Overview
For some, yesterday’s announcement from the Prime Minister was a long time coming, but for others it was a shock ripping up of the international rule book on climate change. It has been long-mooted that the Prime Minister is not as personally engaged or motivated by the green agenda as many of his colleagues, and with the unexpected by-election win in Uxbridge and South Ruislip earlier in the year, the pressure has been building from within the Conservative Party to use climate policies – particularly those hitting consumers such as ULEZ - as a wedge issue with Labour in next year's election.
However, this is something of an oversimplification and the Prime Minster was clear in his statement yesterday that this new approach is about reaching net zero in a pragmatic way, that is both fairer and ensures they are able to bring the public with them on this journey. He pointed out that what he termed the “two extremes” of either denying there is a climate crisis and doing nothing and going further and faster on environmental policies irrespective of the cost are both the wrong approach to take. His speech was an attempt to break the consensus that the current approach is the right one, arguing that it has not been properly debated and that politicians of all colours have continually made commitments without being honest about the sacrifices that will be required to meet them.
The UK has already made huge strides in terms of cutting its emissions, reducing them faster than any other economy in the G7. The UK’s share of global emissions is now 1% and per capita ranks below the EU, China, Australia and the USA.
In highlighting the cost of the previously planned policies, the PM argued that technology is developing all the time, becoming cheaper and more effective, but said it was unfair for the government to be imposing costly measures on the public at a time when people are struggling to make ends meet. Looking at heat pumps he said it remains an expensive technology that is not suitable for every home. For an average terraced house in Darlington, he predicted it would cost around £10,000 to install, in addition to any new energy efficiency measures they may require, and if the government’s approach to net zero consisted of simply forcing people to make such expensive investments they would lose their support and the approach would fail.
In terms of what the government strategy looks like now, the underlying approach is that they will incentivise those who want to make the right decisions, announcing an increase in grant funding for those who wish to replace their gas boiler without forcing them to make investments. The other part of the plan is to use the machinery of government to help facilitate the transition and lay the groundwork to make investment decisions more attractive. This includes lifting the ban on onshore wind generation, as well as commitments to bring forward a comprehensive plan to reform the energy infrastructure in the UK and expand the grid. This remains one of the most significant barriers to both the UK’s energy security and reaching net zero.
While many of the PM’s critics, as well as industry and the scientific community are sceptical – if not highly critical - of the plans, the Prime Minister was explicit that his new approach would still see the UK reach net zero by 2050. In his delivery yesterday afternoon he anticipated this criticism and made it clear that over the past 10 years the UK has significantly over-delivered on every one of its carbon budgets, in spite of predictions that they would be missed. While this can be seen as a high-risk strategy, the Prime Minister feels that the UK’s over delivery to date has bought us the wiggle room to make this change in approach.
Some of our sector specialists have shared their thoughts about what yesterday’s announcement means for industry and how it will impact the UK’s 2050 net zero ambitions.
A word from our Head of Green & Good
Net-zero by 2050 is a statutory obligation for the UK and having a regulatory framework that gets us there and provides a level playing field for business and guidance for consumers is critical. What we got yesterday was the net zero can being kicked down the road without a clear plan for how we deliver the infrastructure and change in consumer and corporate behaviour needed to get us to the revised deadlines. That injects more uncertainty into corporate planning and risk management at a time when we badly need consistency and stability, particularly in the face of bold climate-friendly policies such as the US Inflation Reduction Act.
“It is also a big gamble on public opinion and our 2022 ESG Monitor research shows that the environment remains a high priority for the public despite the cost-of-living crisis, with 72% of consumers we polled expecting corporates to act on ESG issues and prioritise environmental action. Achieving that requires regulatory certainty and a clear vision for a ‘green’ future.
“Yesterday’s announcement runs counter to the focus that corporates have rightly put on delivering the net-zero transition and essentially surrenders any claim that the UK has to be leading the transition to a green economy. It also potentially opens the government up to litigation from NGOs and activists if the policy decisions taken are felt to threaten the delivery of net zero by 2050.
The mood at Climate Week NYC
In New York, there’s been much comment around the timing of the UK Prime Minister’s raft of announcements in London and the change of perception in the UK’s long-held desire to provide global leadership on achieving net zero by 2050.
Political leaders from around the world are meeting in and around the United Nations in Manhattan to generate a sense of momentum for tackling climate change ahead of the COP28 Summit.
The decision to delay and weaken previously declared commitments at a time when the need for a collective consensus on reaching net zero is building towards a peak doesn’t look like a coincidence. Former US Vice-President Al Gore and prominent climate change activist couldn’t have been clearer in his views. He called Rishi Sunak’s U-turns “shocking and disappointing”.
Rishi Sunak insists that Britain is still doing more than other nations to reduce emissions. The problem he faces is how to frame this narrative for the international business and investment community, particularly when it comes to making decisions around how and where to allocate long-term capital.
The former COP26 President and Tory Cabinet Minister Sir Alok Sharma is already warning that the Prime Minister’s decision would “not help economically or electorally". And there has been criticism today that the UK government is moving from leading the pack to being stuck in the unambitious middle.
