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There have been increasing concerns as to the cost of living over the past few months, with poor retail statistics and company forecasts suggesting that consumers and businesses are preparing for a difficult year:
- Wage increases remain below that of the current rate of inflation (CPI May 4.5%, RPI 5.2%);
- Oil prices have continued to pressurise household budgets following instability in the middle east;
- The announcement of potential increases of approximately 10-20% in energy costs in the upcoming winter.
However, out of inflationary effects and rising costs comes the possibility of innovation. For example, consider vehicle excise duty in the UK. This form of taxation has been in place for over 100 years; in 1909 it was announced that the duty would result in the road network being self financing; the tax disc was introduced in 1920. However, the actual tax itself saw little change until 1999 when point the duty was split into bands reflecting cars with smaller and larger engines. 2001 saw this tax policy once again shift with the introduction of more detailed bandings based on the carbon emissions of vehicles.
The UK car market since this time has gone through an amazing transformation. The increase in the cost of this tax alongside rising fuel costs has provided the UK consumer and business with greater incentive to go green. Whilst those who already owned vehicles were unlikely to replace them on this basis of this tax alone (given the up front capital costs), car manufacturers started to see a significant shift in consumers’ demands.
Whilst car tax is based on the CO2 emissions (g/km) of a vehicle and businesses and consumers may ask what their vehicles emissions are, carbon emissions still remain a hard concept to visualise. For this reason another related factor which can be easily seen and felt by consumers and businesses in terms of outlay took precedence, that of fuel efficiency. The combination of vehicle excise duty and fuel costs made this ever more important and, recognising this demand, car manufacturers started to respond. The number of innovations within the car market underwent a step change, with innovations such as active engine cooling/heating systems, hybrid engines, energy recapture systems, and driving evaluation/feedback systems.
The car industry has stepped up to the challenge presented to it by consumers, and with further innovations in battery technologies, engine efficiency and with competing hydrogen systems we could soon see the majority of cars in the UK producing emissions less than 100 g/km. These innovations have occurred following significant investment by business, with all areas of the process subject to scrutiny, including design, materials, construction processes and even improving driving style.
Given the carbon targets set by the UK, a similar revolution is going to be required in the construction sector. There have been a number of innovations in terms of green policies to encourage investment from the emissions trading scheme: the boiler scrappage scheme; insulation schemes; preferential VAT rates and tighter building controls. As with the car industry these will take time to feed through into business and consumer expectations, and it can be seen that these policies are starting to take hold. New homes are being developed at code 3, 4 and 5 in terms of sustainability, and the newest commercial spaces in London are being designed with the inclusion of solar, micro CHP, improved insulation and ground source heat pumps to reduce not only their carbon emissions but also their operating costs.
As with all investments there needs to be a number of conditions in place that will ensure success. The financial crisis and recession have resulted in tighter credit conditions which are less conducive to innovative investment. The higher level of risk attached to innovative technologies does not provide the certainty investors require, reducing the viability of projects. However, the recession has also meant that the rates of return available in other areas of the market have fallen making investments into improving buildings performance potentially more profitable, especially given rising rental rates at a time of a stagnant housing market. The rising costs presented at the beginning of this article have also played their part with already squeezed companies and consumers looking at ways of reducing their costs and liabilities. Whilst this raises consumers’ disposable income, for businesses this improvement to its cost base can mean the difference between being competitive and in profit or uncompetitive and loss-making.
Another area of importance is that of policy certainty. To date there has been a wide and varied approach to green taxes for both businesses and consumers. For example, there have been policies such as the Carbon Reduction Commitment, Renewables Obligations Certificates, Emissions Trading Scheme, Green Deal, and the Boiler Scrappage Scheme. Within these there have been a number of changes with regards to the schemes themselves and the outputs they aim to achieve. This creates uncertainty within the market, which results in higher risk factors and increased return demands. If we compare this to the automotive tax regime, despite several rebranding’s of the vehicle excise duty rates between 1999 and 2011, the number of schemes has remained minimal and the principles more consistent.
Finally, international conditions must be considered. In the motor industry there were clear signals for consumers across Europe and America that fuel cost increases and taxation were becoming unacceptable, and national dependence was not going to continue to be a feasible option. Car manufacturers responded to this demand across the globe, from Germany to Japan. If we look at the influence of low carbon policies, these hold even greater potential to change international construction markets. There is significant weight behind the drive to reduce the effects of carbon dioxide emissions, and there have been a number of policies put in place internationally to drive progress. This means the size of this market holds significant potential in terms of opportunities to work and profits to be earned. For example, China, despite expanding their electricity generation by significant amounts in more traditional fossil fuels, are also one of the biggest investors in renewables. The UK will be competing with these markets and so needs to ensure that its expertise is ready to deal with this global challenge.
Are we about to see the low carbon construction market take off? Based on the policy lag in the motor industry, the prevailing credit markets and consumer uncertainty, significant change is unlikely before the end of 2012, but following this the opportunities in the low carbon sector are likely to expand exponentially.
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