Good morning from New Economy Brief.
Last week the Climate Change Committee (CCC) published its latest statutory report, advising the UK government on the level of its Seventh Carbon Budget – the legally binding limit on the UK’s maximum emissions.
This week, we unpack the CCC’s recommendations, the outlook for net zero and why public investment is key to reaching climate change targets.
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Background.
The Climate Change Act (2008) requires the government to set carbon budgets, which are milestones on the path to reaching net zero greenhouse gas emissions by 2050. The CCC advises the government on what these carbon budgets should be, and each one sets a limit on emissions for a five-year period. This seventh budget covers the years 2038-2042 and sets a limit on emissions of 535 MtCO2e, including emissions from international aviation and shipping, equating to a reduction of 87% below 1990 levels. This works out to mean the UK's annual average emissions need to stay beneath 107 MtCO2e over this period. For comparison, emissions were around 400 MtCO2e in 2023 alone. MtCO2e stands for ‘million tonnes of carbon dioxide equivalent’ and is a unit of measurement that is used to compare the emissions from various greenhouse gases based upon their global warming potential.
The government has until 30 June 2026 to put the seventh carbon budget into law. All previous governments have followed the CCC’s advice. However, this budget is expected to attract more parliamentary scrutiny than usual, given the increasing politicisation of net zero.
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The path to net zero.
The CCC has identified five key ways the UK can keep within the emissions limits set out in this carbon budget: electricity; low-carbon fuels and carbon capture and storage (CCS); nature; engineered removals; and demand.
Electricity. Electricity's key role in moving from oil and gas to renewables means that to be on track for net zero in 2040, we'll need twice as much of it as today. To meet this need, the CCC assumes that offshore wind capacity grows sixfold over this period, that onshore wind doubles, and that solar increases by more than five times. It also assumes that by 2040, three quarters of vehicles will be electric, that half of all homes will have a heat pump, and that electricity will power 61% of industry (up from today’s 26%).
Low-carbon fuels. The CCC says low-carbon fuels will be vital for reducing carbon in aviation and shipping – difficult sectors to electrify. It estimates that by 2040, 17% of flights will run on sustainable aviation fuel. However, as the debate around Heathrow’s third runway shows, many are sceptical of low-carbon aviation fuel. Carbon Brief analysis shows that such fuels will only cut the sector’s emissions 0.8% below current levels in 2040, because relentless growth in air travel will wipe out the benefits. The International Energy Agency also expects these fuels to remain more expensive than kerosene for some time.
Carbon capture and storage. The CCC “cannot see a route to Net Zero that does not include CCS”. However, it acknowledges that this relies on establishing CO2 storage and rapid construction of pipelines to connect sites. As we explained in a previous New Economy Brief, many experts are sceptical about CCS. While it may have a role in managing emissions from industrial processes, it depends on unproven and undeveloped technologies and risks becoming an expensive and inefficient excuse to keep burning fossil fuels for power far longer than we need to.
Nature. Nature-based measures such as planting new woodland and restoring peatlands are also vital for meeting net zero targets, according to the CCC. It estimates that by 2050, nature-based sequestration will offset the remaining emissions from the agriculture and land use sectors. This estimate assumes that by 2040, 16% of the UK will be covered in woodland, up from 13% today. It also assumes the proportion of UK peatlands in natural or rewetted conditions will rise from 26% in 2023 to 55% in 2040.
Engineered removals. The CCC also argues that we can't rely only on cutting the carbon we emit. Some emissions will remain, from hard-to-eliminate sources like aviation. To counterbalance them, we need to actively remove carbon from the atmosphere. This is different to carbon capture, which aims to stop CO2 entering the atmosphere during production rather than remove what’s already there. Once again, this relies on CO2 transport and storage infrastructure being developed in time to meet these targets.
Demand. Finally, the CCC assumes that demand for high-carbon technologies will fall and assumes our meat and dairy consumption keeps falling. It also assumes we start using energy far more efficiently and that by 2040 there will be advances in home insulation as well as in how we deal with commercial, household and food waste.
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The price is right.
It is often assumed that one of the biggest barriers to reducing carbon emissions is cost – whether that’s the cost of building renewable energy infrastructure for the government, or the cost for consumers of switching to greener technologies like EVs and heat pumps. So it is encouraging that the CCC has estimated that "the net costs of Net Zero will be around 0.2% of UK GDP per year on average" – a huge 75% reduction from its previous assessment of £16.1 billion per year in 2020. The reason? “Technology has continued to innovate between the last time we issued advice to the government and today”, according to CCC Chief Executive Emma Pinchbeck. The rising cost of fossil fuels also makes not transitioning much more expensive, even if you ignore the cost of repairing the damage done by climate change. For comparison, the UK has spent £140 billion buying gas since the Russian invasion of Ukraine, while the net cost of achieving full net zero by 2050 is £108 billion. What’s more, the CCC estimates that moving away from fossil fuels will cut average household energy bills to £700 below today’s levels by 2050, with household motoring costs falling a similar amount.
