Watering down net-zero targets is a disaster for UK business – here’s why

Prime minister Rishi Sunak announced that a number of key environmental policies will be weakened or scrapped, but experts argue that would be catastrophic for green investment

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Less than two years ago, the UK was seen as a global leader in tackling the climate crisis as it hosted the United Nations’ COP26 conference. The nation’s net-zero target, the first of its type set by a major economy, was meant to be a standard for the rest of the world to aspire to. Today, it looks more like a battleground. 

Politicians have clashed over the best way to balance voters’ concerns about the economy with the duty to achieve net-zero greenhouse gas emissions by 2050. The debate – in which ministers have attacked a “twisted and dogmatic green outlook” – culminated on Tuesday (19 September) with several key commitments being watered down. 

Sunak said while he is still committed to net zero, he wants the UK to take a “better, more proportionate” approach to reaching its targets. 

Which green policies are changing?

The government’s new policies include: pushing back the deadline for banning the sale of new petrol and diesel cars from 2030 to 2035; giving households more time to install heat pumps and even grant some exemptions to the gas boiler ban; and “scrapping a range” of more hypothetical measures such as taxes on flying.

It follows several other changes in recent months. The government has announced new exploration licences for North Sea oil and gas; made it cheaper for firms to burn fossil fuels; delayed the introduction of rules on packaging waste; given residential landlords longer to meet energy-efficiency targets; and approved the first deep coal mine in 30 years. 

Dozens of environmental organisations have warned of the risks of delaying the UK’s progress towards its net-zero goal. The Climate Change Committee, an independent statutory body created under the Climate Change Act 2008, warned in June that the country was already missing several of its energy transition targets and “losing its leadership” on climate action.

It is now warning that these new announcements are “likely to take the UK further away from being able to meet its legal commitments” to cut emissions and that it is “less confident” it will deliver on its 2030 and 2035 commitments.

Business leaders are expressing alarm too. Lisa Brankin, the chair of Ford UK, which is investing £430m in electric vehicle manufacturing in the UK, said: “Our business needs three things from the UK government: ambition, commitment and consistency. A relaxation of 2030 would undermine all three.”

More than 100 senior figures, including at Amazon, Ikea and Tesco, signed an open letter to the government in July urging it to demonstrate “renewed focus and commitment” to honouring its climate pledges, warning that the UK will be “left behind” if it fails to do so.

One leader in the renewable energy sector tells Raconteur that it’s “baffling” that the government is not prioritising environmental action, adding: “From an industry perspective, that feels like a huge missed opportunity. This is a new industrial revolution – we are fundamentally transforming the economy.”

Ana Haurie, CEO of carbon credit market Respira, agrees. “When you’ve got the government watering down its commitments, it sends absolutely the wrong signal at a time when so much of our action has to be signal-led.”

Stability is vital for net-zero investment

Business leaders say that, to invest in clean energy and other low-carbon tech at scale, they must be able to trust that government policies won’t change on a whim.

“What any business requires to invest is confidence about the future. So it’s super-important that the government is clear on the signalling and then the follow-through,” says James Alexander, chair of impact investor Finance Earth.

Sending mixed messages – for instance, approving new North Sea drilling licences while saying domestic fossil-fuel production should decline – gives potential investors no such confidence.

What any business requires to invest is confidence about the future. So the government must be very clear on its signalling

Australian climate philanthropist Andrew Forrest has threatened to move his battery technology investments from the UK to the US if Westminster continues on its “clickbait cycle” of contradictory announcements.

Car manufacturers have spoken out about the government’s proposed adjustments to electric vehicle production targets, saying that, while these are designed to help the sector, they would make planning “near impossible”.

The heating industry has complained about the government’s approach too, arguing that penalties on suppliers for making oil boilers are useless if the cost of eco-friendly heat pumps is not reduced for consumers. While boiler manufacturers are investing billions of euros in heat pump factories across Europe, the UK is lagging far behind.

There have been some wins, such as Tata Group’s recent decision to build a £4bn battery plant in Somerset rather than Spain, but firms are becoming increasingly concerned about the future of green investment in the UK.

