An £8bn problem: How should businesses respond to Sunak’s net-zero knock back?

Image: Rishi Sunak

“It cannot be right for Westminster to impose such significant costs on working people – especially those already struggling to make ends meet.” That was one of the lines of Prime Minister Rishi Sunak’s swifty prepared public statement last night on plans to deliver net-zero by… pushing back on the key components to deliver net-zero.

However, it appears that by trying to use the net-zero transition as a populist metric to appease the public, the Prime Minister is set to add eye-watering costs to an already volatile and inflated energy market.

Sunak confirmed a five-year delay on the ban on new petrol and diesel car sales. This was set for 2030 under Boris Johnson but will now be amended to 2035. This is aligned with the dates in the EU and many US states. Additionally, Sunak moved a ban on oil boilers in off-grid homes, initially set for 2026, to 2035. A wider plan to phase out 100% of domestic gas boilers by 2035 has also been weakened to 80%. See the full announcements from Sunak’s net-zero bonfire here.

Sunak cited the cost to consumers and competitiveness for businesses as reasons to review certain policies meant to push the nation toward its legally binding target of reaching net-zero emissions by 2050.

However, green groups have been quick to chastise the decision, with the Energy and Climate Intelligence Unit (ECIU) warning that the measures unveiled by the Prime Minister could cost British households almost £8bn in higher bills over the next decade. The price is dependent on if gas prices spike again, which they are likely to do, and because of cancellations to new energy efficiency regulations for the private rented sector.

The ECIU warns that, if gas demand remains high across the economy, it could cost the UK an additional £150bn over the next 10 years to import from overseas gas producers compared to if the Government had introduced policies aimed at drastically cutting the reliance on gas. The ECIU also warns that the measures could cost the NHS an extra £1.2bn a year due to poor housing and living conditions.

The ECIU’s energy analyst Jess Ralston said: “This looks chaotic and not the way long-term policy should be made around important issues, with emergency cabinet meetings and investors spooked.

“Quite the opposite of an honest debate, the implication that any of these policies were going to affect the cost of living here and now is untrue. In fact, the PM has sided with landlords over renters, putting their energy bills and cost of living up by ducking the improvement of rules on energy efficiency. That doesn’t make any sense when excess cold in homes costs the NHS £1.2bn per year and renters are amongst those with the lowest incomes.”

It’s worth noting that the UK’s own climate watchdog, the Climate Change Committee (CCC) has stated it needs to “do the calculations” on what this means for the net-zero trajectory. However, as Ed Miliband, shadow secretary of State of Energy Security and Net Zero, pointed out using the CCC’s own estimations, Sunak’s announcement will “whack up costs on British families”.

If the government delays the petrol and diesel phase-out date to 2035 it will whack UP costs on British families. And here is the evidence from the Government’s own advisors @theCCCuk 👇 pic.twitter.com/3iWCmggBWs

— Ed Miliband (@Ed_Miliband) September 20, 2023

Sunak’s hurried speech, rolled out in response to leaks of the proposed changes that were reported on Tuesday night, is the latest example of a Government stretching itself too thin across too many bases to live up to its own suggestions that it is delivering on net-zero. Reaching net-zero by 2050 will require understanding and action from investors, the public and corporations alike, and the Government seems unable to guide all of these stakeholders through these uncharted waters at the same time.

It is well-versed that the net-zero transition is not a burden, but rather an unparalleled economic opportunity in the long-term. Indeed, the UK has the opportunity to more than double the economic benefits that could be generated by reaching the net-zero target by 2050. A recent report from the UK Business Council for Sustainable Development claimed that introducing policies that address current clean technology barriers that push the nation beyond net-zero would deliver £70bn in annual benefits, compared to £36bn under the net-zero transition. Either way, the net-zero transition is built on sound economic footing. Yet Sunak’s measures look set to dent investor and market confidence for key carbon-intensive sectors.

What’s even stranger is that there are some decent points to Sunak’s sudden announcement.

Sunak, for example, increased the maximum amount any home can claim through the Boiler Upgrade Scheme by 50%, to £7,500, despite pushing the timelines back.

His calls for a sensible and public debate on net-zero are not only welcome but much needed, given the dismissible claims from some lobbying groups that reaching net-zero will be a burden. Of course, the necessity of debate holds little weight if the person in charge of the country then follows up by igniting a bonfire of green legislation without warning.

There was also the fact that many decisions that Sunak moved to reverse or dismiss didn’t actually exist. There were no plans in place to put seven recycling bins in our houses, the tax on flying and dietary shifts had been examined in scientific studies but wasn’t proposed by the opposition, same too for car sharing.

