On 26 November 2008, the groundbreaking Climate Change Act (the Act) received Royal Assent alongside the Energy Act and the Planning Act.

The Act is designed as framework legislation to drive the creation of what the government terms a low-carbon economy. Its key provision is a statutory duty on the UK government to reduce greenhouse gas emissions by at least 80% by 2050, with an intermediate goal of at least a 26% reduction by 2020. It also includes powers to introduce domestic emissions trading schemes, such as the proposed Carbon Reduction Commitment (CRC), by secondary legislation, and to extend the Certified Emissions Reduction Target (CERT) to electricity generators.

On 1 December 2008, the Committee on Climate Change (CCC), established by the Act as an independent advisory body to the government, issued its first report (the CCC Report). It recommends a significantly higher intermediate reduction goal of between 34 and 42% by 2020. The Act and the CCC Report together call for a major policy drive to promote the development of innovative low-carbon technologies in the power generation, transport and industrial sectors, and in buildings. The Prime Minister has referred to a "fourth technological revolution" and there will be significant opportunities for businesses that are capable of responding to this policy shift. According to government estimates, the demand for low-carbon technologies will be a major factor in the growth of the UK environmental sector from a 2006 base of £25 billion, to an estimated £46 billion by 2015. The government also forecasts that the annual value of the low carbon energy sector could be as high as $3 trillion by 2050.

In this bulletin, we consider the key provisions of the Act and the CCC Report in more detail.

The 2050 reduction target

The government is under a duty to ensure that emissions of carbon dioxide and the five other greenhouses gases regulated by the Kyoto Protocol are reduced by at least 80% by 2050, compared to levels in 1990 (a baseline of 1995 is set for certain greenhouse gases).

A target of 60%, first suggested by the 2003 Energy White Paper, was initially proposed. The target was later increased to 80% by the government in accordance with advice from the CCC stating that earlier more radical action would be needed to achieve climate change objectives.

Carbon budgeting

Carbon budgets will limit emissions over successive five year periods and are intended to help set out a trajectory to the 2050 target. Each carbon budget must be approved by Parliament and will be set 15 years in advance. This will provide government with some flexibility, but also provide businesses with some certainty and time to plan their strategies. The first three carbon budgets running from 2008-22 must be set by 1 June 2009.

The Act imposes an intermediate reduction goal by requiring the carbon budget for the period including the year 2020 to be set so as to ensure a reduction of at least 26% against the 1990 baseline.

The key function of the CCC is to advise the government on the levels at which the budgets should be set. The CCC Report calls for this goal to be increased to either 34% under an "interim budget" if no successor global agreement to the Kyoto Protocol is concluded, or 42% under an "intended budget" if an agreement is successfully concluded. On the same day that the CCC Report was issued, talks began in Poznan to deliver a first negotiating text for a new global climate deal.

Although the Act does not introduce the annual targets called for by environmental campaigners, a duty is imposed on the government to ensure that emissions remain within the levels set by each carbon budget. The government must also submit a report to Parliament after setting each carbon budget giving an indicative annual range of the amount of emissions expected for each year of the budget period.

What will happen if the target is not met?

In order to expose the government to some degree of scrutiny, a detailed annual report must be submitted to Parliament stating the levels of, and changes in, greenhouse gas emissions. However, the Act does not provide for any direct sanctions in the event of a failure to meet the 2050 target or to comply with any carbon budget.

A recent unsuccessful attempt by Friends of the Earth and Help the Aged to enforce (by means of judicial review) a statutory duty on the government to implement a fuel poverty strategy demonstrates the reluctance of the courts to require the government to take any specific action to enforce these types of statutory duties, particularly in the context of budgetary constraints.

The "net UK carbon account" and carbon offsetting

The reduction target and budgets will be measured by reference to the "net UK carbon account" which is the UK's net greenhouse gas emissions after any "carbon units" are accounted for under planned carbon accounting regulations.

The Act enables government to credit the net UK carbon account by acquiring units that represent reductions in emissions (eg, Certified Emissions Reductions generated by Clean Development Mechanism projects in developing countries), carbon units from capped schemes (eg, EU Emissions Trading Scheme Allowances), or carbon units representing the removal of greenhouse gas from the atmosphere. This is controversial as it enables units to be "imported" to meet the statutory targets rather than necessitating action within the UK.

