Regulation -v- market forces: the battle to drive change

Regulation

Regulation and compliance is designed to power the journey to sustainability but market forces are the bigger and more effective force, many believe. Nick Gibson gathered evidence from players in energy, mining, data centres, hi-tech and regulation sectors who delivered a unanimous verdict.

“Faced with corporate resistance, regulation has historically failed to create required change,” says Jamie Pitcairn, technical director of circular economy & sustainability at Ricardo. “Increasingly, it will be practical and financial issues that drive net zero more than regulation.”

The failure of net zero regulation has been highlighted by a recent High Court ruling that deemed the UK government’s Net Zero Strategy failed to comply with its own obligations under the Climate Change Act. “The government is not complying with its own legal obligations to address climate change,” says Richard Smith, partner at environmental law firm Sandstone Law. “The implementation by the UK government of almost every environmental protection policy it has launched has been dismal.”

As a former director of UK Energy Catapult, Origami’s Peter Bance has worked at high level with government, regulators and stakeholders in seeking to develop a common landscape for renewable energy technologies and markets. “We must develop a system that is fit for purpose in tomorrow’s green world as opposed to yesterday’s dirty world,” he says in calling for a new mindset among regulators and industry. “The natural instinct of the market is to introduce changes slowly and by increments but sometimes you need to rip up the rule book and start again in order to create a different future.”

Environmental lawyer Ross Fairley, head of Burges Salmon‘s renewable energy team, believes that the renewables industry must combine to educate and inform regulators. “More must be done to bring together regulators and stakeholders within the industry to educate decision-makers and to examine existing regulation to allow renewables such as the hydrogen industry to flourish. Regulators are under-resourced. They’re not focussed on hydrogen or the consequences of inaction and they’re not active in promoting the potential benefits of hydrogen. Authorities are behind the curve in terms of industry and mainstream popular knowledge, confidence and expectation.”

Business benefits will drive net zero transition

Regulation has driven early change across business, industry and consumer environments but it will be bottom-line business benefits that will accelerate action on climate change, according to Richard Clifford at Keysource who design and build data centres. “Regulation is coming and cannot be ignored as in future there could well be fines and levies imposed for non-compliance,” says Clifford. “A net zero strategy will do more than ensure compliance to help the planet, it will improve the business and operational value chain, reduce energy costs and could offer potential to generate money from the energy you consume and the energy you don’t use.

“For industry operators and providers things like the Energy Efficiency Directive (EED) require greater reporting and compliance. Self-regulatory initiatives such as the Climate Neutral Data Centre Pact (CNDCP) ensure we meet PUE’s, the metric we use to measure efficiency in the industry; all current regulation is driving change and improvement across the data centre industry.”

Nell Agate Tsui, Quant ESG Analyst at Satellite Vu believes more government intervention is needed. “Reconfiguring the supply chain for many if not all sectors will require dramatic widespread change,” she says. “Without subsidies, some fossil fuel-derived energy may attract a premium against renewably sourced power, the costs of which would be passed on to the consumer. Hence, whether it’s supporting the energy sector to transition to a net zero economy or shielding consumers from rising costs, government intervention and regulation is required to support transition and ensure it is just.”

Net zero regulation surrounding the built environment is expected to change in 2024 and hopes are high that it will be fit for purpose.

“In terms of construction design specifications there are voluntary best practice codes such as CP12020 from SIPSI that if followed will deliver an efficient low carbon heat network,” says Anthony Coates-Smith, MD of heat networks specialist Insite Energy. “There is also light touch regulation through the heat network meter and billing regulations. We expect to see further regulation introduced when OfGem takes over as regulator of heat in the spring 2024. Regulations for gas, electricity and water do not take into account heat and are not currently fit for purpose regarding heat networks. I’m hoping for new regulations that will make energy suppliers perform better for the better of households and industry.”

Innovation to fuel market reform

 “In order for green industries to grow we must allow innovators to innovate, and then write the rule book around the commercially viable developments that are both green and economically attractive. Things are changing so quickly now that regulators should allow the market to develop around its new green business and technology models, rather than simply tweak existing rules and guess what might be the best way forward. “

Peter Hjorth ceo of Bluelake Mineral also believes that politics and regulation can hamper efforts to meet net zero targets. “The best drivers of change are the market forces, not political decisions,” Hjorth says. “The most important role for policy makers is to facilitate positive market trends and market drivers, not to create more complicated regulations and red tape. The EU ESG taxonomy is a scary example of bureaucracy.”

Net zero regulation -v- market forces

“Market forces will be dramatically stronger than regulation in achieving net zero objectives,” says Jamie Pitcairn, technical director of circular economy & sustainability at Ricardo. “Businesses are already going well beyond what’s required by current regulation and that’s being driven by investors and stakeholders that now demand action on sustainability. Consumers are driving change surrounding products and packaging but the influence of financial stakeholders is having a greater impact.

“Twenty years ago it was simply about compliance today it’s about the direct impact of climate change on the business bottom line. Now, organisations are having to model and forecast environmental factors such as extreme weather events to identify future risks and impacts on their business. Business and industry also has to address how climate change is affecting things like energy security and supply of raw materials. Organisations must also identify impacts and costs associated with their entire value chains and product life cycles. Gone are the days of take, make and dispose so the adoption of circular economy business models will be increasingly important.

“You may have a profitable business today but investors are now looking at the ongoing future and whether your business is adapting to the impact of climate change and net zero regulation across a wide range of elements. Sustainability is not just about the environment, today it’s about the very foundation and future viability of your business.

“New regulation such as CSRD will create change as it is designed to drive investment into sustainable businesses and the cost of compliance will be tiny compared to the benefits of transition. Increasingly, it will be practical and financial issues that drive net zero more than regulation.”

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