Business briefing

The reaction from green groups has been raucous, and rightly so, but amidst the echoed warnings that the UK is burning the last of its credentials as a climate leader and that the measures fly in the face of efforts to actually reach net-zero, one drumbeat of discontent is loud and clear: this will hurt business.

As KPMG’s vice-chair and head of energy and natural resources, Simon Virley points out, businesses thrive on political certainty, which in turn can help drive decarbonisation across value chains and create UK markets for green goods. Today’s measures, in comparison, are chaotic and will dent this progress.

“Large-scale business investments in the industries of the future, like EVs and low-carbon heating technologies, and their accompanying supply chains, are only possible if there are stable, long-term policies in place,” Virley said.

“The constant uncertainty that comes with changes in target dates and commitments, simply makes it harder to attract the investment we need to boost the UK economy and reach our legally binding Net Zero goals. The risk now is that the UK will continue to fall behind in the global race for green investment, and our homegrown businesses will lose out.”

There is every chance that global businesses wishing to deliver against their own ambitious climate targets will look elsewhere to more enabling markets.

At the start of the month, the Aldersgate Group revealed that neglecting to strengthen the industrial sector and respond to global competition, such as the Inflation Reduction Act (IRA), could put the UK at risk of losing £224bn by 2050. Today’s measures will do little to boost UK competitiveness in the wake of ambitious policy frameworks that are also being rolled out across the EU.

The investor community, which arrived late to decisions about the need to reach net-zero, but has since forced every major business to re-examine and better report their non-financial data, is also baffled by today’s decision.

Just weeks ago, a group of major investors representing £1.5trn in assets under management called on Prime Minister Rishi Sunak to deliver clear policy signals for the net-zero transition. The signals shone this week are anything but clear – the UK is still targeting net-zero but is moving the timelines back. That’ll be a problem for another year, and maybe even another Prime Minister, depending on how the polls react to today’s announcement.

The Institutional Investors Group on Climate Change’s (IIGCC) chief executive Stephanie Pfeifer warned that Sunak’s decision is risking “considerable investment”.

“The UK’s long-term, legally binding net-zero commitments are not enough to provide investors with confidence if they are not supported by credible short and medium-term policies to deliver on them. The Government’s mixed signals… create uncertainty that makes it harder for investors to factor climate considerations into their long-term investment decisions,” Pfeifer said.

“Critically, investors are more willing and able to invest in climate solutions in the UK if the government can demonstrate supportive and stable policies, as the EU and US are doing. Simply put, the UK risks missing out on considerable investment if the government continues down its current path.”

The role of the CSO

Even as the markets shake their heads at today’s announcement it is still worth sparing a thought for the traditional edie reader – those who probably feel they are constantly swimming against the tide.

Sustainability professionals are the ones tasked with mobilising ESG actions across a range of organisations – from hulking global behemoths that need dozens of people to sign off on a commitment, to SMEs who may not have the resources to budget for sustainability action. How are you planning on showing up to work to build the business case for sustainable action, knowing that the Government is half-hearting it?

JLL UK’s sustainability head Emma Hoskyn warns of the potential impacts. “Today’s announcements on the government’s net zero position will be disappointing to many businesses that, like JLL, are advocating for ambitious climate action, such as through alignment with the UN Race to Zero.

“Rolling back on net-zero commitments will destabilise investment into green skills, sustainable technology and energy efficient homes.  It will also derail the opportunities and security that a green economy and green energy can provide for the UK, for business and for individuals.”

There is a strange, unwarming comfort in the fact that businesses may well be used to disappointment at the policy end of the net-zero transition. This is just the latest setback. We’ve seen similar before. It doesn’t change the destination, but does add some choppy waters.

A first step is to realise that your anger, disappointment, and maybe even bleak acceptance are not isolated. If you re-read the visceral reaction from most of the economy, which labeled the decision as “stupidity”, it is clear that this is not a welcome decision. There’s company to be had in misery and certainly a chance to collaborate in the void where policy leadership should be.

Another is to remember that COP28 – for all its own flaws – is just around the corner and the initiatives and amendments to global climate action could showcase that the UK is the odd one out when it comes to mobilising action.

If that still doesn’t work, remember that many businesses are now in the coalition of the willing, and collaboratively have the purchasing power greater than many nations. If the Government takes a step back – which it has – businesses can collectively take a step forward – which they should.

This is not the end of net-zero in the UK, but another dazed step from a Government trying to appease too many different voices. The role of business is to make its voice clear and unified;  net-zero is a must.