John Cridland, CBI Director-General

Speech at launch of CBI report The colour of growth: Maximising the potential of green business

Thursday 5 July 2012

-----CHECK AGAINST DELIVERY-----

Good morning. Ive spoken before about the pillars of UK growth: rebalancing the economy; boosting infrastructure investment; increasing exports; and nurturing our highgrowth, medium-sized businesses.

Today I want to discuss a further way to deliver such rebalancing: green business, and the economic opportunities that go hand-in-hand with tackling our energy and climate change challenges.

The choice between going green and going for growth is a false choice. Green and growth do go together, and the statistics back this up. The UKs low-carbon and environmental goods and services market is worth more than 120bn a year. Thats equivalent to more than eight per cent of GDP.

Even through the downturn, green business has been growing steadily. In our major new report, published today, CBI analysis shows that in 2010/11, green business is likely to have accounted for more than a third of all UK growth.

It has a trade surplus of 5bn per year, and is forging strong links with growing economies: its number one export market is China. Its made up of some 50,000 firms, between them employing 940,000 people two-thirds outside London and the South East across many different sectors.

These are not just companies with eco in their name. Theyre mainstream businesses tapping into a global green market currently worth 3.3 trillion a year.

Take SMD, the mid-sized business that I visited in Newcastle yesterday with the Secretary of State for Business. Its the worlds number-one independent designer and manufacturer of specialist subsea remotely operated vehicles, used for lots of things including offshore renewables. Theyre exporting to China, Brazil, Japan, and Singapore. Its just one example of how, for the UK, green is already bringing growth, and the government expects this trend to continue. The CBIs analysis shows that, under official projections, by the end of this Parliament the UKs trade deficit would be double its predicted size without the contribution of green business. But this contribution wont just happen by itself. We face three big challenges if green and growth are to go together. They are: confidence; complexity; and competitiveness.

First, confidence. Business needs this to invest, but were asking a lot given economic and commercial realities.

Take the electricity sector, which needs hundreds of billions of pounds of investment over the coming decade. But generators balance sheets are weaker than they were. The cost of capital from the markets is higher. We need new nuclear in the UK: without it, decarbonising and keeping the lights on will be harder and dearer. But the Fukushima disaster has changed the way many countries think about nuclear, so uncertainties hang over the companies were asking to invest here.

Consumers also need confidence - and the right knowledge - to demand green products and services. Businesses cannot forever lead their customers. But consumer confidence is at a low ebb and many people are saving instead of spending.

The government cannot restore business and consumer confidence overnight. But it can send signals that going green isnt a risky gamble.

It needs to send that message out loudly and consistently, to boardrooms and households.

It needs to stay clear on its ultimate aims of the 80 per cent reduction target in the Climate Change Act and the fourth carbon budget agreed last year.

The government needs to be consistent in its actions too. Since it took office, weve seen changes to North Sea oil and gas taxation, the removal of revenue recycling from the Carbon Reduction Commitment, and the re-jigging of incentives for solar panels.

And now it is widely reported that the government is umm-ing and err-ing about the level of support for wind energy under the renewables obligation, a decision that should have been settled months ago. This kind of uncertainty does not breed confidence in fact, it scares markets and drives up the cost of capital.

Policy uncertainty also makes it harder to build new consumer markets. Its already a tough job only 23 per cent of people consider energy performance

when buying or renting a home, and theyre further put off by initial costs, aversion to debt, and disruption.

The government can help by giving business the tools with which to craft attractive consumer propositions. The Green Deal is a great idea to break down one of the barriers, that of upfront cost. But its not a silver bullet. We also need consistent consumer information and, in some cases, regulation. We wont get energy efficiency into the DNA of the housing market without some kind of long-term incentive, for instance by banding stamp duty according to energy efficiency. It can be fiscally neutral, and its proven very successful for vehicle excise duty. Thats the first challenge: building business and consumer confidence. The second challenge is complexity.

As the UK has raced to put policies in place to tackle climate change and energy security, different bits of government have been frantically doing their own thing. This hive of well-intentioned but uncoordinated activity means policies have grown up independently of one another, and are now intertwined into a gnarly mess.

Take environmental taxes. In 1989 there were four of these. Today, there are 12, and thats before the carbon price floor comes in next year.

The CBI has extensively researched business views on these taxes, and three weeks ago published our findings.

Businesses do believe that if they are well-designed, green taxes can be welcome. Landfill Tax and Vehicle Excise Duty, for example, are working well.

But other taxes are very poorly perceived, in particular the Carbon Reduction Commitment. Its now seen as a pure revenue-raiser with no environmental benefit.

And as a whole, the set of green taxes are not perceived to work well together. Someone needs to step back and work out how to untie this knot. The government should ask an independent body, such as the Office for Tax Simplification or the Committee on Climate Change, to undertake an expert review.

