Comment by Elle Butterworth – Senior Digital Consultant at Energy Systems Catapult. 

We’ve been advocating for the creation of a Carbon Regulator to strengthen oversight of decarbonisation across the economy.

It’s easy to get stuck in solution mode and think about all the exciting things a Carbon Regulator could help us achieve, from setting requirements on verification processes, to mediating carbon intensity claims between competing industries and ultimately helping us get to a Net Zero economy that is driven by credible emissions data.

But with our latest report, we’ve gone back to basics. To really get under the skin of what regulation intends to do, how feasible it is to setup a regulator and what some of the pitfalls can be.

We interviewed regulatory experts from across the energy, finance and environment sectors – from academics to senior regulators. We asked them what good regulation looks like and what they think about setting up a new regulator to have oversight over carbon accounting practices economy-wide.

I learnt a great deal about regulation and regulators in writing this report. Here’s what I have learnt about why regulating is hard:

• Regulation is not as simple as passing and enforcing a law.

A regulator’s success is largely dependent on acceptance and engagement, from industry, the wider public and government. Regulators need a social licence to operate as much as they do a legal one.

• Regulation is usually introduced a last resort.

Regulation is introduced to address a critical problem in a system, and therefore the regulator is already in reaction mode. Regulatory experts we interviewed spoke to the challenge of being held accountable for faults in a system that was already imperfect. Overtime, these perceived failings can limit their credibility and authority.

• By the time it gets to the final reading in Parliament, the regulator you designed will probably look quite different.

The implementation of a new regulatory body and regulating system will likely require a bill to be passed through Parliament. Our brilliant democratic system will then enable conditions to be added or amended. This parliamentary scrutiny is often valuable, but it can also dilute the intended effects of a regulator.

• Heavy-handed enforcement will not get you very far.

For economy-wide regulation it is near impossible to enforce prescriptive rules and have direct regulatory oversight over business activities – it would be hard to justify the resource required and would create a disproportionate admin burden on SMEs. Again, engagement is important – regulating by consensus enables regulators to focus their efforts on larger businesses and activities that could have the most destabilising effect on the system they are responsible for. But this does require a greater deal of diplomacy and stakeholder engagement.

• There’s no such thing as complete regulatory independence.

Regulators get their authority to regulate from government, can never be fully independent from them. Regulators also employ from a relatively small pool so independence from those they are regulating is extremely difficult. Independence can also weaken over time. Changes in public opinion, changes in leadership and in government can influence a regulator’s authority. However, independence is not always advantageous because regulators need the businesses they regulate to engage with them. It’s much easier to regulate by consensus.

• Proactive regulation is largely led by the private sector.

Government and regulators often look to what standardising activities are happing in the private sector and may step in to help mature these activities or give them additional credibility. Regulators also engage industry bodies to encourage regulating behaviours (like standards in financial accounting) and reduce the need for direct involvement. However, in an area where there are multiple competing standards, like in carbon accounting, it’s not always clear where government is best placed to step in and support standardisation.

• Expanding the remits of existing regulators could lead to “cherry picking” priorities.

Resourcing regulators is difficult particularly when their remit is expanded or evolves over time, which is often the case. This could lead to regulators prioritising some areas of their remit over others. However, there is also value in leveraging regulators with existing sector expertise and the stakeholder relationships to regulate by consensus.

If regulation is so hard, why do we do it?

Despite all the challenges and trade-offs required to get the state of implementing regulation or even a new regulatory body, regulation is essential to economic success, sending clear signals to innovators on where to focus their efforts and gives more certainty to investors.

Without regulation the carbon accounting landscape will continue developing in a disjointed way, limiting the credibility of product claims and company disclosures, which in turn limits the confidence investors and customers have in products and services.

Whilst the implementation of regulation is not easy, it is necessary to create a stable framework from which to unlock the investment and innovation needed to decarbonise our economy. That’s why we are publishing a series of reports on Operationalising a Carbon Regulator – with the aim of building a network of informed actors who can contribute to the conversation on emissions regulation and help us move towards a Net Zero economy that us underpinned by credible emissions data.