year.

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