Net Zero Strategy
The Government published its Net Zero Strategy as a purposeful prelude to COP26. The aim of the document is to pull together the various policy and regulatory programmes that are being undertaken across Government to put the country on course to reach net zero emissions by 2050, as well as deliver on interim climate targets.
The document largely pulls together existing policy commitments, but does set a range of new interim emissions goals – these include a signal that by 2035, Government expects power demand to increase by 50% by 2035 and for there to be 10-17GW of clean hydrogen on the system. The document also includes a series of high-level policy decisions across power, transport and low-carbon fuels and kicks off various policy consultations over the next 6-12 months.
The Net Zero Strategy is strongly aligned with the Prime Minister’s approach to green issues. It is long on ambitious targets and the positive benefits that will flow from investing in clean technologies across the country. Unlike some recent Government documents, it also includes a clear, bottom-up analytical assessment of what needs to happen to deliver not just net zero, but also interim climate targets. It also sets a much-needed positive tone on the need for private investment and treads a sensible, politically conscious line on the need to bring the public along the way.
The Strategy does, however, remain light on some of the more difficult decisions that will have to be taken over the next 5-10 years to deliver on the ambitious targets set. There is little on how the costs of new infrastructure projects will be allocated across consumers. It is also light on the detail of the future of the UK’s carbon pricing framework, something that will be a vital tool in driving down emissions. The policy detail is also unbalanced across sectors, with significant gaps on natural resources and heavy transport. Many will be expectant of further detail through the various consultations promised alongside the Strategy.
Despite the shortcomings, the Strategy itself is broadly credible. If Government can come up with the detailed policy initiatives required to deliver the headline targets to 2035 it will get a long way towards the net zero target. Failing to do so will make the contents look like a large dose of cakeism.
Heat and Buildings Strategy
The long-awaited Heat and Buildings Strategy sets out Government’s plans to tackle one of the most challenging aspects of the UK’s net zero target, decarbonising the heating of people’s homes. The Strategy signals a significant shift to electrified heating solutions which is now seen as a ‘no regrets’ option, while decisions on the role of hydrogen will take place later this decade.
The Strategy builds on existing targets, such as the installation of 600,000 heat pumps a year by 2028 and ending the connection of new homes to the gas grid by 2025. Ending the installation of new natural gas boilers from 2035 is a central ambition, and a new Boiler Upgrade Scheme provides initial funding to support households with the transition, as well as a potential obligation on manufacturers to produce low-carbon heat solutions. A rebalancing of policy costs on bills to promote electrification is also signalled, but this is a long-term shift on a decade-long timeframe signalled.
Published during the ongoing surge in gas prices, the Strategy highlights the fundamental political and policy challenges of decarbonising the UK’s heating. A radical shift is required away from natural gas heating to meet the UK’s carbon reduction commitments, while the costs of alternatives need to be addressed without impacting consumers. Perhaps handily for Government, the gas price surge is a further rationale for shifting the country’s homes and business onto new forms of heating.
While the shift to a predominantly electrified system of heating in just a few decades is nothing less than radical, the Government is pitching this as a gradual transition, learning from the success so far of the shift to electric vehicles. A mix of market signals, technology improvements, and Government-supported cost reduction can help turn the niche products of today into the mainstream consumer products of tomorrow.
A number of difficult questions are left for now. The rebalancing of policy costs on energy bills needed to make heat pumps cost-effective to run will not happen any time soon, and the decisions on the role of hydrogen in heating remain parked until 2026. However, the steps taken to kick-start the market for electrified heat are noteworthy, with significant funding on offer for early-tech adopters and new mandates on businesses to deliver clean solutions at a lower cost.
Greening Finance: A Roadmap to Sustainable Living
Following the Green Finance Strategy in 2019, Government has published a roadmap on Greening Finance. It identifies three phases to green the financial system: informing investors and consumers, acting on the information, and shifting financial flows. The roadmap covers the first of these areas by setting out more details on the Sustainability Disclosure Requirements (SDR) and the Green Taxonomy. The roadmap is led by Government but also includes input from the FCA and the Bank of England. It promises discussion papers and consultations on almost all the reforms cited, including on the Taxonomy, TCFD implementation and fund labelling.
