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Commercial Question

A climatic conundrum

updated on 21 September 2010

Question

What is the role of energy lawyers in combating climate change?

Answer

Following the publication of the Stern Report on the economics of climate change in October 2006, there is now greater recognition of the potentially catastrophic consequences of allowing carbon dioxide emissions to remain at their current levels. The report states that the long-term cost of the consequences of climate change, in terms of floods, droughts, famine, the extinction of species and mass human migration, will outweigh the short-term cost of reducing emissions.

The United Kingdom is committed to various targets to reduce its carbon dioxide and other greenhouse gas emissions over the next decade and beyond. EU member states (including the United Kingdom) have adopted the 20-20-20 package and have thereby set themselves a target of ensuring that 20% of overall energy consumed in the EU is derived from renewable sources by 2020. Further, the UK Parliament has enacted the Climate Change Act 2008, which requires the United Kingdom to reduce greenhouse gas emissions to 80% below 1990 levels by 2050. However, to achieve these reductions there will need to be significant changes in power generation strategy, transport action and the energy efficiency of public, commercial and residential buildings.

Achieving these changes will require significant investment in energy assets. Indeed, many of these projects will be among the largest in the world. The types of projects that will require legal advice in terms of renewable power include offshore and onshore wind, tidal, wave, landfill gas, solar, biofuel and biomass facilities. While potentially controversial, nuclear power is being treated as a priority in terms of energy security, given its low-carbon attributes, flexibility and reliability. Further, carbon capture and storage technology is under development and is considered to be a viable option for producing clean energy from coal combustion.

Large projects require significant capital outlays, making external funding from banks and investors a prerequisite. Financial centres such as the City of London, New York and Hong Kong act as marketplaces for entrepreneurs and developers to arrange financial backing for their projects. The role of transactional lawyers in these marketplaces is to help transactions run smoothly, resolve commercial difficulties and ensure that the parties reach a common position at the outset which complies with the law and is documented clearly. Innovation is necessary: new assets, new technology and new players require new and creative thinking. The responsibility of avoiding commercial disaster in groundbreaking deals is a real one. The measure of success is that lawyers make themselves obsolete, as the esoteric becomes safely commoditised and moves into the mainstream.

In economic terms, the damage to the environment from carbon emissions has been referred to as an unpriced externality. Due to the long-term, gradual nature of climate change, it has been possible in the past for market participants (whether people or companies) to function without considering the adverse consequences of their choices on the environment. Governments can promote change by putting in place regulations which incentivise beneficial behaviour and discourage that which is environmentally damaging. Since such changes will necessarily stem from policy and regulation, lawyers will have an important role to play in facilitating, communicating and enforcing them.

An example of existing regulation is the EU Emission Trading Scheme, which imposes a price on carbon for market participants in the European Union. The scheme regulates carbon trading for the purpose of meeting the European Union's obligations under the Kyoto Protocol. Broadly speaking, this scheme requires large carbon emitters, such as electricity generators, to surrender carbon allowances matching the level of carbon they produce annually. The more carbon they produce, the more carbon allowances they must surrender to avoid financial penalties. As the number of carbon allowances available in the market is fixed, generators must make up any shortfall by purchasing surplus carbon allowances from more efficient or low-carbon generators. In theory, if demand for such allowances is high, their price increases and, accordingly, increasingly expensive abatement action becomes economic. This entirely artificial and intangible market - like a stock market or trade in intellectual property - is rule-driven and therefore fertile ground for lawyers, whether that is advising on compliance at one end of the spectrum or on arbitraging between different carbon schemes for commercial advantage at the other.

Climate change is a global issue, and effective policy and regulation will require international cooperation. The reductions have been referred to as the low carbon transition. While clients such as developers, investors, operators, construction companies and technology companies are the principal actors in this transition, energy lawyers provide important assistance and can offer creative solutions to get deals done. As the low carbon transition develops, the already complex system of international and national rules will expand and become relevant to increasing numbers of clients. Lawyers will need to help them navigate the rules. Further, given that the transition involves innovation in terms of policy and technology, avoidable disputes and problems caused by poor advice could delay or prevent crucial developments. Therefore, the calibre of advisers, including lawyers, is critical to success.

Oliver Shipway is an associate in the projects group at Linklaters.