• Avinder Laroya

A review of the Environment Act 2021 and how it impacts UK businesses



This article will assist UK SME businesses better prepare and review the impact of the Environment Act 2021.


We will explore in this article the new legal framework of the Environment Act 2021 and how it impacts businesses in the UK.


We will investigate the impact that the new provisions will likely have on businesses and lastly, we will review the shortcomings of the Environment Act 2021 and the challenges for SMEs to implement the changes.


The Environment Act sets out to reduce and where possible to reverse the adverse effects of climate change. In this article we will focus on the following: -


  1. Brief overview of the Environment Act 2021

  2. Who will it apply to?

  3. New OEP office and its powers

  4. What are the impacts on business?

  5. Shortfalls of the Act and challenges for implementation for SME’s?


During the COP26 in 2021 there was a lot of discussion about the impact of climate change on our planet, small island nations are at the fore front of the race with tragic events like we witnessed in the media in Tonga where there is an increased intensity of tropical cyclones, sea level rising and coastal erosion.


It is a harsh reality that some nations are currently dealing with the brunt of the impact of the climate changes to our planet.


While the high level discussions at COP26 might appear at a distance, the policy changes and regulatory obligations following such discussions that impact businesses, in particular SME’s is where real impact can be made.


In November 2021, a new ground breaking environmental legislation came into force, The Environment Act 2021.


The Act comes at a crucial time in the world as recent adverse effects of climate change and COVID have impacted businesses negatively given the lack of resilience to withstand the increasing likelihood of supply chain disruptions.


Brief overview of the Environment Act 2021


The Act was enacted to bridge the gap left by the UK’s exit from the EU and sets out statutory targets to recover the world of nature through air quality, biodiversity, water, and waste.


The Act sets out a target to do the following;


  • Reverse the extinction of species by the end of 2030;

  • Provide a new guide to help Natural England and others to enact laws to conserve the environment;

  • To halt the decline in nature by 2030 and;

  • For the UK government to publish a 25 year environmental improvement plan setting interim targets for each 5 year period.


There are 5 Environmental Principles (Integration, Prevention, Rectification at source, Polluter Pays, and Precautionary) to be considered by all Government Ministers when making policy to help increase the opportunities for Nature recovery across Government.


Who will it apply to?


The Act will impact all businesses in one way or another, whether it is a direct impact as a manufacturer with the use of raw materials or indirectly to end consumers. The Act has implications for all levels of business activity and the supply chain.


The greater frequency and severity of climate hazards create more disruptions to the global supply chain. In a recent case study by McKinsey , they looked at how the risks from climate hazards are likely to evolve in the next few decades.


The interruption to production will lead to rising costs and prices, thus affecting corporate revenues.


The supply chain is interdependent around a complex system and involves everything from the production of cars to food and medicines, global trade is worth almost $20 trillion annually.


Every aspect of business operation should consider environmental factors and exposures as they are developed and reviewed through the business supply chains to ensure the ESG impact is assessed throughout the business life cycle.


The Office for Environmental Protection


The Act introduces a new Office for Environmental Protection (OEP), it is a new public body that is an independent statutory body with the principle duty to support environmental protection, improve the natural environment and hold public bodies accountable.


The office has the power to conduct independent investigations on alleged serious breaches of environmental law by public authorities and take legal action where necessary.


The mission is to protect and improve the environment by holding the government and other public authorities to account. The Environment Act sets out the powers and duties which are split into four types of activities;


  1. Scrutinising environmental improvement plans and targets

  2. Scrutinising environmental law

  3. Advising government on environmental law

  4. Enforcing against failures to comply with environmental law


The work covers England and Northern Ireland and cover reserved matters across the UK.


Impacts on business



The Act will have an impact in all areas of the business cycle, to include the design of consumer products to the design and manufacturing of the vehicles we drive. Below we review some of the practical areas for consideration.


Production costs


It is no doubt that businesses will have to dedicate a portion of their budgets to put in place mechanisms that will enable them to comply with the new regulations.


However, contrary to popular belief, the cost of complying with the new regulations will mostly likely only represent a small share of production value in SME’s.


The Environment Act is not the first of its kind. There have been several attempts and/or regulations made globally over the last decade to create policies to conserve nature.


On the introduction of carbon pricing in Europe, many critics predicted that industries with a high energy consumption such as paper, aluminium, and steel companies would experience a high increase in costs.


However, this was not the case because of generous free allocation and low carbon prices.


Arguably, the environmental regulations may also have a large impact on investment costs for new businesses.


By way of reference, the 1990 Amendments to the US Clean Air Act led to the increase of the set up cost of greenfield facilities by 50%.


Therefore, although initial set up costs and/or compliance costs may be high, the general consensus is that the long term effect of industrial greener practices will have a positive impact on businesses which will outweigh the initial high production costs.


Productivity


In order to comply with environmental regulations such as the Environment Act, businesses may have to divert some production resources away from production tasks towards compliance therefore negatively impacting productivity levels in the short term.


Economic studies have shown that once the initial transition period has been surpassed, the net effect of the environmental regulations boosts productivity in the long run.


For example, it is estimated by Christiansen and Haveman (1981) that the introduction of similar regulations in the United States led to approximately a 10% increase in industrial productivity between 1965 and 1980.


More recently, Alpay et al. (2002) found that environmental regulations enhanced productivity levels in the Mexican food processing industry.


Despite the overwhelming evidence supporting the positive impact of environmental regulations on productivity in the long run, it should be noted that similar regulations such as the pollution regulations in the United States had no impact on the profitability of food processing industry. It is therefore a matter of time before the real impact on SME’s is unveiled.


Innovation


Onerous environment regulations tend to encourage innovation of environmentally friendly technology to meet the demand for sustainable solutions as businesses seek to comply with the new legal framework.


The growth of researchers and clean energy entrepreneurs ultimately increases the eminence of sustainable technology therefore making it more accessible.


Employment


High costs related with compliance may lead to loss of jobs as businesses seek to allocate more resources towards compliance.


Compliance may however create more job opportunities as businesses seek to innovate alternative technologies to combat climate change and promote sustainable use of resources.


The overall impact of this substitution may therefore result into minimal changes on net employment.


Business Relocation


There is a general consensus that countries with relatively less stringent environmental regulations tend to specialise in the production and export of, for example, pollution intensive goods and services.