Shortly before it received Royal Assent, the Act was amended to include an obligation on the government to set a limit on the amount of carbon units that can be credited to the UK carbon account during each budget period. The limit for the budgetary period 2008-2012 must be set by 1 June 2009. This is broadly in line with recommendations in the CCC Report stating that the use of offset credits from outside Europe should be tightly controlled, particularly when such credits are used to meet the interim budget.

Trading Schemes and other measures

The Act provides the government with powers to establish emissions trading schemes by means of secondary legislation. These powers will be used to introduce the Carbon Reduction Commitment (CRC), a mandatory cap-and-trade scheme for large non-energy intensive organisations which is due to commence in 2010. The CRC will cover approximately 5,000 public and private organisations whose total half-hourly metered electricity use (measured against a 2008 baseline) is greater than 6,000 megawatt-hours. Draft regulations are due to be released for consultation in February 2009, although businesses that may be subject to the scheme are already taking action to verify their inclusion within the scheme and to plan their compliance.

The Act also extends the existing Carbon Emissions Reduction Target (CERT) - a scheme requiring energy suppliers to achieve targets for the promotion of reductions in emissions from domestic properties - to electricity generators. Further measures to reduce emissions include powers to introduce pilot financial incentive schemes for household waste, and powers to require a minimum charge for single-use carrier bags.

Decarbonising the power sector

The CCC Report emphasises the need to move towards full decarbonisation of the power sector by 2030, but points out that the UK is well placed to achieve this goal given that around a third of its electricity generation capacity is scheduled to be decommissioned in the next 15 years. According to the CCC, wind generation could satisfy up to 30% of electricity demand in the UK by 2030.

The CCC considers that reductions of 40% below 1990 levels are realistically achievable by 2020 by adopting economically viable low-carbon generation technologies, but that various policies will be required to support the introduction of these technologies, including a strong carbon price within the EU Emissions Trading Scheme.

The CCC recommends that conventional coal-fire power stations should only be constructed with a clear and publicly stated expectation that they will be retrofitted with carbon capture and storage technology by the early 2020s. The CCC considers that this could be achieved by means of mandatory retrofitting requirements for new and existing plants or the setting of emissions standards necessitating the use of such technology. The CCC Report also notes that nuclear power is cost competitive with conventional fossil fuel generation, even when decommissioning costs and potential increases in uranium prices are accounted for.

Transport

Following significant debate in Parliament, emissions from international aviation and shipping will not initially be covered by the 2050 statutory reduction target or the carbon budgets, although projected emissions must be taken into account by the government in making decisions on carbon budgets. The government is currently reluctant to include these types of emissions in the absence of an international agreement to allocate emissions between different countries.

However, by 31 December 2012, the government must include international aviation and shipping emissions within the 2050 target and the carbon budgets, or explain to Parliament why it has not done so.

The CCC is of the opinion that the 2050 reduction target should cover all sectors of the UK economy including international aviation and shipping. The CCC Report states that significant emissions cuts in road transport can be achieved through improving the fuel efficiency of new vehicles. It calls for ambitious EU targets governing carbon emissions from new cars, and also emphasises that significant potential exists to deliver reductions through changed driver behaviour, shifts to less carbon intensive transport (for example, rail rather than car) and better journey planning.

Company reporting

The Act requires government to issue guidance by 1 October 2009 concerning the way in which companies should report their greenhouse gas emissions, and to review the contribution that such reporting could make to the UK's climate change objectives by 1 December 2010.

By 6 April 2012, the government is also required to exercise powers under the Companies Act 2006 to require the inclusion of reporting information concerning greenhouses gases in a company's directors' report, or to explain to Parliament why it has not done so.

Opportunities for businesses

The Act provides new opportunities for businesses, especially those that are able to develop innovative low-carbon technologies and practices. The CCC Report concludes that the costs to the UK of the levels of emissions reductions proposed are affordable and are estimated to be less than 1% of GDP by 2020 and between 1% and 2% of GDP by 2050. Nevertheless, the potential financial impact of the Act will be contentious, particularly given current economic conditions. The Act and the CCC Report may also provide environmental campaigners with a stronger position to press for earlier and more drastic action by business and government.