House of Commons - Regulatory Reform Committee

Themes and Trends in Regulatory Reform - Regulatory Reform Committee Contents

Memorandum submitted by the Aldersgate Group (AG)

INTRODUCTION

The Aldersgate Group (AG) is a coalition of private, public and third sector organisations who believe that high environmental standards are essential for long term economic growth and international competitiveness. The Group engages actively with government and other key decision makers to contribute to the future development of UK economic, environment and sectoral policies, as well as providing a distinct voice that advances the better regulation and sustainability agendas.

In a recently published report entitled Green Foundations 2009, the AG argues that the current financial crisis reinforces the urgent need for a regulatory reform programme which addresses key systemic risks to economic growth and stability. It also sets out the case that the better regulation agenda should aim to deliver high environmental standards providing the maximum stimulus to innovation and the creation of business opportunities, while minimising the administrative burdens of complying with them.

MEMBERS

ACCA Global

Atkins IEEP

Barratt Developments Institution of Civil Engineers

BIFFA John Edmonds

BT Johnson Matthey

Dinah Nichols Lord Whitty

Dalkia Michael Meacher MP

Drivers Jonas LLP Peter Jones OBE

Eftec RSPB

Elliot Morley MP SEEDA

Environment Agency Scottish Environment Protection Agency

Environmental Industries Commission Sir John Harman

Environmental Law Foundation Sustain

Enviros Speechly Bircham

Friends of the Earth Tesco

Friends of the Earth Scotland UK GBC

Green Alliance United Utilities

Greg Barker MP WWF

SUMMARY

Implications of Economic Recession

— The economic recession is a unique opportunity to make rapid progress towards addressing long term challenges facing the economy such as climate change, resource efficiency and energy security.

— The 2008 financial crisis illustrates how the unregulated excess of the free market and banking system, governed by a "light touch" and "hands off" approach that does not adequately address market failure, can have devastating economic and social consequences.

— Whereas removing unnecessary regulation and reducing the cost of compliance improves the overall productivity of the economy, particularly during the economic recession where costs to businesses must be minimised, the vital role that regulation plays in correcting market failures, promoting fairness and protecting the environment must not be overlooked.

— Any evaluation of a regulation regime must include a balanced and proportionate assessment of the potential economic and social benefits, and not be crudely based on rudimentary gross estimates of the overall burden.

Regulatory Reform

— While the UK is consistently recognised as having one of the best regulatory environments in the world, there is a tendency to overly focus on reducing regulatory burdens.

— Better Regulation should focus on simplifying regulations into a more manageable and mutually-consistent form, or reducing the burden of paperwork and the time taken dealing with information requests. What must be avoided are crude regulatory reform initiatives that focus on narrowly defined cost burdens, whilst ignoring tangible societal and economic benefits.

Impact Assessments

— Despite reform to the impact assessment procedure with some welcome developments, intrinsic and systematic defects remain.

— Cost assessments tend to be an overestimate because innovation potential is rarely assessed and are routinely based on exaggerated figures from industry—in the past trade organisations have systematically inflated cost estimates to combat new regulations.

— At the same time, environmental benefits tend to be underestimated, as they are complex to monetarise and are rarely assessed in a rigorous manner.

— As well as being more objective, impact assessments must be used early in the policy formation process to be most effective.

Environmental Regulation

Green Foundations 2009

Sustainable Buildings

Better Regulation for a Sustainable Built Environment

MEMORANDUM

Implications of Economic Recession

1. It is evident that the world economy is facing a crisis not seen since the Great Depression. The credit crunch, coupled by peak prices in oil and food last year, has infected the entire global economy, and led to financial losses of over £1.8 trillion according to the Bank of England.[1] At the same time, large scale market failures associated with climate change, resource depletion and energy security necessitate an industrial transformation of unprecedented scale and speed.

2. The AG's recently published report Green Foundations 2009 argues the current financial crisis reflects the interaction of credit, energy and resource crunches which reinforce the urgent need to accelerate the transition to a low-carbon, resource efficient economy, and align economic, environmental and societal benefits. It draws on new evidence that substantiates a positive interaction between high quality environmental regulation and economic growth—enabling companies to become more efficient and productive, and creating new opportunities to secure the jobs and wealth of the future.

