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Sustainable finance: putting UK consumers at the heart of the government’s net zero target

15 Sep 2021

There has never been a stronger case for taking meaningful action to address climate change than the one delivered by the IPCC in August, we are running out of time, on this we all appear to agree. Therefore, it is time to trust the consumer with the information they need to take individual but collective action.

Here at the University of Edinburgh, the Edinburgh Futures Institute is currently leading a coalition of UK universities and other stakeholders to explore the economic case for the type of consumer-focused instruments to definitively reduce our emissions.

Climate change, driven by anthropogenic greenhouse gas (GHG) emissions, is the defining challenge of our time and has rightly dominated public consciousness in many countries over the past few decades. In a bid to address it, the landmark 2015 Paris Agreement proposes the long-term goals of “holding the increase in global average temperature to well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels”.

Although the UK government has since 2019 enshrined a legally binding net-zero target into law, the current emissions trajectory here and elsewhere strongly suggests that we are yet to be on a sustainable path to reducing emissions. The reason for this is not difficult to understand.

Consumer action is not placed at the heart of national and global climate change policies, where it needs to be. According to the UK’s Climate Change Committee, at least 62% of the actions we need to take to address climate change involves changes to the ways we heat our homes, power our vehicles, and shop for our households – these are changes that we, as a society, cannot meaningfully make without a concerted push by everyone.

Indeed, achieving the net-zero target is dependent on the hundreds of millions of choices consumers make every day throughout the UK. Therefore, to deliver the transition to a low carbon future in an effective way, we need to understand how consumers may behave and which policies better encourage the required changes.

However, human decision-making is complex and can often result in behavioural biases working against us and influencing our behaviour in ways that are unbeneficial to us, perhaps as much as they can work in our favour. This implies that even when we are offered low-emission product options, there is no guarantee that we will take them. This dynamic is aptly captured by a recent survey by Deloitte, which shows that only about 20% of UK consumers have switched to low carbon modes of transport, reduced their air travel or switched to renewable energy in response to climate change concerns.

And the cost is only a small part of the problem, apathy is the main barrier to change. A Sky/YouGov survey also finds that only 20%, 13% and 2% of Britons would welcome climate action-induced changes to the costs of air travel, animal products and heating respectively, while 23% are unwilling to see any action on climate change.

Hence, based on the evidence, successfully enabling the changes in consumer attitudes and behaviour that are needed to achieve net-zero will require more than just providing options.

One way we can bring about these changes is by putting a price on emissions (or carbon) – this is not a new concept, but it matters how we do it as demonstrated by the gilets jaunes protests in response to the 2018 plan for petrol tax rises in France.

Indeed, influencing consumer behaviour is already at the heart of existing carbon pricing instruments globally. Instruments such as cap and trade and carbon taxation are designed to impose higher costs of consuming emission-intensive goods so that consumers become inclined to pursue less emission-intensive options.

However, this expectation of significant changes in consumer behaviour leading to a reduction in emissions has not materialised in countries using these instruments. The reason is simple: the instruments are not apolitical. They are only as effective as the restrictions or caps they impose on emission production by the companies that are subjected to the emission caps.

Effective lobbying and other pressing priorities by successive governments have always combined to ensure that the caps are not stringent enough to drive up the cost of emissions to a significantly high enough level to force large scale consumer course corrections.

The High-Level Commission on Carbon Prices estimates that reducing global emissions to allow for achieving the Paris Agreement’s temperature goals requires carbon prices to be between US$40 and US$80/tCO2e by 2030. However, in 2020, only about 5% of GHG emissions covered by a carbon pricing scheme was in this price range, half are priced at less than US$10/tCO2e and, according to the IMF, the global average price is just about US$2/tCO2e.

Companies realise that without significant and risky new investments in low carbon technology on their part, changes in consumer spending patterns could result in significant losses in revenues. This is why, despite being efficient in putting a price on carbon, carbon pricing instruments have not been very effective in reducing emissions – the lack of political will to make them work.

This failure is underscored by the fact that there has been no empirical evidence of companies adopting innovative low carbon technologies requiring significant upfront costs, have long implementation lags and are difficult or very costly to reverse, therefore ensuring their lasting economic impact.

For carbon pricing instruments to work, the political nature of climate change policy development and how this is driven by signals emanating from consumers, from whom policymakers’ authority derives, must be acknowledged. Instruments should be designed to incorporate the buy-in of consumers/voters, whom politicians are beholden.

One way to do this is by designing regimes that make it difficult for consumers to overlook the contributory impact of their activities on climate change so that they can easily link their decisions to the production of emissions, and they may also easily access remedies for their actions.

This implies that policy instruments must prioritise the signalling of the environmental effects of consumer behaviour at the source. This is akin to labelling packed products on supermarket shelves to signal the presence of allergens or calories.

This is what many of the existing instruments currently lack – the prominently placed signal(s) consumers need to act. Already active in the space, without a potentially helpful regulatory push, are sustainable finance FinTech start-ups, such as Meniga, Yayzy and CoGo, that are utilising consumer financial transactions data to compute consumers’ carbon footprints and therefore inform their spending patterns on investment and everyday household products. Initiatives of this nature need to be more commonplace and given legislative impetus for us to effectively induce the creation of true emission-constrained economies.

Understandably, if effective, the impact of far-reaching and effective emission reduction instruments will be more significant on the economy than the current slew of policy instruments, i.e., they are likely to lead to the shrinking of certain sectors of the economy, specifically, those driven by fossil fuels.

However, any effective action on climate change cannot avoid the shrinking of the fossil fuel sector or at least the constraining of the sector to only options that work with economically viable carbon sequestration options. This is the reality that any serious attempt to address the climate change challenge must contend with.

Nevertheless, effective instruments for addressing climate change are also likely to enhance economic welfare, in at least three ways.

Firstly, the need for consumers to seek out low carbon alternatives will give rise to new industries because changes in consumer spending patterns will force significant investments in immature, high investment, and relatively irreversible technologies.

Secondly, the revenue that such instruments may yield can be deployed to providing incentives to innovative companies to invest in low carbon innovation and cushion their effects on lower-income families.

Thirdly, effective policy instruments will address distortions in the pricing of energy commodities that have arisen due to current climate change policies in the UK. For example, achieving net-zero in the UK requires extensive electrification of the economy; however, the UK’s levies on electricity are unjustifiably high, while other sectors are in effect free-riding as they benefit from the negative externality that is climate change. This has led to UK consumers and businesses arguably currently paying more for electricity than they would under an economy-wide implementation of net-zero policies.

It’s simple, we need to reduce our carbon emissions faster than we are doing now. At the Edinburgh Futures Institute, we are already working hard, with multiple partners, to establish how consumer-focused instruments could help us do just that – one of the many ways our data-driven research and innovation is working towards a better world.

Gbenga Ibikunle
Professor of Finance, The University of Edinburgh
Director for Industry, Economy & Society, Edinburgh Futures Institute.

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