FTI Consulting Public Affairs Snapshot: Green Day – Long on content, short on money

How did we get here?

The origins of “Green Day” can be traced back to last year, when the High Court ruled that the Government’s 2021 Net Zero Strategy was unlawful. The policies within it were found to have failed to meet the Government’s obligations under the Climate Change Act and lacked sufficient detail to meet the UK’s legally binding carbon budgets. An updated Strategy was mandated by the end of March 2023, and interested parties have been watching and waiting with bated breath.

The resultant Green Day, in which Government published its updated strategy, was also used disseminate all manner of publications related to the climate transition. Despite the potential threat posed to the UK’s competitiveness by a global green subsidy race, there was no significant new funding, with progress instead on delivering some of the key workstreams that the Government had already developed.

This approach – steady as she goes, sticking to the pre-set course of action – was exemplified by pointed remarks from Chancellor Jeremy Hunt. Hunt described the IRA as “massively distortive”, and argued that the UK would not be drawn into a subsidy race. The UK Government has stuck to its guns on this point, with Energy Secretary Grant Shapps having previously argued that the UK had no need to counter the IRA, given that the US was “playing catch-up” on renewable energy. This however, is hardly in tune with the mood music amongst green investors in the UK, who warn that rather than catching up, other markets may have leapfrogged the UK.

Decarbonisation

A common charge thrown at the Government’s decarbonisation policy over the last few years is that it has been strong in setting stretching targets, but weak in delivering meaningful change. The formation of a new Department for Energy Security and Net Zero intends to reverse this trend, with the ministerial team trotting out now well-worn lines about having a “laser-like” focus on delivery. The Green Day package did this to a degree, with the first batches of state funding assigned to carbon capture, utilisation and storage (CCUS) and hydrogen production projects, a new Energy National Policy Statement, and the launch of the fifth Contracts for Difference auction round, the first of annual allocation rounds moving forward.

Deployment of funding through the Government’s industrial cluster decarbonisation programme and the Net Zero Hydrogen Fund, which provides capital grants for low carbon hydrogen production, have been broadly welcomed by industry. The one exception has been companies involved in decarbonising industry on the Humber, with Humberside projects notably absent amongst the list of funding recipients.

There is significant funding to be had too: Chancellor Hunt had backed British CCUS with a new £20 billion funding settlement at last month’s Budget, to be delivered over 20 years through the industrial cluster decarbonisation programme, whereas the Net Zero Hydrogen Fund stands at a rather more meagre £240 million. Successful bidders will be key to decarbonising the UK’s most polluting industries and facilitating the hardest-to-abate sectors’ net zero ambitions.

This is all positive, but still lacks ambition when compared to the global green subsidy race. The UK Government’s approach of providing funding on a competition basis – whilst consistent with Government’s free market principles – is at odds with the extremely simple and extremely generous framework of tax incentives set out by the IRA.

While competitive bidding processes have been hugely successful in the UK, for example the use of CfDs to drive down the cost of renewable deployment, there is now a risk that these are being overtaken by other markets. The latest round of the CfD scheme is a microcosm of this, with limited capital stumped up by Government and other interventions in the market making the UK’s investment environment less attractive.  Only £205 million has been put up by Government for Auction Round 5 of the CfD scheme, while the Electricity Generator Levy on extraordinary profits from renewables generators has further driven up the cost of capital for investors. Industry has already warned of future projects failing to come to fruition, as these issues combine with increasing supply chain costs to imperil new deployment.

The UK Government has created a fiscal bind for itself. With the Treasury coffers bare, the focus had to be on delivery in other places – removing regulatory barriers to accelerate deployment rather than matching the fiscal might of the $369 billion IRA or €1 trillion pledged by the European Green Deal. The new Energy National Policy Statement for example provided some positive signals that the planning system can be reformed to support quicker delivery of critical national infrastructure. However, industry is still awaiting a holistic network design framework to facilitate the shortened planning timelines and advanced investment in grid needed to meet the UK’s target for decarbonising the power system by 2035.

Sustainability

More broadly, there were some positive developments on wider sustainability policy, with the Government publishing its revamped Green Finance Strategy and launching a new consultation on minimising carbon leakage. While sustainability can often be a nebulous concept, drawing in a vast array of different aspects that can seem tenuously linked to the core net zero mission, these are two tangible proposals with economy-wide implications for sustainability in the UK. However, they remain as yet short of the delivery phase.

The Green Finance Strategy, a long-awaited update to the Government’s original 2019 document, represents the Government’s latest efforts to capitalize on the opportunity that green finance presents to UK plc. Central to this is the UK’s ambitions to become the world’s first Net Zero-aligned Financial Centre. Given the importance of financial services to the UK economy, this is a potential differentiator for the country and was a key focus of the Prime Minister during his time at the Treasury. As is the case with so much of the Government’s action to date, however, warm words do not mean concrete action.

While the document sets out a detailed timeline of activity through the next 12 months, it typically plans to consult further on various aspects of the strategy. A key aspect of this will be a consultation on a proposed UK Green Taxonomy. This has been much anticipated and is a positive step, setting the parameters as to what will count as green investment, providing a framework for investors to work in. To get to this stage, however, has been a long winded process. With an election expected next year, it is unlikely that the Green Taxonomy will be finalised until the next parliament, flying in the face of the need to move with speed.

Proposals to minimise carbon leakage are more proactive. While a carbon border adjustment mechanism (CBAM) has been mooted for some time, and was the subject of a recent Environmental Audit Committee inquiry, consideration of such a novel policy to this degree is a welcome development. A CBAM is just one potential measure considered in a suite of proposed policies to reduce the transfer of production away from the UK for businesses to avoid climate policies. This will be essential to ensuring that businesses located in the UK remain competitive with those that do not have to face strict regulation pertaining to their emissions footprint, and aligns with the EU’s own plans to avoid a similar fate for their corporations. Away from this narrow, mercantile motivation, it will also be another important step in properly and effectively pricing carbon, a key frontier in building sustainability into every aspect of the economy.

What next?

Whilst Government assesses that the package of publications on Green Day means it has now fulfilled its legal requirements under the Climate Change Act to set out a roadmap for meeting UK emission target, this is unlikely to put activists off pursuing another judicial review of the Government’s plans. Whitehall’s own sums acknowledge that the raft of policies is not quite sufficient to meeting the UK’s sixth carbon budget, although it is on course to exceed four and five.

However, as an answer as to how the UK can remain an attractive destination for green investment in the context of the IRA and Green Deal, last week’s announcements fall far short. More is expected from Government on green subsidies, potentially as soon as this autumn. While it has stuck to its ideological line until now, this is unlikely to be able to hold in the face of the incentives available on both sides of the Atlantic. The Labour Party has been bold in its commitment to spend £28 billion annually on combatting climate change, a commitment that pre-dated the IRA but is increasingly being billed as a direct response to the US incentive package, underlining the extent to which American policy has captured the attention of global businesses.

With an Advanced Manufacturing Plan also expected later this year that aims to enhance UK competitiveness in the industries of the future, the UK is not out of the green subsidy race yet. Its opening salvo, however, will do little to allay concerns that the UK is fast losing its leading position in the sprint to net zero.