3. The financial crisis illustrates how the unregulated excess of the free market and banking system, governed by a "light touch" and "hands off" approach that does not adequately address market failure, can have devastating economic and social consequences. It should serve as a palpable warning, as the inherent risks associated with market failures relating to fundamental long term challenges facing the economy, such as climate change, resource depletion and energy security, are much graver.

4. The AG supports the aspirations of the Government's better regulation agenda, aimed at reducing regulatory burdens on UK businesses by cutting unnecessary red tape and financial costs, thus removing obstacles to industrial efficiency and profitability. Whereas removing unnecessary regulation and reducing the cost of compliance improves the overall productivity of the economy, particularly during the economic recession where costs to businesses must be minimised, the vital role that regulation plays in correcting market failures, promoting fairness and protecting the environment must not be overlooked.

5. For example, Lord Adair Turner, Chairman of the Financial Services Authority (FSA), has stated that if the FSA had wanted to embark on a fundamental regulatory reform programme in early 2007 that addressed many of the root causes of the 2008 credit crunch, such as higher capital adequacy, disclosure of liquidity information and key issues around remuneration, it would have been "strongly criticised for harming the competitiveness of the City of London, for red tape, and for over-regulation."[2] Such over-sloganised and over-zealous criticism must be judged in the wider context of overarching policy objectives—and inherent risks to economic stability must be identified and effectively addressed.

6. Yet faced with the challenges of the economic downturn, increased competition from the global market place and the elimination and simplification of regulations worldwide,[3] it is precisely these benefits that are being overlooked in the drive to minimise costs. This has led to some industry groups, such as the British Chambers of Commerce, injudiciously arguing that "the success of the government's drive for better regulation must be judged on the extent to which the UK's regulatory burden has been reduced".[4] While it is crucial to reduce unwarranted costs, any evaluation of a regulation regime must also include a balanced and proportionate assessment of the potential economic and social benefits, and not be crudely based on rudimentary gross estimates of the overall burden.

7. Such views merely encourage "better regulation" to be interpreted as "deregulation"—regardless of the longer-term costs this can impose on economic growth. The government's own enterprise strategy,[5] launched alongside the 2008 Budget, portrays regulation as a "barrier" and "obstacle" to growth, citing a number of studies that assume a negative association between regulation and productivity. The Aldersgate Group strongly oppose this perspective—far from undermining the UK economy, proportionate, effective and well-designed environmental regulation generates essential public benefits and is a cornerstone of civilised society.

8. The AG report Green Foundations 2009 draws on new evidence and research that substantiates a positive causality between high quality environmental regulation and economic growth—enabling companies to become more efficient and productive, and creating new opportunities to seize the jobs and wealth of the future. In doing so, it supports the views of the Network of Heads of European Environment Protection Agencies, which finds that good environmental regulation, management and performance assists competitive advantage by reducing costs, creates markets for environmental goods and services, drives innovation, creates and sustains jobs, improves the health of the workforce and the wider public, and protects the natural resources on which business and society depend.[6]

Regulatory Reform

9. The credit crunch has exemplified the underlying problems of soft-touch regulation that is overly sensitive to the demands of big business and helps fuel unsustainable economic growth. While the UK is consistently recognised as having one of the best regulatory environments in the world,[7] there is a tendency to overly focus on reducing regulatory burdens. In doing so, there is a danger that the better regulation agenda loses sight of how to most effectively deliver the outcomes it is designed to achieve, and so puts at risk future wealth and prosperity.

10. There is no doubt that some regulations are outdated, badly designed or poorly applied. Better Regulation should focus on simplifying regulations into a more manageable and mutually-consistent form, or reducing the burden of paperwork and the time taken dealing with information requests. What must be avoided are crude regulatory reform initiatives that focus on narrowly defined cost burdens, whilst ignoring tangible societal and economic benefits.

11. The government should continue in its increasingly modern approach to regulation, which is outcome focused and risk-based. By focusing on the highest hazards and poorest performing operators, businesses with the best records can be rewarded with less supervision and control.

