Good business environment

OECD Observer

Mixing competition and the environment might raise some eyebrows, but they may help each other. Take the UK’s energy market reform.

According the OECD’s latest environment review of the UK, the resulting “dash for gas” in power generation should enable the UK to meet its 12.5% greenhouse gas (GHG) reduction target under the Kyoto Protocol. The switch from coal to gas fuel in thermal power production, driven largely by the liberalisation of the UK electricity market, led to a 20% reduction in CO2 gas emissions in the UK over the period 1990 to 1999.

This was the easy part; reductions in CO2 and other GHG emissions will be more difficult and costly to achieve in the future, the review says. The lower electricity prices brought about by market liberalisation have acted as a disincentive to conserve energy on the part of consumers. But with further measures in place and still being written, the UK’s climate change programme forecasts that national GHG emissions will be 15% below 1990 levels in 2010.

For instance, the Non-Fossil Fuel Obligation, part of the 1989 Electricity Act, required electricity supply companies to get specified amounts (2.8% in 2000) of new generating capacity from non-fossil sources, including renewables. A new proposal on the table, the Renewables Obligation, expects to increase that amount to 10% by 2010, if consumers agree to shoulder some of the cost.

Another promising regulation is the Climate Change Levy (CCL), a charge levied on businesses and public sector organisations for energy use. It adds about 15% to typical energy bills, but the carrot is that businesses which accept and subsequently meet energy reduction targets get an 80% discount on that levy. As of June 2002, over 40 CCL agreements were in place, covering 5,500 companies in some 13,000 sites. Britain’s efforts to push the environment higher up the policy agenda have also put into motion such “no regret” measures as the road-fuel duty escalator, the landfill tax credit programme and the emissions trading scheme.

But privatisation has not yet worked the same wonders in water services, according to the environmental review. While the report congratulates the government on its decoupling of economic growth from environmental pressures like CO2 increases, the UK’s overall environmental ranking is only average compared to other OECD countries. The survey, a follow-up to the first report in 1994, advises that more attention needs to be given to such areas as waste and waste-water treatment infrastructure; agriculture and urban runoff; nitrogen pollution; and marine habitats and biodiversity conservation measures.

©OECD Observer No 235, December 2002

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