The UK government’s Net Zero Strategy has been praised for its breadth, but crucial gaps remain.
The UK government’s newly announced Net Zero Strategy, designed as a framework for the country to reach net zero emissions by 2050, has seen generally positive feedback. The independent Climate Change Committee called it a “genuine step forward”.
The policy paper, ‘Net Zero Strategy: Build Back Greener’, sets out the government’s policies and proposals for decarbonising key sectors of the UK economy.
It contains details aplenty, but questions remain on whether the strategy provides enough certainty on the policies needed to enable asset owners to invest with confidence to support the transition.
This is especially necessary for investing in areas of renewables, clean energy, sustainable agriculture and moving away from carbon intensive sectors.
“The plan is a really important cue,” says James Alexander, CEO at UKSIF, a body representing financial institutions focused on sustainable investment, noting that the strategy provides the policy detail needed to underpin the UK’s legally-binding commitment to eliminate emissions by 2050 under the Climate Change Act.
In April, the UK’s sixth Carbon Budget enshrined in law a commitment to cut emissions by 78% by 2035, from 1990 levels.
Alexander says the strategy will enable the UK to start at the top in terms of quality of legislation and scope, with the hope being that it is added to in future, not watered down.
Deliverable action
The plan’s breadth and level of detail was welcomed by some who expected broader strokes from the government.
Luke Sussams, Vice President of ESG and Sustainable Finance Research at Jefferies, told ESG Investor that he was “genuinely surprised” by the document.
While agreeing that some gaps remain, Sussams says the strategy provides insight into the UK’s transition journey which can be used to chart future progress.
“The challenge is enormous; this document at least offers some of the detail needed to provide a benchmark or baseline this government – and future governments – can be held against,” Sussams says.
“This level of accountability, that can now be undertaken by civil society, companies, and policy makers, is incredibly valuable. They are the sources that pressure.”
In terms of transforming the UK’s energy mix through use of new technologies, the Net Zero Strategy provided significant detail in many areas, but fell short in others. The plan commits to four carbon capture usage and storage (CCUS) clusters, with the aim of capturing 20-30 MtCO2 per year by 2030, including 6 MtCO2 from industry, providing jobs in Teesside, Humberside, Merseyside and North Wales.
Under the plan, the two successful hubs will qualify for funding. “There’s no such thing as a ‘free lunch’; support comes with provisions,” explain HSBC analysts Verity Mitchell and Tarek Soliman. “At various stages of the forming of its CCUS policy, the UK has stated that, in order for the technology to earn financial support, projects must demonstrate an ability to lower costs and represent taxpayer value as an effective industrial decarbonisation route.”
This level of detail has been broadly welcomed, but it does not apply to every area. The UK’s plans for transitioning domestic heating from gas boilers has received widespread criticism for its lack of consistency and ambition, for example.
Carrots and sticks
“The scale of the challenge means the deliverable is often harder and there have been false starts,” says Sussams. “But it’s difficult to understate the challenges of net zero. The strategy is at least filling in some of the blanks on a sector-by-sector case.”
Looking at the overall UK transition package, Sussams suggests it contains a greater balance between incentives and costs to industry when compared to the European Union’s Fit for 55 plan, which steadily ratchets up carbon emission costs via the EU Emissions Trading System to encourage firms to innovate to reduce their emissions levels.
While it will still have some aspects of both the carrot and stick, he says, it is not all stick. “Having incentives and taxes in balance makes it more palatable to the public,” says Sussams.
A key aspect of the ‘carrot’ side comes through the potential for funding support. This includes use of the UK Infrastructure Bank to “crowd in” private finance, as well as the British Business Bank’s remit to incorporate net zero and ESG factors across all activity.
“It has to be considered a huge step forward both nationally, with the granularity, and on the international landscape as well,” he says, but warns: “There’s a big difference between intentions, ambitions, and delivery. And delivery is the key.”
Green job gains
An important consideration, especially for those focused on ensuring a just transition away from reliance on fossil fuels, is the generation of new green jobs to replace those lost in carbon-intensive sectors. But new analysis by Rathbone Greenbank Investments suggests net gains are possible.
“By 2030, there is expected to be a net gain of 120,100 jobs as a result of the net zero transition,” said the report. “Behind this are total direct gains of 226,800 new jobs in green economy sectors.”
Crucially, it added, “All UK countries and English regions are expected to experience a net gain of employment. The area with the largest increase in absolute terms is Yorkshire and the Humber, with a net increment of 18,800 jobs.”
By 2050, while still positive in job terms at more than half a million positions gained, the report underlined the potential scale of the transition’s impact on jobs, noting that some 338,000 jobs lost across the country.
And although Rathbones’ research suggested net green job gains in all UK regions over the longer term, it also warned that there would be near-term bumps in the road. By 2025, there would be net job losses in several regions, including London, where over 11,000 jobs associated with Heathrow Airport could disappear. Wales and Scotland would also lose 1,600 and 3,800 jobs respectively.
The economic ramifications of this change is recognised in the government’s efforts to assuage fears by highlighting new education and skills programmes it will offer. The Net Zero Strategy includes commitments to reform the skills system and deliver a ‘Lifetime Skills Guarantee’.
“[There are] around seven million direct jobs found in UK industries that account for a high proportion of greenhouse gas emissions, we cannot ignore the social impact of the transition,” says John David, head of Rathbone Greenbank Investments.
Net zero in practice
At the same time the UK government released the Net Zero Strategy it also unveiled its Roadmap to Sustainable Investing, which provides new details on how asset owners, financial institutions and corporates must report on their climate and other environmental risks. The new requirements have been broadly welcomed as helping to provide investors with more detailed insight into environmental risks on a double materiality basis, albeit noting the absence of similar social or governance-related requirements.
“The Roadmap is driven by COP26, so a lot of it is being driven by climate, which is only one part of ESG,” says Leonard Ng, Co-head of Sidley Austin’s UK/EU Financial Services Regulatory group.
Both the roadmap and the strategy whetted stakeholders’ appetite for more detail, not least to ensure that the journey to net zero emissions includes a just transition. Kate Elliot, Head of Ethical, Sustainable and Impact Research at Rathbone Greenbank Investments, said to achieve real positives, the government must prioritise “long-term social inclusion and resilience, through education, re-skilling and retraining for workers, otherwise we risk an incomplete strategy.”
This is especially vital in the areas of the UK most reliant on carbon-intensive industries, to limit the human cost of decarbonisation. “As investors, we can translate these ambitions into action. We have a critical role to play in securing a more sustainable future,” she said.
While COP26 might have driven the timing on the release of the Net Zero Strategy, UKSIF’s Alexander points out that the summit officially marks only the start of the UK’s twelve months in the chair of the rotating presidency.
This will give the UK government a full year to strengthen the outlines they have made in the documents and give further detail. To fulfil the promise of the strategy, says Alexander, “Net zero must be woven into the DNA of every government decision and every piece of legislation”.
The initial signs are not promising. Just days before COP26 started, the UK Chancellor of the Exchequer announced his budget, which was seen by some as lacking detail on how to pay for a net zero transition.
“The budget was very much lacklustre on the energy transition,” says Maria Connolly, Head of Energy & Renewables at TLT. “There remains a disconnect between the government’s supposed ambitions on climate change and the methods and financing it is putting in place to achieve its goals.”
