March 14, 2017
Richard Folland

What should the Government’s Clean Growth Plan be prioritising in the signals it sends to investors?

Since Theresa May became Prime Minister and she established the Department for Business, Energy and Industrial Strategy (BEIS), the new department has been promising to publish an “emissions reduction plan” to make good on how it would deliver against the targets of the Fifth Carbon Budget, the 2028-2032 period.

We have recently heard on the grapevine that the emissions reduction plan has been renamed the “clean growth plan”, ostensibly in order to give it a stronger focus on economic growth. At first glance, this looks like a smart move: a more mainstream green agenda has a better chance of securing more public support through the positive prism of growth and prosperity than though the hair-shirt of emissions reductions (even if all the evidence consistently points to a comfortable majority among the British population for action on climate change).

Putting this re-badging to one side, arguably the more important factors are when the plan will be published; and what it will contain in terms of tangible policy measures. The latest on timing is that the report’s publication might be further deferred until June, or at least into the next quarter. If true, this is not great news as far as the finance and investment community are concerned; even though a hurried, incoherent plan would be much worse.

When BEIS do decide to bring their plan forward, it will be particularly welcomed by investors, who have become increasingly concerned by the lack of visibility on the Government’s direct of travel on energy and climate policy, even when making allowances for the dragging anchor of Brexit (which inevitably is only adding to the prevailing uncertainty). The Chancellor’s Budget published last week provided little substance in the way of policy measures on the green agenda and was largely a matter of decisions (eg on the Levy Climate Framework and future arrangements for fiscal support for low-carbon energy sources) deferred.

Against that background, this analysis piece considers what would be the most effective signals the clean growth plan, when published, can send in order to strengthen investor confidence.

Immediate Actions

Different campaigners will have different priorities for urgent action. But if we apply the test of early incentivisation for investors, two areas would be high up many lists.

First, the Government needs to plug the policy gap on energy efficiency. Ever since the failure of the coalition’s Green Deal flagship scheme, the Conservatives (under Cameron and May) have struggled to come up with any sort of replacement. Experts, led by the IEA, continue to highlight action on energy efficiency as a win-win across the energy and climate trilemma.

Second the Government needs to finish what it started on phasing-out coal. The market trends – it’s staggering to recall that only four years, coal was still generating over 40% of the nation’s electricity mix; it is now down to under 4% – should logically

point to the Government confirming its target of phasing out unabated coal by 2025 (or even earlier, if possible). The consultation on this key issue concluded just over a month ago; but it would be strange, and run counter to market trends, if the Government were to duck the decision now – and send the signal to investors that this administration remains somewhat unconvinced about setting a strong low-carbon trajectory. (Incidentally, a decision in favour of phase-out would also resonate globally, and send the message that the UK can still lead on climate policy, despite its other preoccupations)

The Longer-term Policy Gaps

The Committee on Climate Change has been explicit about the need, if the UK is to meet its Fifth Carbon Budget targets, for the Government to introduce policies that go beyond decarbonizing the power sector, which the Committee says is almost entirely responsible for how UK emissions have fallen over the last five years.

Energy efficiency (qv earlier paragraphs) is of course earmarked for action by the Committee. It is also unambiguous about the necessity for policy measures on heat (especially to support low-carbon heat in the building stock – residential and industrial) and the electrification of transport. On the latter, the Committee talks about “stretching standards” for vehicle CO2 emissions, which it sees as supporting an increasing share of electric vehicles in the 2020s.

The Government is aware that these gaps need to be addressed. Moreover, the emphasis on the transport sector chimes well with what BEIS said in its recently-published green paper industrial strategy consultation about its aspiration for the UK to develop electric vehicles as a world-leading sector. But reducing emissions from heat in buildings is a challenge for policymakers all around the world, and the Government will have to show that it is serious about this important area in its plan.

On a separate but related point, the stronger the links between the Clean Growth Plan and the Industrial Strategy, the more that should reassure investors about the seriousness and credibility of the Government’s intentions.