This is at a time when other countries are scrambling to boost their domestic cleantech production. In the US, the Inflation Reduction Act 2022 is expected to catalyse as much as $216bn (£170bn) in private capital for low-carbon industries, creating 9 million jobs over the next decade. The EU’s so-called green deal industrial plan has a similar remit to boost production and job creation.

Inflation is affecting clean energy development

While the government’s cooling on net-zero targets is intended to reassure voters concerned about the cost-of-living crisis, the private energy sector is also struggling with cost inflation. 

This is becoming increasingly evident in offshore wind. In July, Swedish firm Vattenfall cancelled a large project off the Norfolk coast that would have powered 1.5 million UK homes. It blamed a 40% increase in input costs. 

“Everyone in the industry is gutted that this project is not going forward,” says Adam Berman, deputy director at trade body Energy UK. “This is not an isolated case. It’s reflective of a broader fundamental issue, which is that the costs for clean energy infrastructure have risen in recent months. The government has not yet recognised what that will mean for the roll-out of clean energy.”

The government’s main support programme for clean energy producers is the Contracts for Difference (CfD) scheme. Firms bid for these agreements, which guarantee the prices consumers will pay once generation starts. They are so important to catalyse investment that BP’s planned subsidy-free offshore wind farm would be the first of its kind in the sector.

But the CfD funding available this year has been cut by almost one-third to £205m. The maximum price per unit of electricity offered under the scheme is based on costs in 2012 – when the average rate of inflation was only 2.6%.

Berman says: “It shows a penny-wise, pound-foolish approach in which the government is keen to drive down costs for such projects. But the scale of the cost increases is so substantial that it’s clear we don’t have sustainable prices being reflected in the CfD regime.”

As a result, this was the first CfD round that failed to produce a substantial offshore wind project. Berman believes this is disastrous, given that the sector needs to quadruple in capacity by 2030 if it’s to decarbonise the nation’s electricity system by 2035.

Consequences for corporate climate targets

Failing to meet that target would have a huge impact on UK plc. The growth of the country’s clean energy infrastructure underpins the emission-cutting plans of most organisations.

“If we don’t decarbonise the power sector, we can’t really decarbonise any other sector,” Berman says. “When you see a slowdown in investment in things such as wind farms, that’s a slowdown in the entire country’s progress towards zero.”

That is a concern in competitiveness terms too: electricity produced by new renewable energy projects is expected to be up to seven times cheaper than that generated by gas-powered plants by 2030. 

It also raises reputational problems for businesses. Large companies must report on the carbon emissions resulting from their electricity consumption – and stakeholders ranging from consumers to investors are watching closely.

Alexander expects this to become a problem for businesses if the government fails to follow through on all its net-zero plans. 

“The Task Force on Climate-Related Financial Disclosures and the Taskforce on Nature-Related Financial Disclosures are, in effect, forcing large companies to disclose their impacts and be ever more transparent about it,” he says. “Companies are taking this action partly because it’s in their interests but also because they’re going to be publicly outed if they don’t.”

The future of the UK’s net-zero efforts

The UK’s flagship target to reach net-zero emissions by 2050 is legally binding and the prime minister has stressed that he is committed to it. A poll conducted by Focaldata in August found that two-thirds of voters support this objective and half even want to bring the deadline forward.

Meanwhile, Sunak has not announced changes to a number of other statutory measures that are in the works. The so-called biodiversity net gain regime, which requires new developments to leave nature in a better state than they found it, comes into force in November. And the energy bill, which would ban coal mining and levy consumers to fund hydrogen infrastructure, is set to be enacted this autumn. 

“Sunak’s next challenge will be to find a way of making this reduction in ambition square with his legal obligations under the Climate Change Act,” says Adam Bell, policy director at Stonehaven. “Either he amends the short term Carbon Budget target, which would require the consent of both Houses of Parliament, or he commits to expensive new measures to suck carbon out of the atmosphere. Both approaches are fraught with risk.”

The elephant in the room is the next general election, to be held no later than January 2025. With the Conservatives still trailing well behind Labour – which has promised to give industry “stability and certainity” on net zero – in the opinion polls, it looks likely that these policies changes will be short-lived.

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