How the Government will attempt to turn sustainable finance into a competitive advantage for the UK and London as a financial centre is becoming clearer. As expected, it is through alignment with global standards, attempting to be the first-mover when it comes to implementation and looking for UK specific nuance where its available. This means going further and faster on TCFD implementation. Requirements on both listed and registered UK companies are significant and fast approaching. Similarly, much is made of the IFRS’s new group, the ISSB, and how the UK will implement its findings wholesale.
There are subtle attempts to leverage unique UK positioning and capabilities for competitive gain. For example, by emphasising the recently revamped Stewardship Code, which has already attracted controversy in the industry, and going further on fund labelling, the Government is hoping that they can offer certainty to asset managers and owners and attract long-term capital flows off the back of it. There are also likely to be subtle differences in the way the taxonomy is applied in the UK, with nuclear now being covered by the Energy Working Group, and a potentially more liberal interpretation of transition for taxonomy-aligned activities and funds.
CCUS cluster announcement
The Government has announced that it will take forward two CCUS clusters in the first round (Track 1) of projects – HyNet, based in Liverpool, and the East Coast Cluster, in Teesside. Both clusters will now need to deliver their transport and storage networks, together with initial industrial and power capture projects by the mid-2020s to meet the target set out in the PM’s Ten Point Plan.
The Scottish cluster has been selected as a reserve cluster – it met the eligibility criteria and performed well when assessed against other bids, but Government has chosen only to take forward two clusters at this stage. Looking ahead, Government recommitted to advance another two clusters by 2030. This will enable Government to deliver its more ambitious new target to capture and store 20-30MtCO2 by 2030 – a significant increase from the 10MtCO2 as outlined in the Ten Point Plan.
As with most Government decisions of late which grapple with tradeoffs between core initiatives to deliver net zero and major spending asks, Government took the decision on which clusters should proceed at the eleventh hour. The key point of contention being whether to confirm two or three clusters to proceed in the first round. We expect this dynamic to continue to play out as negotiations with the clusters begin soon and the real challenges of delivering these projects becomes clear.
Today’s decision means that the next phase of the process will kick off at earnest – direct negotiations with each cluster to agree Government support to develop transport and storage networks, and a competition to select which industrial and power capture projects will go ahead first. We expect Government to publish details of its overall delivery plan and further updates on the business models in the coming weeks.
Net Zero Review
HM Treasury today published its Net Zero Review Final Report which considers the potential exposure of businesses and households to the net zero transition, and highlights factors to be taken into account by Government when designing net zero policy and allocating costs.
The Review uses the 6th Carbon Budget trajectory and considers the potential macroeconomic effects of the transition; the potential economic opportunities and risks; the factors affecting a household’s exposure to the transition; the policy levers that could support the transition; and the likely fiscal implications.
The Review makes clear that the net zero transition will have material fiscal consequences for current and future taxpayers. While obvious, this does show the scale of the challenge facing the exchequer in dealing with the consequences in a politically feasible way. While the detailed approach that HM Treasury will take remains unclear, the Review stresses that it will maintain the “polluter pays” principle arguing that any departure from this approach would not be consistent with intergenerational fairness or fiscal sustainability and could blunt incentives, ultimately pushing up the economic cost of the transition.
While the Review focuses heavily on the cost of action, it does clearly recognise that inaction is ultimately the more expensive option. However, this is not to say that the Review is a departure from HM Treasury orthodoxy and carte blanche to open the spending taps for all things green. The Review does however mark a concerted effort from HM Treasury to embed climate considerations, alongside cost, into the policy making process across Government.
Josh Buckland, Partner leads Flint’s work on energy, sustainability and environmental issues. Prior to joining Flint, Josh was Energy Adviser to the Secretary of State for Business, Energy and Industrial Strategy. Josh previously worked on energy and climate issues across HM Treasury and in the No10 Policy Unit. Josh also worked as a senior adviser within the COP26 Unit.