A New, New, (New?) Climate Strategy

April 6, 2023

Enthusiasm for last week’s ‘Energy Security Day’ – nee ‘Green Day’ – was dampened the night before, when the Chancellor advised Parliament that his policy package to compete against America’s Inflation Reduction Act won’t be released until the autumn. He promised the UK’s strategy “will be different – and better.”  

In the meantime, his colleague Grant Shapps travelled to Oxfordshire to unveil Powering Up Britain – the first quarter of which focused on a raft of regulatory inducements for hydrocarbon production and supply. Much like President Biden, the Tories have softened their pace on consigning fossil fuels to history.  

The rest of the plan confirmed a raft of previously mulled goodies for the greener side of energy and climate, including long-awaited outlay of the £240m Net Zero Hydrogen Fund, streamlining planning permissions for renewables, £160m for port investments to support floating offshore wind manufacture, and a zero emission vehicle (ZEV) mandate that Policy Exchange has been advocating for since our 2020 report, Route ‘35.

There’s a lot of excitement over the launch of a new quango, Great British Nuclear (GBN), which will administer the international competition to build Small Modular Reactors (SMRs), announced by Hunt during the budget, claiming it would “steal the march” on our competitors. That may have been the case when George Osborne launched the first – unconsummated – competition in 2016, but the world has since raced ahead. 

SMR projects are already approved and under construction in America and Canada, with China in the lead. The notion of another competition is all the stranger since the UK’s only domestic developer, Rolls Royce SMR – with sixty years experience building reactors for submarines – has already received £210m of public funding and is making great headway through the regulatory assessment process. GBN urgently needs to finalise siting procedures and enter negotiations for at least two of their 470 megawatt units, enabling the company to raise capital and start building out their supply chain. Those “competitive pressures” the Treasury hopes to stoke already exist from real-world rivals like NuScale, Westinghouse and GE-Hitachi that enjoy a daunting head start. 

The real crown jewel of the Conservative climate strategy is Carbon Capture, Utilisation & Storage (CCUS). Cynics might point to uncanny parallels with the sector similarly being subject to an aborted ‘competition’ for Government funding in 2011 and then again in 2016. Nevertheless, pledging £20bn of new funding over 20 years has captured investors’ attention, as does confirmation of the eight projects selected to enter into negotiations for public funding.  

But the most consequential – and largely underreported – development for CCUS was the Secretary’s opening move to address carbon leakage and resolve the longest standing contradiction in our net zero strategy. 

Britain’s primary mechanism to incentivise decarbonisation has been the Emission Trading Scheme (ETS), requiring heavy industry, electricity generation and domestic aviation to secure and retire an ‘allowance’ per tonne of CO2 emitted. At scale, CCUS will allow these and other sectors to sequester their carbon at a cost lower than purchasing allowances. 

However, a third of these allowances are given away for free, primarily to energy intensive, trade exposed (EITE) industries. This cost relief is essential to keep them competitive against jurisdictions without carbon pricing, but drains the impetus for emission reductions – domestically and globally.  

Shapps is proposing to level the playing field with climate laggards through policies like minimum carbon standards or carbon border adjustment mechanisms (CBAMs), as detailed in Policy Exchange’s report, The Future of Carbon Pricing and the subject of a Parliamentary inquiry. Britain wouldn’t be moving alone – the EU begins implementation of their CBAM in October, while the US is proposing a ‘Green Steel Club’ to levy tariffs on imports from heavy emitters like China. A binding commitment coming into effect for the latter half of this decade makes the most sense, avoiding short-term price hikes but delivering a clear signal to heavy industry: prepare for investments into CCUS in alignment with 2030 abatement targets.

Having set out their new, new strategy, this Government must resist the familiar habit of ensnaring itself in consultations, competitions and reviews. Chancellor Hunt will be unveiling his IRA response in some six months time. Voters and investors are right to expect some tangible progress on these new objectives before he hits the stage. 

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