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Contradictory policy signals leave investors unclear on UK net zero ambition

Contradictory policy signals leave investors unclear on UK net zero ambition

The UK government announced support for new carbon capture and storage clusters alongside 100 new oil and gas licenses, adding to contradictory signals from changes to its Emissions Trading Scheme (ETS). These developments risk undermining the UK’s climate credibility and damage investor confidence, warns IIGCC CEO, Stephanie Pfeifer. 

Investors committed to net zero have cause to be concerned by recent UK government climate and energy announcements.  

The challenge of balancing energy security with climate ambition is an unenviable task for leaders, but new oil and gas exploration is not a short-term solution as it requires a minimum timeline of between five and ten years. 

More broadly, this announcement adds to a conflicting mix of policy signals which seem at odds with the targets set in UK law to respond to the climate emergency. And from a climate perspective, the International Energy Agency made it clear that no new oil and gas is needed to meet the net zero by 2050 pathway. 

This comes as the repercussions of global temperature increases are more evident than ever; wildfires burn wider and for longer, weather patterns defy expectations, and industries of every sector are scrambling to adapt. 

Bigger, longer-lasting wins 

World events show us that there is another way for the UK – that the pathway to greater energy security and independence is to increase investment in renewable energy sources. This will secure affordable clean energy to fuel the nation while also unlocking green skills and jobs in the real economy and supporting the UK’s climate commitments.  

Accelerating grid connections to better utilise renewable energy would help to stimulate green investments, as would a more flexible planning system to feed this capability. Making it easier to secure planning permission for new on and offshore energy-generating sites is one such example. 

These policies would also help develop the skills needed for future growth industries, helping the UK to reap the rewards of green energy. This in turn would also help voters to see opportunity in the net zero transition, from cleaner air to new green jobs, and answer net zero sceptics.  

The conversation could quickly turn from negativity and cost concerns towards a more optimistic, growth-driven future. 

Discount on pollution 

It is with this opportunity in mind that changes to the UK’s carbon trading scheme further risk market sentiment. In July of this year, the UK government announced its intention to slow the rate of reduction for the number of emissions allowances in its Emissions Trading Scheme (ETS), increasing the available emissions budget.  

It has also decided to increase the percentage of ETS allowances that can be given for free to certain high-emitting sectors deemed to be a risk of ‘carbon leakage’. This considers the movement of production and associated emissions from one country to another due to different levels of national decarbonisation effort.  

These trading scheme adjustments reduce the cost of pollution for high-emitting industries – even though getting polluters to pay is seen as central to accelerating the energy transition in line with the Paris Agreement. A loosened UK ETS carbon cap has led to a price difference (per metric tonne of CO2e emitted) of nearly 40 per cent compared to the EU, according to the Financial Times. 

Such erosion encourages ‘business as usual,’ a message at odds not only with the science but with global economic incentives like the US Inflation Reduction Act and the EU Green Deal Industrial Plan. Research also shows that a robust and relatively high carbon price is essential for fledgling Carbon Capture Utilisation and Storage (CCUS) technologies to have any chance of success. 

Just transition ‘in’ 

This contradictory nature of highly ambitious targets and a tilt towards largely-unproven technologies to offset new fossil fuel exploration, underpinned by an eroding carbon price, risks undermining investor confidence at a time when it is needed most. 

We often talk of the just transition of workers and communities ‘out’ of fossil fuel industries, but the just transition ‘in’ to new sectors is as important. It is focusing on these actions that will deliver true energy security and affordability, liberating UK energy supplies from geopolitical shocks and demonstrating a clear commitment to the transition. Markets need to see this commitment.  

Achieving the 1.5°C goal will require an enormous, concerted effort from all parties. To play their part, investors need the right policy signals from governments to inform their capital allocation decisions on behalf of their clients and beneficiaries. 

For now they watch on, hopeful for no further backsliding on the UK’s existing climate commitments and eager to help it maintain global leadership status in the race to zero. 

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