Rishi rolls the dice with the City
A decade on, David Cameron’s advice is reverberating around the Conservative Party, the media and now the City. Potentially spotting a narrow route to victory by ‘cutting the green crap’, Rishi Sunak has decided to push some of the UK’s key net-zero targets back from 2030 to 2035. Although just last month financial institutions managing £1.5 trillion in assets warned that the government lack of clarity on green policies risks halting investment, Rishi will rip up Boris Johnson’s green legacy. This is something he may not be too concerned about, but he is now facing the ire, confusion and surprise of the business community and investors, and as we know, these emotions are the enemy of investment. For years the UK has promised to enforce its net-zero targets, companies have been built on the back of these commitments and share prices have soared – and plummeted – on the back of these legislative and regulatory red-lines. Now the City and businesses are left with a whole heap of uncertainty and their trust in the UK government’s ability to follow-through on any of its commitments has the potential to reach new lows – what will they (international investors, for instance) think abroad?
What does this mean for Energy? Business vs consumers
Markets and investors hate nothing more than uncertainty and prior to the Prime Minister’s speech yesterday there was already a sense that the UK was slipping behind on delivering its net zero commitments. Within the energy sector, businesses upstream and downstream have been calling out for clear policy certainty in order to make long term business investments. And since yesterday’s announcements, Sunak has been inundated with calls from across the energy sector to restore confidence in the green transition.
But his announcements were designed to appeal to swing voters hit by the cost-of-living crisis and not the business community. His ‘watering down’ of policies is more nuanced than the initial BBC scoop suggested, and the negative impact of that leak has obscured the lens through which many businesses have viewed this.
On green energy, the announcement involved an acceleration of important planning processes for green grid expansion. And on EVs, the ZEV Mandate requiring manufacturers by law to meet sales targets for 80% of vehicles sold to be zero-emission by 2030 will remain. So, while in theory a voter can buy a petrol or diesel car in 2034, there may not be many in the showroom to choose from.
There is an informed school of thought that while Sunak has recognised the legally binding net zero commitment and recognises the political damage it would do to unpick that, his personal commitment is less than total. At the same time Sunak has identified that where policy interacts with voters lived experience, there are several areas ‘where the shoe rubs’. Too many voters trying to fit heat pumps find that planning or other regulations won’t allow it and likewise for motorists who lack off-street parking seeking to transition to EVs.
Rather than resolve the conflicts that the green transition created, Sunak has opted to dial down the ambition. Labour will need to recognise the importance of addressing practical questions if it is to maintain voter support for the more ambitious approach it seeks to clean energy.
A view from the Property sector: landlords the only real winners
If the stated aim of Sunak’s announcement was to reduce costs to consumers, then the move to row back on measures to improve the energy efficiency of Britain’s homes makes very little sense. The UK has some of the most badly insulated housing in Europe and UK households consume more gas than almost all of their European peers, at around twice the EU average. Analysis by the Energy and Climate Intelligence Unit (ECIU) has indicated that cancelling energy efficiency regulations for the private rental sector could cost households almost £8 billion in higher bills over the next decade. The losers are therefore renters, who are of course also among the lowest earners in the country and the group most effected by fuel poverty. The most obvious beneficiaries are private landlords, who are no longer obligated to improve the energy efficiency of their rental properties. As Peter Chalkley, director of the Energy and Climate Intelligence Unit, said yesterday: “The one measure that would have brought down bills is the landlord energy efficiency rules. Rented accommodation is some of the worst quality and so most costly to heat with tenants having no power to insulate themselves. [This] will add to the cost of living for those struggling, not make things easier.”
It’s no surprise therefore that the National Residential Landlords Association is among the few property organisations to welcome Sunak’s announcement, although along with many others they also condemned the government’s inconsistency and the lack of certainty around energy efficiency policy, which is making investment decisions difficult. Others condemned the short-termism, lack of clarity, mixed-messages and ongoing failure to grasp the nettle when it comes to energy efficiency, which is critical in ensuring the UK meets its net zero commitments. As Simon McWhirter, the UK Green Building Council’s Deputy Chief Executive, puts it, “the anger and frustration” at the government’s latest policy U-turn has “reverberated across industry”. “Delaying green policies just means they’ll have to be implemented much faster, later, pushing up the cost for everyone – householders and businesses alike,” he says. “The Prime Minister’s change in approach will also have a chilling effect on investment and skills training across green industries as they’re faced with yet another pull on the policy handbrake, just as our members and wider business were scaling up their pro-green activities across the economy.”
While it’s true that successive governments have failed to rise to the energy efficiency challenge, it’s difficult not to conclude that his government is failing harder than others. And failing also on Sunak’s own terms when it comes to supporting working families. Something the Labour opposition is sure to seize upon.
In conclusion…
While yesterday’s announcements represented one of the Prime Minister’s most significant moment in office, it is important to stress that this was just the first in a number of announcements we can expect over the coming months. The PM wants to present a change in approach to how the government addresses the long term challenges the country faces – as part of his attempt to present himself as the “change” candidate at the next election - and so will be looking to set out a series of long-term decisions to deliver that change over the coming months.