How UK net zero policy is veering off course – for investors and the wider world.

At the last count, the UK’s contribution to global emissions was less than 1%, although it’s worth noting that the UK historically has been responsible for some 3% of total CO2 emissions since the industrial revolution.

Despite this relatively low number, there is no denying the attention that recent decisions by Prime Minister Sunak’s government on climate and energy policy – which by consensus have watered down the UK’s commitment to its net-zero goals – have generated both in the British public policy debate and internationally.

Against this background, we address the controversy through Carbon Tracker’s regulatory, economics and finance nexus, in particular the signals which it sends to the finance and investment community – and considers what a sound net-zero policy ought to rest on in terms of generating investment for the longer-term.

The wrong direction

None of the following developments or decisions can be viewed individually as positive for the UK’s net-zero goals:

• last month’s Contracts for Difference (CfD) auction, which failed to attract a single offshore wind project bid, was viewed as badly-designed by the industry and whose outcome should “set alarm bells ringing in Government”, according to RenewableUK;
• the change of policy announced by the Prime Minister to delay the ban on new petrol and diesel cars, which attracted widespread criticism from business;
• as part of the same announcement on net-zero, the decision to scrap the policy to force landlords to upgrade the energy efficiency of their properties; and, related to that, the dissolution of an expert home energy efficiency taskforce (only six months after it was established);
• confirmation that the Government, despite the fact that the UK is already the second largest North Sea producer, plans to proceed with issuing over 100 new oil and gas licenses (including for the controversial Rosebank project) ;
• reactionary downward price swings in the UK Emissions Trading System, which have left prices at significant discounts to the EU scheme, reducing the amount of revenue which can be redirected to green projects in the UK, and potentially leaving domestic producers with significant additional administrative costs for exporting to the EU.

The over-arching point is really about the cumulative impact of this set of decisions, and what they say to investors and the wider world about the British Government’s overall direction of travel on climate change and the energy transition.

Many interest groups in the UK have drawn their conclusion. Investor groups have been critical. A senior business representative said that handling government policy was like “wading through treacle”; the parliamentary Environmental Audit Committee, in a letter to Rishi Sunak, said they were “deeply concerned”.

 A little better ­­­­­elsewhere

However, before making a final assessment, it is worth listing – in the interests of balance – any recent developments which might be considered more positive and progressive.

The following might come under this heading:

• the review of grid planning and approval to speed up the removal of bottlenecks (a priority for Carbon Tracker, as our research demonstrates);
• the promise to provide more public money and increased grants for replacing boilers with heat pumps (even if major questions remain over capacity to administer the scheme);
• the launch of Great British Nuclear and the progress made on Small Modular Reactor (SMR) technology via a public competition for government financial support (notwithstanding the question-marks over likely costs, permitting and construction times, and opportunity costs compared with supporting renewables).

Why the Cumulative Impact Matters

Taken at face value, the negative side of the ledger does outweigh the positive elements,  There are moreover two principal reasons to back up this negative assessment up, neither of which in themselves are about reducing emissions: one is for what it says about UK leadership and its place in the world; the second about the clarity and consistency of messaging for the investment community.

Internationally, it was noticeable how much the Prime Minister’s speech on 20 September cut through unfavourably with commentators and decision-makers. Whatever the motivations, timing that speech to coincide with the UN Secretary-General’s Climate Ambition Summit in New York (designed amongst other things to showcase climate leaders in government and business) was unfortunate. It also didn’t go un-noticed that the UK failed to get a ticket (putting it in the company of Norway, interestingly) to attend Guterres’ summit. This has all added to the sense that, despite the British Government’s claims to the contrary, the UK no longer sits at the top table when it could deservedly do so less than 10 years ago: where it was a prime mover on EU climate and energy; was spearheading the growth of the offshore wind market; and even as recently as COP26 in Glasgow, where it was able to convene major announcements ranging from coal exit to green finance. The Government’s objectives for COP28 in Dubai will have been weakened by this episode.

If some of this global criticism is based partly on emotion and people feeling let down, investors are more clear-eyed – focusing on what this government’s announcements mean for where they allocate their capital, by geography and by sector. And the mood music among business and finance (as noted above) is that the Government is, at a minimum, sending contradictory signals. This is for several reasons.

First, the Government doesn’t seem to be following the advice of their own advisory body, the Climate Change Committee – also worried about the implications for commitments to future carbon budgets – who have described the efforts to scale up climate action as “worryingly slow”.

Second, those involved in the wind industry in particular question why the Government should have dropped the ball so glaringly on the last CfD: if it ain’t broke, don’t fix it.

Third, the wrong policy signal risks contradicting what market and technology developments are telling markets. The conspicuous example here being the decision on electric vehicles, where the evidence is that the tipping point for deployment is accelerating towards us.

Lastly, Carbon Tracker’s analysis about the risk of stranded assets in fossil fuel infrastructure which won’t see out its projected lifetime is well-known. But this is a theme which is increasingly gaining traction: from the IEA (the new Net Zero Roadmap) to Goldman Sachs (cf the assertion in their recent annual analysis of the energy sector that concerns about stranded assets have played a major role in curtailing oil and gas investment). So why would it make sense to increase North Sea production on this scale, while in the same breath, maintain that you will still meet your net-zero commitments?

The Future: what would be the right signals for investors?

This is not about party politics. It is a Conservative Government; Labour is not in power. But it may be instructive to quote a strong message from the recent Labour party conference and contained in Keir Starmer’s speech: that there will be no more “chopping and changing” on policy.

Financial institutions often say that, alongside geo-politics, regulatory risk is the biggest obstacle to investment. And this leads on to what business and investment would ideally like to see on climate and energy policy, and the lessons to be drawn from the recent developments and decisions made by the Government – that the key principles for policy direction should be:

• clarity – no mixed messages
• coherence and stability;
• long-term certainty for investors and administrators.

In essence, we are talking here about a net-zero industrial strategy which can direct opportunity as well as risk for finance and investment. An industrial strategy that would also give the UK the opportunity to compete for the new green technologies and jobs globally. This would seem to be a key learning that the EU has drawn from Biden’s Inflation Reduction Act.

The Chancellor has the opportunity to say something more in his Autumn Statement on 22 November. Unfortunately, the present policy approach signalled by government – short-termist and, in case we forget, not based on robust climate science – risks the UK missing out and not taking full advantage of the economic opportunities that the energy transition is presenting.