Impact Assessments

12. In April 2007, the government reformed its impact assessment procedure to ensure they presented cost and benefit information in a more transparent way and are undertaken throughout the policy making cycle. Significant developments are the requirement to indicate value changes in greenhouse gas emissions on the front page summary (which must be signed off by the sponsoring department's chief economist) and the introduction of a new toolkit to guide policy makers for considering how their proposals contribute to the five principles of sustainable development. However, a strong focus on monetisation risks marginalising rigorous qualitative assessments of environmental and non-monetarised impacts.

13. Although it is too soon to comprehensively evaluate the new process, a number of intrinsic and systematic defects remain. On one side, cost assessments tend to be an overestimate, first and foremost because the innovation potential is rarely assessed. Routinely, impact assessments focus on currently available solutions and static assessment of current costs, as corresponding financial data is easily and readily available. A key recommendation of the Commission on Environmental Markets and Economic Performance (CEMEP) is to reform the process, allowing for the potential of innovation and investment to deliver better, cheaper solutions. It suggests that "finding ways to value the future benefits of innovation, in a way that realistically reflects the financial and risk-reward perspectives of the private sector innovator, would greatly enrich the contribution of policy appraisal to the longer-term health of the economy".[8]

14. Additionally, costs can be based on exaggerated figures from industry and in the past trade organisations have systematically inflated cost estimates to combat new regulations. A pertinent example is the European Commission's impact assessment for EU car efficiency targets for 2012. Originally, the supplementary cost per vehicle was estimated to be an average of €577. The car industry then heavily influenced the secondary analysis, providing much of the new cost data, and the final estimate was over six times the original figure.[9] This profoundly influenced the European Commission's decision to water down its original proposals, which remains a contentious issue.

15. On the other side, environmental benefits are complex to monetarise and are rarely assessed in a rigorous manner. Well-designed environmental regulations can produce comprehensive economic benefits, such as improving health, amenity and ecosystems. For example, the European Commission estimates that for large combustion plants alone, the IPPC Directive, preventing pollution from stationary installations, will lead to net environmental and health benefits of at least €7-28 billion per year, including the reduction of premature deaths and years of life lost by 13,000 and 125,000 respectively.[10] Such benefits are extremely complex to accurately and objectively evaluate.

16. The net result is that environmental issues are being undervalued and often overlooked. A study by the Environmental Audit Committee found that policy appraisals often neglected the sustainable development agenda in the pursuit of minimising regulation. It recommends that impact assessments include all relevant environmental impacts, as well as adequately recognise and consider the contribution that would be made by a flourishing environmental industries sector. Fundamentally, a more even-handed approach is required and it is "no longer viable to view environmentally-minded regulation as a straightjacket to industry".[11]

17. As well as being more objective, impact assessments must be used early in the policy formation process to be most effective. In practice, they are habitually an exercise in ex post justification, validating pre-determined policy decisions. A recent report by the National Audit Office finds that impact assessments are not an integral part of decision making—informing and facilitating all stages of the policy making process—and the assessment of costs and benefits is the weakest area.[12] While the new process addresses this intrinsic problem, it remains to be seen what effect the reforms will have on policy making.

18. Fundamentally, policy appraisals should reflect the strategic framework set out by government. Keystone policy objectives such as increasing resource efficiency and decarbonising the economy will only be achieved if they are adequately reflected in price signals, both as regards to the market price and the values to be accorded in policy formation. To avoid the potentially severe long term economic impacts of climate change or a resource crunch, high values should be accorded to the natural resources whose use is contributing to these market failures; essentially what Stern did by using a low discount rate for future carbon costs. Policy appraisals on the basis of current or anticipated market prices are not adequate tools for addressing wider, longer term challenges facing our economy and society.

Environmental Regulation

19. Green Foundations 2009 argues that far from presenting a crisis for environmental policy making, the challenges posed by the credit, resource and energy crunches reinforce the urgent need to accelerate the transition to a low-carbon, resource efficient economy, and align economic, environmental and societal benefits. It sets out five key points that justifies this argument.

