Net Zero U-turns unpacked

Good morning from New Economy Brief.

Last week the Government announced delays to critical net zero targets, to widespread condemnation from business leaders, climate experts, cross-party MPs and trade unions alike. Why did they do this? 

This week’s New Economy Brief explores the economics and the politics of climate delay and explains why the government’s risky electoral strategy to pit net zero against the cost of living crisis may backfire. 

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Net zero targets delayed. Last week the government outlined its “new approach to net zero” which was widely perceived as “a string of U-turns” on legal targets - the 2030 ban on sale of new petrol and diesel cars was delayed to 2035, phasing out gas boilers was similarly delayed, and the PM scrapped plans to require landlords to meet new energy efficiency regulations. Alongside these reversals, the government did increase the heat pump subsidy grant from £5k to £7.5k and change the rules about grid connections so new renewables projects can connect faster, but despite this the announcement met widespread condemnation from corporate leaders, business groups, MPs from all parties, climate experts, trade unions and the rest of civil society. 

• Businesses need certainty. Delaying targets sends a mixed signal to businesses who need policy certainty in order to plan investment, develop new technologies, scale up production and create jobs. Consequently, Shevaun Haviland, director-general of the British Chambers of Commerce, noted that the “ambiguity” triggered by the announcement has undone “years of work” in “depoliticising the debate and building investor confidence”. Similarly, the Trades Union Congress warned that the government’s “incoherent” and “reckless climate politicking” risks losing 800,000 manufacturing and supply chain jobs in automotive, steel and other sectors to other countries with more stable and ambitious industrial strategies. 
• A chequered history of Conservative industrial strategy. Industrial strategy - or the process of “coordinating a wide range of economic policies to achieve particular objectives”, according to this parliamentary briefing - was revived in 2017 under Theresa May’s government. The Industrial Strategy Council was set up to provide expert, impartial evaluation of the government's progress, headed by the Bank of England’s Chief Economist, Andy Haldane, with members drawn from business leaders, academia and civil society. But Johnson’s government soon replaced May’s strategy with the Treasury’s Plan for Growth and the scrapped the Industrial Strategy Council - a move that Darren Jones, then chair of the BEIS Committee said “resulted in a short-termist, unclear and unwelcome approach to industrial policy when business is crying out for long-term consistency and clarity.” Last week’s announcements seem to be a continuation of the Conservatives’ decision to “mark a departure from the industrial strategy brand”, despite being seen as the new international consensus, and widely regarded as a pragmatic way to grow the green economy. 

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Economics of crowding-in. Many economists have argued that clear policy signals and ‘missions’, such as decarbonising housing and transport, can help to ‘crowd in’ private investment into strategically vital areas (see our previous Briefing for an explainer of ‘mission-led’ industrial strategy). As UCL’s Green Innovation Policy Commission found “green innovation can dramatically bring down the costs of low-carbon technologies”; increased investment means more technical innovation, allowing firms to find efficiency gains so the cost of production reduces and consumer demand grows. But certainty is a key part of this equation, and the legal targets underpinned that certainty, giving industry and investors confidence about the direction of travel for government policy and de facto creating new markets for products, like heat pumps and electric vehicles. It is easy to see why the UK car industry and other sectors feel that ripping up those targets with little warning and no consultation undermines the whole process. For example, most people will buy second-hand electric vehicles, and whilst prices have been dropping, a later target of banning the sale of petrol and diesel cars means fewer people will switch to newer electric vehicles and the second-hand market will struggle to supply enough used EVs to meet eventual demand. 

• We’re losing industries to other countries. The government’s failures to secure a stable future for the UK’s car battery industry is a case study in how to lose the private sector’s confidence and thereby destroy investment and jobs. The day after the government announced a U-turn on the commitment to ban on internal combustion engine vehicle sales in 2030, Green Alliance highlighted that the absence of clear government direction is why the UK's battery market lacks appeal to potential investors. The report warned that the piecemeal approach to the battery industry has driven manufacturers to seek opportunities abroad, eroding confidence among private sector investors. By contrast, the “biggest climate spending package in US history”, the Inflation Reduction Act, includes $369bn in emissions-reduction spending, including tax breaks aimed at directing private investment into low-carbon energy and electric vehicles. This spending will continue for a 10 year period, signalling policy stability for developers and investors (Read IPPR’s Luke Murphy’s report on Lessons for the UK from the US' Inflation Reduction Act for more). 

• Best resources to understand this concept. Drawing on the analysis of its founder and Director Mariana Mazzucato, the UCL Institute for Innovation and Public Purpose argues that government must explicitly steer the direction of economic activity in order to achieve sustainable, inclusive, investment-led growth. It calls for a 'mission-oriented' approach to industrial and innovation policy. 

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So why are the Conservatives doing this? The economics of the government’s “new approach to net zero” may be questionable at best, but what about the politics? Though most of the public wants more action from the government on climate change, even more people care about their personal finances, and sowing conflict between climate policies and cost of living priorities could help the Conservatives win the support of crucial swing voters. This seems to be the lesson that the Government has drawn from the Uxbridge by-election, where fears around the future cost of climate policies contributed to a shock Conservative hold.

• The green wedge. With Labour already proposing to defend the original target for banning the sale of petrol and diesel cars, the Conservatives may try to portray Labour’s approach to net zero (which, it is worth remembering, was also their own until last week) as a radical stance that will cost voters dearly - for example by forcing them to install heat pumps and buy an EV. They can then position their own plans as more sensible - e.g. “we are still committed to net zero, but with a more balanced approach that will protect your wallet”. (This is probably why Labour has not confirmed it will stick with the government's original target of phasing out gas boilers, saying that their party would not “put people’s bills up”) There is some polling to support this; research by Stop the Squeeze finds that climate change comes behind the cost of living in the policy priorities of ‘disillusioned suburbans’, and argues whichever party wins the argument on the cost of living will win the next election.
• But there are holes in their strategy. There are ways to convey to voters that faster action on climate will make them better off. The Energy Climate Intelligence Unit calculated that households with net zero technologies like electric vehicles, heat pumps, solar panels and good levels of insulation could have saved over £2,000 in 2022 compared to those that rely on petrol cars and gas boilers. Over 100 leading economists wrote to the government over the weekend to echo this point. They argue that these delays will also perpetuate key structural economic problems that underpin the cost of living crisis: “By keeping the UK dependent on volatile and expensive fossil fuels, and by reducing the likelihood of securing high paying jobs in green manufacturing, you are choosing to expose the nation to a high cost of living longer into the future.” Combined with lower energy costs, and the economic benefits of investment (job creation, productivity and wage growth), there is a compelling economic case for climate action both boosting growth and reducing the long term cost of living.‍
• Explaining the connection between climate action and lowering the cost of living is crucial. Round Our Way’s Sofie Jenkinson looks back at previous focus group research with ‘Red Wall’ voters and argues that “being anti-green, anti-net zero isn't, ultimately a vote winner because it misreads where the public are at.” She offers 10 recommendations for persuading voters to support green policy. Similarly, Paul McNamee and Steve Akehurst’s report for Labour Climate and Environment Forum found that “People view climate action as one of the best ways to encourage economic growth and tackle the cost of living crisis. Those who saw Starmer talking about climate were twelve percentage points more likely to think Labour was the best party on the economy…Over three quarters of people view improving housing efficiency and investing in renewables as a key measure to improve growth in the UK economy.”