Kicking the can down the road: the economic effects of the UK’s net zero U-turn

Trevor Hutchings, Sustainability partner at BIP UK, argues that the wellbeing of our climate and wealth are inextricably linked.

On September 20 this year, Prime Minister Rishi Sunak surprised the nation with a series of announcements rolling back the country’s net-zero commitments. 

The controversial changes include scrapping landlord requirements to upgrade the energy efficiency of housing & delaying both the ban on gas-fired boilers & the ban on new fossil fuel car sales, pushing the deadlines to the year 2035. 

This abrupt shift came despite prior warnings from the Climate Change Committee (CCC) that the UK was not on track to meet its legally binding carbon targets.1

A faulty rationale

The government justifies these measures by claiming that they ease the short-term financial burden on working families. Indeed, the poorest in society cannot afford electric cars and smart home energy upgrades, but neither can society afford to ignore the climate crisis.

Sunak’s administration attempted to balance the news and pacify both sides of the argument with two welcome measures – households will be offered larger grants worth up to £7,500 to fund the installation of heat pumps, and £150m will be awarded to the scientific community developing green technologies. 

But what’s good for our pockets and what’s good for the planet is not a trade-off – these are two sides of the same coin. Continuing to treat them as opposing priorities will only exacerbate the very real costs of climate change that vulnerable people are already experiencing.

The wrong decision for families

To appreciate the consequences of this policy reversal, one need only look back to the winter of 2015. Devastating flash floods submerged swathes of northern England, ruining homes and inflicting immense suffering on communities. The financial toll was staggering – not just to rebuild, but as insurance premiums skyrocketed. What were once ‘one in every 100 years’ events are now far more common.

The OECD points out that whether it’s higher food prices due to crop failures or higher healthcare costs due to pollution, poor families always come off worst from climate shocks as they don’t have the resources to protect themselves.2 

It’s no wonder the government has come under fire for relaxing climate targets, especially as it’s unclear if decisions to delay bans and scrap mandated efficiency upgrades actually ease short-term hardship.

Monthly energy bills for renters will remain at excessive levels until new standards improve the energy efficiency of buildings, and the CCC estimates that the cost of a new electric vehicle will be in line with the cost of a new petrol or diesel vehicle by 20303, the original date of the sales ban. It follows that for many citizens, postponing climate action offers no practical advantage – we need to decarbonise now.

Investment for the transition

A successful energy transition will hinge on the support of investors – their confidence is essential to the growth of any industry, and the fields of renewable energy and green technology are no exception. While there is near limitless capital available for sustainable projects today, financiers may be more hesitant to put pen to paper on deals if they feel the UK government no longer stands behind them.

Investors require higher returns on investments to compensate themselves for the risks of operating where there is regulatory instability. If venture capitalists perceive the risk as too high and withdraw support completely, green tech would have to resort to more traditional and expensive sources of capital.

UK competitiveness under threat

The government’s policy shift also disrupts and frustrates a number of industries that are integral to making the energy transition happen. 32 financial services firms have written to the government with three main grievances.4

 The first is practical – executive teams are planning for future market opportunities in a net zero world and face complex strategic decisions to adapt their business models. Over two-thirds (68%) of companies are right in the middle of that process5, so the timing of this U-turn couldn’t be worse.

The second is reputational – if a country like the UK is seen to flinch from its net-zero commitments, other countries will question their own initiatives. The country risks giving up its leadership position on climate, losing pace with the US and Europe where green capital will flow. Domestic industries could subsequently miss out on important knowledge clusters and supply chains.

The third is fundamental – climate mitigation and adaptation options narrow as more environmental blows are inflicted, and the cost of these options will only increase.

Fortunately, it’s not too late for the government to correct its course.

A way out of the climate crisis

This government once dubbed net zero as the “growth opportunity of the 21st Century6”, worth over £1 trillion for British businesses by 20307. Make UK’s research earlier this year showed the private sector was in broad agreement – two-thirds of companies see the transition as a “commercial opportunity”8. We can still seize this opportunity if the government shows strong leadership, not only recommitting to original carbon targets but going to new lengths to ensure we achieve net zero by 2050.  In doing so, government must shield vulnerable groups from the short-term costs of tackling climate change via support packages to improve the energy efficiency of their homes, and other mechanisms.

The UK could take a fresh look at infrastructure in need of sustainable upgrades, address barriers to low carbon technologies and open up projects to international investors or public-private partnerships for funding, underpinned by policy guarantees. It could set the standard internationally by incentivising sustainability with more effective carbon pricing – when investing in green projects is profitable, the market naturally answers the call to action. 

One thing is abundantly clear; that now more than ever, the UK government must recognise that the climate and the economy are inextricably linked and win back trust by matching rhetoric with action.

Trevor has over 20 years’ experience in the ESG/sustainability sector, previously holding positions as Director of WWF and Director of Gremserv. At BIP, Trevor works with 4,500 people across 13 countries to help organisations with their sustainability journeys and capture the benefits that flow from improving ESG performance.

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