Dr Gerard Lyons is a senior fellow at Policy Exchange. He was Chief Economic Adviser to Boris Johnson during his second term as Mayor of London.
Tackling climate change should be high on our economic and policy agenda. Addressing it is possible, although it requires significant global policy coordination. And while transitioning from fossil fuels is not easy or costless, kicking the can down the road is not a solution. In fact, a pro-green agenda can go in hand in hand with a much-needed pro-growth economic strategy.
This coming weekend sees the start of the next major climate summit: COP 27 in Sharm El-Sheikh, Egypt. Let me highlight three areas relevant for the UK.
First, although the UK’s presidency of COP is coming to an end there is still a strong global role to be played. There are many facets, both in supporting the overall global approach and taking the lead in specific areas.
Much has been made of whether the Prime Minister will travel, or not, to Egypt. While signalling of the Government’s commitment to the green agenda may be improved by Rishi Sunak’s attendance, it is not a major issue. It is the norm that every five years COP takes on increased importance. For example, COP19 in Paris in 2015, when a legally binding treaty on climate change was agreed, and its major follow-up was COP26 in Glasgow which because of Covid took place in 2021. It is these five yearly COPs which many global leaders attend. While important, COP27 does not fit into the same schedule even though both Presidents Biden and Macron will attend.
This COP, like all COPs, will call for enhanced international cooperation and scaling up collaborative commitments. But it requires domestic agendas to be aligned. Perhaps the UK could play an enhanced role in the move towards policy harmonisation in some of the areas that are now receiving focus.
One example is carbon border adjustment mechanisms, needed to guard against carbon leakage where emissions move overseas in emissions intensive industries. This follows on from the G7’s call for a Climate Club, recognising the need for policy coordination across developing as well as advanced economies.
By Glasgow, each country was supposed to outline its own plan – so-called nationally defined contributions (NDCs) – to help meet the Paris Agreement. That didn’t happen as hoped. Neither was an agreement on financial help from rich countries to developing ones forthcoming, to help them pay for their green transition – the “just transition” as it is known. It is hoped this unfinished business will be concluded in Egypt.
But with global public debt at an all-time high, this issue may not be resolved now. However, the UK can continue to demonstrate its key role in driving up the amount of private funds directed to greening the financial system – but these are more likely to find a home in advanced economies. Next steps need to include more openness and transparency, and a greater array of green assets into which investments can be made.
In addition to resolving the finance issue, this meeting needs to focus on reducing the emissions gap and further steps to creating a climate resilient global economy, but that has to be carried out nationally.
A second area for the UK is to continue to show leadership by reducing greenhouse gas emissions. The UK is making good progress. It could be quicker, but the reality is moving from a fossil fuel economy takes time.
The UK was one of the first countries to commit to Net Zero. As a consequence of the Climate Change Act 2008, the UK became the first country to set legally binding carbon budgets. Each covers limits on greenhouse gas emissions covering a five-year period, with the latest Sixth Carbon Budget looking the furthest ahead, covering 2033-37.
The UK reduced greenhouse gas emissions by 44 per cent between 1990 and 2019. There are ambitious markers to reduce emissions in 2030 to 68 per cent below the 1990 level and by 78 per cent by 2035, aimed at returning them to that 1990 level by 2050.
Gradualism, though, may be needed in some areas. The GMB trade union, for instance, has been a vocal critic of the green levy on bills, which it called a green poll tax, since it isn’t linked to peoples’ ability to pay.
This touches on a key issue, namely the need to take into account the starting position. As we have already seen, moving to electric vehicles, for instance, requires far better infrastructure, with charging points, to be in place Likewise with housing and heating. Retrofitting properties – such as replacing gas boilers – to make them energy efficient is expensive. It can be costly and thus much harder to bear at times of sluggish economic growth.
Third, there is a huge opportunity to link addressing climate change to a new growth model for the UK. In these respects, this agenda supports both the need for the UK to raise its rate of investment plus the achievement of levelling up. The commitment to 2050 has created a host of investment opportunities that previously did not exist, but the additional factors needed to improve the investment outlook are known. More finance and lending for firms. Sound macro policies. A skilled workforce. Functioning and supportive infrastructure. A lack of bureaucracy. The level, predictability and simplicity of tax. As well as future expected demand.
The Government therefore needs to deliver on what it controls in terms of investment-led growth. The green agenda provides an opportunity to do this, with consumer and corporate behaviour likely to change further, driven both by behavioural change as well as through public policy. Again, this may take time, since many small firms are not in a financial position to change. Furthermore, they may have a blindspot to future climate risks, with limited ability to make assessments. This may require further public policy help.
With regard to levelling-up, consider some of the areas taking the lead in the UK. Blyth, Hull and Aberdeen are seen as centres for offshore wind. There is also the potential for floating offshore wind in waters near the Shetlands. Sunderland has a high concentration of patents for carbon capture and storage. South Wales has received funding for a net-zero industrial cluster. The Tees Valley already produces significant amounts of commercially available hydrogen, and Orkney too is the site of a potential hydrogen project. Anglesey and the Severn look set to be at the forefront of tidal.
In fact, the tidal potential is seen as huge, with Britain’s west coast having one of the highest tidal ranges in the world. Meanwhile, when it comes to new technologies, Nissan is making Sunderland its European centre for electric vehicles, and there is much talk of government funding for a a new gigafactory for batteries for electric vehicles around Coventry. All such factories across Western Europe rely heavily on government subsidies. While it is welcome if such initiatives are driven by the private sector, a favourable public policy environment is crucial.
Policy options worth exploring further for the Government include establishing a carbon-offset market, carbon pricing, a carbon border tax and even a form of full expensing for green technologies. The former is an area where the City can take the lead globally, while many of the others can tangibly dovetail Net Zero and levelling-up. After all, London and the South-East are primarily service sectored-based economies. While the UK needs to continue doing what is currently doing, namely reducing greenhouse gas emissions at a significant pace, it has an enhanced opportunity to tie the green agenda with a pro-growth economic model at home, while pushing the case for it globally.