But there is a quick win available by scrapping the Carbon Reduction Commitment. We know the Treasury will need the revenue for the next few years, but lets have a much simpler, time-limited energy tax that doesnt pretend to be green.

With the CRC gone, we can have better energy efficiency policy, and the government has made an excellent start with the introduction of mandatory carbon reporting. Provided its done in a flexible and phased way, the CBI has been advocating this for years.

If we can keep the complexity of green taxes and all green policy - down, itll allow businesses the freedom to innovate.

The third big challenge is competitiveness.

We know green growth can be a good news story for the economy as a whole. But we need to be careful about how costs are distributed. If we design policy right, we dont have to create losers. Take energy costs. Global trends mean theyre not likely to plummet any time soon, despite the advent of shale gas. We should certainly maximise our domestic production of gas, but investing more widely in low-carbon energy will help to insure us against global price rises.

However, policy does add costs in the short term, and we have to make sure that these costs dont harm vulnerable consumers. Its right to help people facing fuel poverty, through initiatives such as the governments new Energy Company Obligation.

There are vulnerable businesses too, those who are energy intensive and trade exposed.

If UK energy prices are uncompetitive, these companies will fall prey to their international counterparts and be forced out of the country or out of business altogether.

If we had to make a decision between going green and keeping the 1 per cent of GDP and 225,000 jobs provided by our energy-intensive industries, that would be a tough call. But we dont have to make a choice.

Allowing these industries to go offshore wouldnt prevent one molecule of carbon dioxide from entering the atmosphere, and in fact might produce more. And were going to need their products for our green economy: low-carbon steel for wind turbines; low-carbon chemicals for electric batteries; low-carbon cement for eco-buildings.

For businesses, UK electricity costs are already mid-table at best compared to European competitors. And in other countries, energy-intensive companies dont pay mainstream electricity prices. Theyre recognised as vulnerable, and are offered help - through tax discounts, policy cost exemptions, and other forms of support. We need to act to keep costs competitive. Im pleased the government has set aside 250m to support energy-intensives. But Im worried that this money might not be enough, and I think we need a strategy that goes beyond just price protection, to work out how we can help these companies decarbonise and grow in the UK. So those are the challenges. If theyre not met, the question is whether the governments forecasts for green business growth can possibly be reached. I dont think they can. Instead, I fear that green business growth could slow and perhaps even stall. That wouldnt just be a problem for those businesses directly involved. It could also knock around a quarter of a percentage point off the UKs annual growth rate by 2014/15, costing nearly10bn per year in lost GDP.

Even worse, we could further damage the economy by undermining vulnerable sectors such as our energy-intensives.

To avoid that, we have three solutions.

First and foremost, we need to get the European policy framework right. The global picture is important, and we havent given up on a climate deal. Well need it to equalise carbon prices around the world. The process agreed at Durban must be successful. But we think that progress within the EU must and will - come first.

Business has always supported the EU Emissions Trading System, which sets a clear framework and lets the market deliver the outcomes efficiently. But its got out of step. The economic crisis has reduced demand, and now the cap on emissions between the present day and 2020 looks generous. The ETS is still ticking along, doing what it was designed to do delivering the cap at least cost. That cost has plummeted, with the carbon price now at less than seven euros per tonne of carbon dioxide. The problem is, the system has no credible goals beyond 2020.

The experts know Europe will need significant emissions reductions post-2020. But the markets cant factor that into todays prices, and can only work within the parameters theyve got. So the investment we need for the future - in lowcarbon technologies and infrastructure - isnt happening.

This is setting Europe up for trouble further down the line, when climate targets will be much more costly to meet. So we need to lay the groundwork now.

Weve recognised in the UK that we need a robust carbon price if were going to plug our looming electricity supply gap with low-carbon generation. But the supposed solution has brought its own problem. The carbon price floor is a necessary evil, but it will create a competitiveness gap between the UK and rest of the EU.

The ETS should remain the central pillar of European climate policy. But we need to make it effective by bringing it back into line with our aims.

Most importantly, we need clarity on the longer term. We need clear statements from policymakers of what Europes emissions goals will look like in 2030 and beyond, and how phase IV of the ETS will implement these goals. Once we have this picture, well be able to turn to the question of whether we need to change anything in the run-up to 2020.

The answer to this might well be yes. If there would be a big jump to get from the path we are on now to the path we need to be on after 2020a kink in the curvethen it will probably make economic sense to smooth that out. But we cant work out whether and how to do this until we know what the path after 2020 looks like.

And - crucially - to make the ETS truly effective we must take a hard look at how we protect our most vulnerable industries against carbon leakage.

If we can restore a robust ETS price, we can make the UK carbon price floor into a redundant backstop. Once that happens, we will no longer have to provide the UK-specific compensation thats currently vital.