20. Firstly, it puts forward the case that our long-term economic success depends on a healthy environment and the sustainable use of natural resources. The economic fallout from the financial crisis is an opportunity to reconsider the relationship between business and society, and address the inherent problems of unsustainable growth. The natural capital assets that lay the foundations for our economy and society should not be off-balance sheet items similar to the risk exposures and subsequent heavy losses incurred in the banking sector during the 2008 credit crunch. Rapid resource depletion necessitates the adoption of new business models and requires a range of well-designed environmental measures to smooth the path towards a more sustainable economy—the "green foundations" needed to underpin future growth and jobs.

21. Secondly, at the company level, good environmental performance translates to tangible economic benefits and is a major source of competitive advantage. In response to the upward trend and imminent return to high energy, water, raw material and waste disposal costs when global demand picks up again, systematically addressing environmental performance is one of the most cost-effective measures businesses can undertake to reduce expenditure. Achieving high environmental standards across the UK would produce significant cost savings and boost competitiveness—which currently lags far behind major trading partners such as Germany, France and Japan. The role of government in providing a clear policy framework is crucial, particularly in the long-term, where competitive advantage will increasingly depend on resource efficiency, innovation and energy security.

22. Thirdly, environmental regulation creates new business and employment opportunities in a fiercely competitive global marketplace. The economic downturn presents a unique opportunity to use public sector investment to fuel the economy with green jobs and growth. Environmental regulation is a key driver in this lucrative market and the government has a critical role to play in setting out an explicit industrial strategy with planned support for particular technologies and establishing the right policy frameworks that will stimulate business innovation through improving environmental performance.

23. Fourthly, policy appraisals must accurately assess environmental costs and benefits (see the section on impact assessments).

24. Lastly, the better regulation agenda must not lose sight of the need to maximise outcomes in the drive to reduce unnecessary costs (as noted previously).

25. Increasingly, businesses which take a long-term view of value are demanding more regulation, so that they can address emerging challenges and provide a competitive edge without being undercut in the short-term. The headline finding from 2008's Carbon Disclosure Project,[13] a survey of 1,550 of the world's major companies, is that global corporations view climate change as a driver for risk and opportunity and have cited clear regulation as key to managing the impacts. For the Global 500 companies, a backdrop of regulatory uncertainty is delaying strategic investment decisions and senior management are calling for greater visibility on climate change related policy in order to better anticipate the impact of regulation driven carbon markets and carbon prices. Similarly, a survey commissioned by Clifford Chance of more than 100 major financial institutions and businesses over a broad geographical and sectoral spread found that 81% called for increased regulation—demanding clarity and coordination in order to remove uncertainty in the markets and exploit potential opportunities.[14]

26. Government must listen to the industry leaders in the transition to a low carbon, resource efficient economy, who are demanding long, loud and legal policy framework, and ensure that the laggards are not given short term competitive advantage. For example, the Climate Change Levy, a tax on the business use of energy, has improved UK business competitiveness and economic resilience, in complete contrast to the fear than an additional regulatory burden would damage company performance.

27. Strong environmental regulation will also benefit SMEs by enabling cost reductions, increasing business potential and providing long-term certainty but further government support is required by adopting a modern, risk-based, proportionate approach and targeted assistance through programmes such as NetRegs.[15]

28. To maximise the potential economic benefits which companies are so eager to exploit, environmental regulation should combine price and policy certainty with a mixture of policy instruments rather than adopting a "one size fits all" approach. In a final report to Defra, UK-based consultancy SQW found that the design and implementation of environmental regulation can positively affect competitiveness. It recommends that the "pollution prevention pays" principle should become a central policy thread running through all approaches to environmental regulation and emphasises the need for clarity, ambition and determination of the regulating bodies to increase pollution prevention requirements and to use a hybrid of instruments to do so.[16] The more uncertain the regulation, the more polarized is the private sector—with some "over managing" (eg paying high prices for carbon) and some sitting back and waiting in the hope that nothing will happen. Either way the cost of uncertainty is likely to be higher than cost of an appropriate level of consistent regulation.

