What a new PM means for a net-zero UK
The 56th prime minister of the UK has already made significant changes to the government’s stance on energy.
On 6 September, Liz Truss was confirmed as the UK’s 56th prime minister. She has taken the job at a volatile time, with surging inflation creating a severe cost-of-living crisis and threatening to tip the UK economy into recession.
With energy prices a key issue behind soaring inflation, Truss has already made energy a core focus of her political agenda. Experts are wary though of what near-term changes to policy could mean for the UK’s pursuit of net zero.
A shift against renewables
With energy relationships across Europe in disarray, and Putin threatening to cut off gas pipelines, Truss has announced new support for domestic energy sources. This is coming in the form of releasing new licences for gas drilling in the North Sea and reopening the conversation around fracking. This has already rung alarm bells among those involved in energy transition investment.
“The UK’s pivot to fully turn on the taps for North Sea oil and gas as well as to open the lid on fracking seems drastically out of step with the science, albeit motivated to address the short-term energy crisis,” says Eoin Murray, head of investment at Federated Hermes.
Murray also points out that shale gas will take over a decade to make a significant contribution to domestic supply – therefore, having little impact on the current crisis – and that renewable energy sources could offer a better solution from numerous economic and sustainable perspectives. Consequently, the head of investment is suspicious of the motivations at play: “The question has to be what is stopping us?
“Fossil fuels still enjoy enormous subsidies – as much as $6trn according to a 2020 IMF report. Is it time to call out the vested interests? We cannot continue like this.”
These concerns are shared by Ben Constable-Maxwell, head of sustainable and impact investing at investment manager M&G. Describing Truss’s early energy announcements as “worrying”, Constable-Maxwell is urging policymakers to keep in mind the UK’s net-zero targets and says these should not be forgotten in the midst of the energy crisis.
“While there’s a valid focus on the immediate priorities of energy security and affordability, this must not distract the government from the urgent need to implement a long-term strategy to deliver both net zero and energy security,” says Constable-Maxwell.
“This should involve expanding zero- and low-carbon energy generation, investing in affordable and sustainable public transportation, developing low-carbon industrial solutions such as green hydrogen, and radically improving energy efficiency and buildings insulation.”
New windfall taxes rejected
The new PM has also rejected an extension of the £5bn windfall tax, or Energy Profits Levy, imposed on power companies by former UK chancellor Rishi Sunak. Additional taxes targeting energy companies that have accrued record profits off the back of surging fuel prices appear popular with the public. An extension of the windfall tax would also have been another policy step taken against the powerful fossil fuel lobby.
Truss’s reasoning is in line with that of previous conservative governments, arguing that such a tax could put off foreign investment in the UK. But president of Carbon Neutral Consulting – and former climate adviser to Bill Clinton – Steve Crolius, says this does not stand up to scrutiny.
Explaining that such companies’ investment decisions are primarily driven by business opportunities, Crolius insists a windfall tax could still work in helping reallocate capital during the current energy crisis.
“Most UK citizens, including its corporate citizens, feel moved to do what they can to alleviate that crisis,” he says. “A windfall profits tax could be of material assistance in this regard.
“The key is for the government to find a way to expeditiously channel the proceeds back to the citizens – in the form of reduced tax rates, or as tax rebates. Enlightened energy companies will see a windfall tax not as a reason to avoid investment in the UK, but as the sign of a capable government that knows taking care of its citizens is an indispensable part of creating a favourable business environment.”
In agreement is Nigel Yates, portfolio manager at AXA Investment Managers, who remains hopeful fossil fuel companies can be encouraged to be more active in the UK’s energy transition. Yates says windfall profits could be put to good use by being invested in net-zero infrastructure: “We would really like to see those oil and gas companies respond publicly in that manner and increase their commitments to renewables, a point we are making in our engagements with them.
“I am hoping the politicians will do likewise.”
Truss has been PM for less than a month and has done so at a chaotic time – two days after her confirmation, Queen Elizabeth II died, which put the country into a period of national mourning and effectively froze parliamentary procedure during this.
Investors are waiting to hear more from the new PM about her plans and how she will still accommodate for net-zero targets. M&G’s Constable-Maxwell takes confidence from these targets’ legal protection but is still keen to hear further details.
“The UK’s ambitious net-zero commitment is likely to be protected by the fact it has been written into law, the first such legal commitment by any major economy,” he says. “In practice, the government’s climate advisor, the Climate Change Committee, has been clear that we’re already off target in delivering on that commitment.
“The current crisis will inevitably slow progress,” he added.