Who’s contributing? The CCC estimates that the private sector will cover 65-90% of the investment required to achieve net zero. However, research from think tank Common Wealth argues that private capital is “ill-suited to delivering investment of this scale on its own”. In fact, it thinks relying on private investment and private profitability to reach net zero will be slower, more unequal, costlier and less secure than an approach based more on public investment and coordination.
The need for public investment. The CCC does acknowledge the importance of public investment too, particularly earlier on in the transition when it can “drive investment in technologies at their early stages and… foster innovation and commercialisation of early-stage technologies”. It estimates that the country (i.e. the total share between public and private sectors) needs to invest an average of £26 billion per year between 2025 and 2050 to achieve the ‘balanced pathway’ that the CCC thinks is the UK's best and easiest route to net zero. While the CCC leaves the government to decide on how to balance public and private costs, the government will need to take on a greater share if it wants the costs and benefits of transition to be spread fairly – for example by helping low-income people with the high upfront costs of low-carbon technologies. Recent moves to drop climate commitments by key players in the financial sector also show the dangers of relying solely on private capital.
Where does this leave us? The new cost estimates in the report should put paid to any suggestion that the UK has to choose between the economy and the climate. But there is still a case for substantially increasing public investment in the transition. The recognition that climate change presents ‘potentially catastrophic’ risks to the public finances and to our security has led to new thinking on how it should be more closely integrated with the UK’s fiscal framework and the way we think about national security.
We must also remember that this is not an issue the UK can solve alone, and that there are international as well as national equity concerns. Many civil society groups have argued that 2050 net zero commitments by developed countries like the UK are insufficient. They argue that we should also make massive financial transfers to developing nations to account for our outsized historical responsibility and the damage that climate change is already doing in the Global South. The UK’s recent cuts to the aid budget are a major setback and highlight the need for a more joined-up approach to climate justice at home and abroad.
Trump tariffs impact international efforts to tax corporations. A Guardian editorial suggests that the Trump administration’s attempt to “strong-arm nations into preserving a system that shields corporate profits from fair taxation” might backfire. International tax cooperation at the OECD has largely stalled due to opposition from richer countries, but after a series of tariff threats from the US, a “growing coalition behind the UN tax convention shows that many governments prefer to chart their own course”.
Fighting back with a stronger UN Tax Convention? A new report from Tax Justice Network explains why “joining the collective negotiation of an effective and inclusive means of international tax cooperation is the smartest move politically, and the strongest move economically in the tax and trade wars that the Trump administration seems intent on starting.”
Cutting the aid budget to fund defence. After meeting US President Trump last week, the Prime Minister announced 40% cuts to the overseas aid budget (known officially as Official Development Assistance) to pay for higher defence spending. There have since been reports that the National Wealth Fund could also be used to fund defence, and that the Chancellor has “instructed officials to develop proposals for a new funding mechanism that could allow countries to increase spending on defence equipment without breaching debt rules”, such as a new £100 billion bank for European defence spending.
Pushback. Anneliese Dodds, the Minister for Development at the FCDO. Minister for Women and Equalities at the Department for Education and former Shadow Chancellor, resigned in response, stating: ”I also expected we would collectively discuss our fiscal rules and approach to taxation, as other nations are doing … it will be impossible to raise the substantial resources needed just through tactical cuts to public spending.” The Children’s Investment Fund Foundation (CIFF) also organised a letter to the PM expressing “deep concern” at the decision from economists including Lord Nicholas Stern, Lord Malloch-Brown and Mariana Mazzucato. Meanwhile a group of Labour MPs have written their own letter to the Prime Minister, calling for a 2% wealth tax on those with assets of £10m or more as an alternative way of funding increased defence spending.
What is the appropriate monetary policy response to trade fragmentation? Swati Dhingra, an external member of the Bank of England’s Monetary Policy Committee, gave a speech at National Institute of Economic and Social Research last week in which she spoke about the limitations of monetary policy in "countering supply-side" inflation. Dhingra suggested that "even outside of extreme scenarios, monetary policy action alone… is not well-suited to address systemic price shocks in key sectors such as energy and food. It may even be counterproductive, as it could constrain investment that would enhance supply resilience and exacerbate future vulnerabilities."
The Social Determinants of Growth. Ben Glover and Andrew O’Brien at the Independent Commission on Neighbourhoods argue that “youth clubs and green spaces should get as much attention as runways and roads” in the upcoming Spending Review. Their article explains why investment in social capital and revitalising the UK’s social infrastructure is key to economic growth.
What does Reform UK think about the economy, really? The Fairness Foundation’s Will Snell exposes the economic contradictions at the heart of right-wing authoritarian populist movements like Reform in the UK and MAGA in the US. He suggests that there are big opportunities for UK political parties in exploiting (or resolving) these internal contradictions, such as the “clear divide between the economic concerns and preferences of Reform’s median voters and the Thatcherite worldview and policy prescriptions of its leaders”.