29. This is reiterated in a BERR occasional paper which finds that regulation can have positive impacts on firm productivity through innovation and faster diffusion of technologies; firms may respond to regulatory uncertainty by postponing or abandoning investment decisions; and government should focus on the rate at which new regulations are introduced as well as the total stock of regulations.[17]

30. A common misguided criticism of the UK framework is that there is excessive "gold-plating" (extending the scope of European legislation), more often than not founded on questionable, rudimentary measures—such as comparing the number of words used in European and domestic legislation. The Davidson Review put to rest such claims by finding that inappropriate over-implementation is not widespread and it is sometimes beneficial to set regulatory standards that went beyond the minimum requirements of European legislation.[18] Nevertheless, the government will rarely go beyond these minimum requirements, even if its own analysis finds that there would be an overall societal and economic benefit. For example, in regard to the implementation of the Environmental Liability Directive, the Environment, Food and Rural Affairs Committee[19] suggests that the "minimum implementation" approach is a pan-Government one, with a political motive of avoiding accusations of gold-plating, and challenges the robustness of Defra's defence of the environment in response to the predominant "business friendly" approach of BERR.[20]

31. A good example of an effective simplification plan is the Environmental Permitting Regulations. This was introduced in April 2008 by Defra, the Welsh Assembly Government and the Environment Agency, replacing over 40 pieces of legislation and established a single permitting platform. It cut 507 pages of regulations to 130. This delivers more flexibility for industry, a simpler risk-based system for regulators and continued protection of the environment and human health. It will save £70 million over 10 years, with greater savings estimated as more regimes enter into the Environmental Permitting Programme.

32. Another Environment Agency initiative which illustrates the economic potential of a well-designed regulatory regime is the Waste Protocols Project which aims to turn waste into useful and valuable resources by developing guidance on how to recover waste, remove it from the regulatory regime and cut through red tape. Early indications from the financial impact assessments, which were developed using market predictions from industry, suggest that over the next ten years the first eleven Quality Protocols could see cost savings to business of £407 million and £280 million in increased sales to business. Environmental benefits include 17 million tonnes of waste diverted from landfill and saving 15.5 million tonnes of virgin materials.

Sustainable Buildings

33. The AG report Better Regulation for a Sustainable Built Environment finds that disjointed policy and weak enforcement risk damaging the credibility of the Government's ambitious targets for low-carbon buildings. Tackling the environmental performance of the built environment, especially buildings, is a fundamental concern for the UK economy, and better regulation and fiscal incentivisation have major roles to play in stimulating transformational change.

34. This lack of consistency and regulatory rigour is already undermining the potential role of the built environment in securing a sustainable future for the UK economy. It also undermines the competitive advantage that should accrue to those companies and organisations that have shown leadership in responding to sustainable development priorities.

35. The report finds that:

— A sustainable built environment is good for business and good for competitiveness;

— Far greater regulatory and fiscal emphasis is needed on improving the environmental performance of our existing building stock;

— Key new market-based instruments designed to improve the performance of existing buildings risk giving rise to perverse environmental and economic outcomes;

— More robust implementation of existing regulations is needed urgently to achieve compliance and stimulate innovation in the delivery of new buildings; and

— Government is failing to show the leadership expected of it on its own estate.

February 2009

1 Bank of England (October 2008) Financial Stability Report. Back

2 Larry Elliot (17 October 2008) The Guardian: We'll get tough with the City, says watchdog Back

3 HM Government (August 2008) Regulatory Budgets: A consultation document, p13. Back

4 Smith, David (17 February 2008) The Times: Cost to British business of government red tape leaps by £10 billion. Back

5 HM Treasury & BERR (March 2008) Enterprise: Unlocking the UK talent. Back

6 Network of European Environment Protection Agencies (November 2005) The Contribution of Good Environmental Regulation to Competitiveness. Back

7 For example the World Bank Doing Business Survey 2008 placed the UK second in the EU and sixth in the world for the best business conditions and the OECD Going for Growth Survey in 2005 ranked the UK top among the G8 countries for liberal product market regulation. Back

8 BERR & Defra (November 2007) Commission on Environmental Markets and Economic Performance Report, p34. Back

9 See http://ec.europa.eu/enterprise/automotive/projects/report_co2_reduction.pdf Back

10 European Commission (December 2007) Press Release: Questions and Answers on the Commission's proposal for the revision of industrial emissions legislation in the EU. Back