But it wont solve the carbon price gap between the EU and the rest of the world and we need to protect those industries genuinely at risk.

Those already in the ETS, who need the free allowance system to be apolitical and evidence-based. And those big electricity users that arent in the ETS, but face its pass-through costs in their bills. They need a new, harmonised system of protection, probably plumbed into the ETS itself.

Alongside an effective EU framework, the second element of the solution is domestic policy. And the single biggest priority right now is the governments Electricity Market Reform process. The CBI has long argued that reform is necessary to generate investment and keep costs competitive, and that it can bring jobs and growth. So I support the governments resolve. But the details need to be thoroughly thought through and put in place quickly to avoid stalling investment. We know the investment required cannot come solely from energy companies balance sheets. It will have to come from financial markets. That means the first job is to lower the cost of capital offered by financiers so that energy projects become viable.

Even with an effective EU Emissions Trading System, a feed-in tariff will be needed.

The CBI continues to believe that the contract for difference is the right kind of feed-in tariff, but as ever the devil is in the detail.

In the draft energy bill, the government has proposed a feed-in tariff model where generators would enter into a new kind of statutory contract. There would be no single counterparty to sign the contract with. Instead, the collective pool of energy suppliers would ultimately be liable.

If you are an investor working out how to price capital for companies in these contracts, you are going to look at the risks to your return. There are some tricky questions. If the contract is not honoured, who do you talk to in order to resolve the dispute? If it comes to it, who do you sue? And assuming youre proven right, are you confident that the money will be there? At the start of this policy process, everyone assumed that the government would back these contracts, but thats no longer whats proposed.

These questions make people worry whether the contracts will allow companies to leverage investment. The government has recognised this, and is looking at alternative models. Its a shame weve reached the stage of a draft bill when really were still making policy. Now we need to get it right quickly.

We need to work out if there is a workable model with a single counterparty.

And we need to work out where its best for the liability to sit. In my view, the analysis hasnt been done to answer this question satisfactorily, but it could be that the Treasury somehow underpinning the contracts would be better for the economy as a whole.

The only way the government will get these details right is to ask the right people. Not just energy companies. Not just specialised green investors. But also the mainstream financiers who will have to buy into it.

The draft bill also contains the capacity mechanism, intended to ensure security of supply. Ive never been convinced that its necessary. But if were going to have it, its important its introduced quickly so companies can make investment decisions. So the government should run the first capacity auction in 2014. Its also important that the costs of the capacity mechanism are minimised. Existing plant should be allowed to compete fairly, to avoid the unnecessary building of new plant. This would also bring the bonus of reducing the chances of stranded assets or the lock-in of future carbon emissions. Allowing the demand-side to get involved should bring down costs too. The last thing the energy bill should take care over is the costs that could be imposed on energy-intensive companies. Ive explained why we need to protect them from current policy costs. We also need to make sure we dont encounter the same problems all over again in a few years time. And the bill can also help industry by finding some way to incentivise combined heat and power Ive talked about specific policies, both at the European level and in the UK. For my third solution, I want to talk about the mindset that should be brought to all green policy-making.

Good green policy has to be good industrial policy too. In everything we do, we have to look at how we can maximise the economic gain.

Much of what Ive already talked about are the ingredients of good industrial policy consistent messaging, stable policies, simplicity.

But we need to think more widely, about how to capture more of the value of supply chains. At the moment, for every offshore wind turbine that goes up in our waters, only one third of the economic value originates in the UK. We should identify where we are well-placed to compete theres no point trying to win everything. For example, the UKs not likely to oust the leaders on wind turbine design. But we could lead the world on offshore cable installation.

And we should support new industries that could start life here and spread globally. Of the eight operating prototypes testing wave and tidal renewable power, seven are in UK waters.

How can we nurture these growth areas, beyond the smart policy engineering Ive already discussed? There is a clear role for the government to facilitate directly the flow of finance. The Green Investment Bank a world first should leverage institutional capital. It must be able to raise funds from the markets as soon as the public finances allow, and in the meantime it should use its limited balance sheet innovatively to maximise investment. But the Green Investment Bank isnt the only game in town. The CBI recently proposed that the government should intervene directly, such as through credit enhancement, to bring on infrastructure investment. Green infrastructure should be a key part of this programme.

So what could happen if we apply these solutions, if we get green policy right?

CBI analysis suggests green business could grow faster than the government predicts. Compared to the slowdown which we fear could result from the current approach, a green business boost could increase the UKs growth rate by half a percentage point by the end of this Parliament, a gain of nearly 20bn in GDP. It could add 800m to net exports. Thats a big prize. In the search for growth, were digging for goldmines and one of them is green.

Thank you very much.

-ends-

(3148 words)