As the nation continues struggling with both the climate and the energy/cost-of-living crises, the UK budget was a key moment for the Government to make progress in providing the building blocks for a productive, sustainable and resilient future. But how far did Chancellor Jeremy Hunt take us in the right direction?
There was optimism that the Spring Budget could be a slight return to more “normal” times, especially around the fiscal headroom which would allow the Chancellor to be more generous in certain areas.
This proved to be true, with the budget including more free childcare, high-tech Investment Zones and greater support for nuclear and carbon capture usage and storage (CCUS).
Investment for net zero, resilience and sustainability
Action is clearly needed to increase the amount of business investment in the green economy, but the nature of that investment also matters – particularly when it comes to net zero, where government commitments and incentives are needed to deliver large-scale investment at pace in order to meet its 2050 goal.
Since the US passed its landmark Inflation Reduction Act (IRA) in 2022 with its $369 billion support for clean technologies, and the EU with its Net-Zero Industry Act, the global “green race” has become more heated than ever and, as the Skidmore Review pointed out, “we are now at a crunch point where the UK could get left behind.”
The UK Government currently spends a smaller share of its GDP on net zero compared to the US, Germany, and France. Although the UK cannot compete in terms of the scale of support, it still needs to respond with a clear and targeted strategy for areas where it has or can build a comparative advantage, or where energy security demands it.
Prioritising CCUS and small modular reactors (SMRs) in the budget might be a sign that the Government is deciding what it wants to compete in. These are both areas where the UK appears to have some innovative specialisms. However, both of these technologies are years away from being able to make a substantial contribution to decarbonising UK energy.
Meanwhile, the 2035 deadline to fully decarbonise the UK’s power system is fast approaching and is looking increasingly challenging to achieve in the absence of a long-term plan to accelerate the delivery of readily available and cost-effective renewable technologies.
As other countries are demonstrating, there is potential to do more in the tax system to provide enhanced incentives for net zero-aligned investments in fixed capital assets or R&D. There is also scope for better-designing levies on electricity generators to incentivise investment; the Electricity Generator Levy acts as a windfall tax on renewable companies but without offering the kind of investment allowances available under the Energy Profits Levy serving the equivalent function in the oil and gas sector. While taxing excess profits is sensible in both sectors, the current approach creates a signal that may hurt investment in renewable generation.
The budget also announced government plans to refresh the Control for Low Carbon Levies, which states there will be no new low carbon electricity levies until the burden of such costs on energy bills decreases. This would be positive for home decarbonisation if it means progress on rebalancing electricity and gas prices. However, the fact that the ‘up to £20 billion’ support for CCUS was not reflected in formal budget costings might suggest it will be charged against energy bills, which would entrench inequality, especially at a time of existing hardship as low-income households spend a higher proportion of their income on energy bills.
The Chancellor made new funding for energy efficiency available from 2025 in the Autumn Budget, but what is needed is more than a headline figure, providing clarity on policy delivery starting today. Recent analysis has shown that around one-third of the funding supposed to be used to decarbonise homes between 2020 and 2025 remains unspent and action is needed to build public awareness, supply chain capacity and workforce skills. On transport, keeping fuel duty frozen yet again – rather than focusing on a long-overdue reform of transport taxes – again fails to strengthen the move away from petrol and diesel vehicles while also missing out on another term of much-needed government revenues.
Looking forward to “Green Day”
The measures announced in this budget are unlikely to massively move the dial on increasing business investment, delivering on net zero or capturing the opportunities for growth and improved resilience along the way.
There should be further announcements from the UK Government as it updates its Net Zero Strategy (as ordered by the High Court) and responds to the Skidmore Review on what has been termed “Green Day” by the end of March, for progress on delivery and the UK’s response to the Inflation Reduction Act and Europe’s Net Zero Industry Act.
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