With the landmark climate summit COP26 happening in November, climate action at a domestic and international level is set to accelerate materially in 2021. Government is developing a series of major changes to the financial, policy and regulatory environment to drive down emissions across the entire economy and show global climate leadership.
The stage is now set
We have heard many times that action on climate change is urgent. From that perspective, the prospects for the year ahead are far more promising than 12 months ago. While the UK was a relative outlier at the beginning of 2020 in having committed to a net zero goal, around 50% of global GDP is now covered by some sort of zero-carbon target. Having spent four years rolling back environmental regulation and walking away from international commitments, the US under Biden will make climate one of its key diplomatic priorities. The relentless increase in global emissions once seemed unstoppable, but COVID-19 has shown that if governments set their collective minds to something it is possible to drive radical change.
A better outlook is one thing – translating it into tangible progress is another. On the domestic front, the full economic consequences of COVID-19 are yet to materialise, and the Government will have to divert attention and resources elsewhere when they do. In principle there is broad political agreement on the need for climate action, but there is scepticism on the Conservative side about potential conflict with the levelling up agenda. Internationally, there remains a huge challenge in convincing some countries – such as Brazil – that they should increase their climate ambition ahead of COP26. Given a recent forecast that the rate of global decarbonisation will have to increase nearly four-fold if we are to keep global warming under 2oC by 2050, success is far from guaranteed.
No hiding places
The UK Government finished 2020 with a bang. The Prime Minister published a 10-point plan for a green industrial revolution, followed by a new 2030 greenhouse gas reduction target and the long-delayed Energy White Paper. While many gaps on the detail remain, these documents represent a step-change in UK political ambition on climate. Perhaps most importantly, they signal that action to reduce emissions is set to go well beyond the power sector, touching all areas of the economy – with no more sacred cows.
One area where this will become particularly clear is the financial system. The UK is taking steps to mandate more stringent climate disclosure rules and the Bank of England is planning a major climate stress testing exercise. The Chancellor, supported by Mark Carney in a dedicated COP26 role, has put a strong emphasis on green initiatives in his post-Brexit vision for the City, a part of which will be a new ‘green taxonomy’ to guide all areas of sustainable investment, from low-carbon infrastructure to new technologies. Treasury thinking remains at an early stage, but there will be significant implications for those looking to invest in the net zero transition or develop technology offerings to capture market share, particularly across the energy, transport and industrial sectors.
After numerous delays, we also expect Government to use 2021 to accelerate development of low carbon infrastructure, both to cut emissions and deliver on the levelling up agenda. Government is moving at pace to develop new financing mechanisms to support key technologies, such as carbon capture and storage, EV charging infrastructure and hydrogen production. It is also considering more changes to the economic regulatory regime to drive investment, including a review of Ofgem’s duties with the potential addition of a ‘net zero duty’. There is scope for more radical changes, such as institutional reform of how to manage the next stage of the transition, including how major changes are planned and coordinated across different markets.
2021 is also likely to be the year of carbon taxation. As Government grapples with the fiscal consequences of the pandemic, it is looking at measures that could both raise tax revenue and cut emissions. It is specifically considering whether the new UK Emissions Trading Scheme could be expanded to cover new sources of pollution, such as transport. A range of other environmental taxes could prove politically attractive to a Chancellor with few easy options to balance the books and replace revenue, such as fuel duty receipts, that will decline as the economy decarbonises.
Going truly global
The UK is also under the spotlight on the global stage in the run up to COP26 in November. The decision to reinstate a full-time COP26 President shows a welcome determination to dedicate more time and effort to this. It is hard to overstate the importance of a successful summit to this Government for its Global Britain agenda after Brexit.
We expect a more concerted diplomatic drive in the months ahead – evidenced already by the recent G7 leaders meeting - with Government developing a set of high-profile, multilateral initiatives to build a stronger international consensus across several priority campaigns, ranging from electric vehicles to afforestation. It is also focusing on ratcheting up ambition at a corporate level.
The tide does seem to be turning
The UK Government is facing a 10-month ticking clock until COP26, by which time it must have developed a credible domestic net zero strategy and convinced the rest of the world to materially increase its ambition. If we get it right, 2021 stands to be the moment that the tide finally turns against climate change.
Josh Buckland is a Director at Flint. He wrote this piece with input from Flint Partners Mary Starks and Tim Pitt. To find out more about how Flint can help you capitalise on the opportunities created by the net zero transition get in touch.