Disruption: the Impact of Accelerating Technologies

The technology agenda is another element that should be tightly bound into the Clean Growth Plan when it emerges. Perhaps the most important ask of BEIS officials here will be for them to demonstrate that they are fully seized of how the cost reductions of clean energy technologies are accelerating and thereby increasing the disruptive capacity of the energy transition. The call for evidence on smart, flexible energy systems concluded a couple of months ago, so the department ought to be well-placed to incorporate the relevant key findings into the clean growth plan. However, this point about being up-to-date on technology cost reductions – as the recent Carbon Tracker/Imperial College report “Expect The Unexpected” made clear – is something that policymakers (witness the consistent underestimates that the IEA has made about the falling costs of renewables) have regularly failed sufficiently to factor in and will therefore be a test.

The costs of implementing carbon capture and storage (CCS) tend to be viewed from a totally different perspective to that of renewables. The clean growth plan is the opportunity to put domestic CCS back on to the agenda and could be a big moment for CCS, one way or another.

Clearing up Confusion on Carbon Pricing

There are two substantive unknowns about UK government policy on carbon pricing, neither of which were answered in the Budget.

First, to nobody’s surprise, the UK carbon price floor has been retained. But this doesn’t tell us anything about direction of travel over the longer-term and, in particular whether the Government prefers more of a market price on carbon, a tax, or the hybrid approach at present in play.

This reads across to the second major uncertainty, which is whether the Government will take the opportunity that departure from the EU will provide to leave the EU Emissions Trading System (ETS) and set up its own carbon pricing scheme (a UK-only ETS – which could still link to the EU ETS – or a tax); or if it will try to remain a member (which won’t be easy, but in principle might be possible if the UK could somehow stay inside the internal energy market post-Brexit).

The Treasury said in its Budget documents that further details on carbon prices for the 2020s will be set out in the Autumn Budget 2017. But surely the Clean Growth Plan will be an ideal opportunity to start clearing up the confusion about what ought to remain a primary policy instrument within the Government’s overall decarbonisation strategy; and at a time when EU member states are finally (although false dawns have materialized before, and political divisions remain) showing some indication that they want to properly strengthen the EU ETS as an instrument for driving low-carbon investment.

Coherence with the Politics

In overall terms, if the Clean Growth Plan is going to send policy directions that are taken seriously and are credible with investors, it will have to demonstrate a self-aware political dimension. One of the reasons why Philip Hammond’s Budget has taken something of a media hammering was because it ignored the 800-pound gorilla that stalks the British Government’s every policy initiative: Brexit. In this context, the plan will need to be clear that the huge uncertainties about the terms on which the UK will depart the EU are material to energy and climate policy. The single most important and relevant issue is that of UK membership of the internal energy market (see above for its impact on UK membership of the EU ETS), and BEIS ought to be honest about the implications that EU departure will have for the future. Reference to that post-Brexit world – whether it be the potential for transitional arrangements or the relevance of the Great Repeal Bill, or even potential Scottish independence – must be a part of that plan.

Investors would for good measure be more reassured if they could be confident that party political concerns will by and large be excluded from climate and energy policymaking. There is no doubt that renewables policy has suffered on this score –

eg for those wishing to make the case for wind and solar as part of a rational policy on decarbonisation – and BEIS would do well to rely on solid evidence-based policymaking and eschew the sadly sensationalist (with scanty evidence) conclusions on the costs of renewables in the recent House of Lords report on “The Price of Power”. Better to listen to what the business community is saying as a reflection of investor sentiment: perhaps to take a leaf out of the CBI’s report on the low-carbon economy in 2030 and establish some sort of joint government/business Steering Board to deliver the clean growth plan. Governments of any colour haven’t always been convincing about listening to business and investment; evidence of this would be a tangible demonstration that they are listening and are simultaneously more prepared to put party political and special interest concerns to one side.

Last, “long, loud and legal” may have become a stuck record as to what investors want from government on decarbonisation. But the needle has stayed immovable because it is true, for these reasons:

- Policies for the long-term, eg on government support (NB: this doesn’t mean subsidies but policy frameworks), give investors reassurance that they can take business decisions without being subject to the risks of short-term political opportunism. The Climate Change Act of 2008 is a powerful example of this kind of policy framework;

- The louder and more definite that government is about its direction of travel, the more convincing it will be to its investor audience. Half-baked compromises never work with an investor audience;

- Putting policy measures into law also does much to provide reassurance. Speeches and rhetoric that encourage voluntary action can go only so far. The investment community will want to see legal and regulatory intent in the Clean Growth Plan.

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